Time Value of Money: Basics Using the equations and tables in Appendix 12A of th
ID: 2719566 • Letter: T
Question
Time Value of Money: Basics
Using the equations and tables in Appendix 12A of this chapter, determine the answers to each of
the following independent situations:
a. The future value in two years of $2,000 deposited today in a savings account with interest
compounded annually at 6 percent.
b. The present value of $8,000 to be received in four years, discounted at 12 percent.
c. The present value of an annuity of $2,000 per year for five years discounted at 14 percent.
d. An initial investment of $32,010 is to be returned in eight equal annual payments. Determine
the amount of each payment if the interest rate is 12 percent.
e. A proposed investment will provide cash flows of $20,000, $8,000, and $6,000 at the end
of Years 1, 2, and 3, respectively. Using a discount rate of 20 percent, determine the present
value of these cash flows.
f. Find the present value of an investment that will pay $5,000 at the end of Years 10, 11, and
12. Use a discount rate of 14 percent.
Explanation / Answer
Ans a Initial Deposit 2,000.00 Interest 6% PA Future Value 2000*1.06^2 2,247.20 Ans b Future Value 8,000.00 No of year to maturity 4.00 Discount % 12.00 Present Value Discount Factor 0.64 Present Value 5,084.14 Ans c Annuity 2,000.00 No of Years 5.00 Interest rate 0.14 PVAF 3.43 Present Value of annuity 6,866.16 Ans d Intial investment 32,010.00 Interest rate 0.12 PVAF 4.97 Annual Installment 6,443.70 Ans e Year 1 Year 2 Year 3 20,000.00 8,000.00 6,000.00 PVDF 0.83 0.69 0.58 16,666.67 5,555.56 3,472.22 PVCF 25,694.44 Ans f Year 10 Year 11 Year 12 DF 0.27 0.24 0.21 Cash flows 5,000.00 5,000.00 5,000.00 PVCF 1,348.72 1,183.09 1,037.80 Toal 3,569.60
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