Time Value of Money

Time Value of Money

much will she have in December 2010? (Assume that a deposit is made in December of 2010. Make sure to count the years carefully.)

9-20. Solution:

21. Future value (LO2) At a growth (interest) rate of 8 percent annually, how long will it take for a sum to double? To triple? Select the year that is closest to the correct answer.

9-21. Solution:

Appendix A

If the sum is doubling, then the tabular value must equal 2.

In Appendix A, looking down the 8% column, we find the factor closest to 2 (1.999) on the 9-year row. The factor closest to 3 (2.937) is on the 14-year row.

22. Present value (LO3) If you owe $30,000 payable at the end of five years, what amount should your creditor accept in payment immediately if she could earn 11 percent on her money?

9-22. Solution:

23. Present value (LO3) Barney Smith invests in a stock that will pay dividends of $3.00 at the end of the first year; $3.30 at the end of the second year; and $3.60 at the end of the third year. Also, he believes that at the end of the third year he will be able to sell the stock for $50. What is the present value of all future benefits if a discount rate of 11 percent is applied? (Round all values to two places to the right of the decimal point.)

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9-23. Solution:

Appendix B

PV = FV × PVIF

Discount rate = 11%

$ 3.00 × .901 = $ 2.70

3.30 × .812 = 2.68

3.60 × .731 = 2.63

50.00 × .731 = 36.55

$44.56

24. Present value (LO3) Mr. Flint retired as president of Color Title Company but is currently on a consulting contract for $45,000 per year for the next 10 years .Time Value of Money

a. If Mr. Flint’s opportunity cost (potential return) is 10 percent, what is the present value of his consulting contract?

b. Assuming that Mr. Flint will not retire for two more years and will not start to receive his 10 payments until the end of the third year, what would be the value of his deferred annuity? Time Value of Money

Solution:

Using a Two Step Procedure

a.

Alternative Solution

b.

Chapter 09: Time Value of Money

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