Chapter 5

Time Value of Money: The Basics

= PV (1 + i)n
= $5000(1 + 0.10)10
= $5000 (2.594)
= $12,970
n
= PV (1 + i)
= $8000 (1 + 0.08)7
= $8000 (1.714)
= $13,712
= PV (1 + i)n
12
= $775 (1 + 0.12)
= $775 (3.896)
= $3019.40
n
= PV (1 + i)
= $21,000 (1 + 0.05)5
= $21,000 (1.276)
= $26,796.00

5-1.

(a) FVn
FV10
FV10
FV10
(b) FVn
FV7
FV7
FV7
(c) FV12
FV12
FV12
FV12
(d) FVn
FV5
FV5
FV5

5-2.

(a) FVn = PV (1 + i)n

compounded forward for 1 year at 6%
FV1 = $10,000 (1 + 0.06)1
FV1 = $10,000 (1.06)
FV1 = $10,600
compounded forward for 5 years at 6%
FV5 = $10,000 (1 + 0.06)5
FV5 = $10,000 (1.338)
FV5 = $13,380
compounded forward for 15 years at 6%
FV15 = $10,000 (1 + 0.06)15
FV15 = $10,000 (2.397)
FV15 = $23,970

2011 Pearson Education, Inc. Publishing as Prentice Hall

Solutions to End of Chapter ProblemsChapter 5

131

(b) FVn = PV (1 + i)n

compounded forward for 1 year at 8%
1
FV1 = $10,000 (1 + 0.08)
FV1 = $10,000 (1.080)
FV1 = $10,800
compounded forward for 5 years at 8%
5
FV5 = $10,000 (1 + 0.08)
FV5 = $10,000 (1.469)
FV5 = $14,690
compounded forward for 15 years at 8%
15
FV15 = $10,000 (1 + 0.08)
FV15 = $10,000 (3.172)
FV15 = $31,720
compounded forward for 1 year at 10%
1
FV1 = $10,000 (1 + 0.1)
FV1 = $10,000 (1 + 1.100)
FV1 = $11,000
compounded forward for 5 years at 10%
5
FV5 = $10,000 (1 + 0.1)
FV5 = $10,000 (1.611)
FV5 = $16,110
compounded forward for 15 years at 10%
15
FV15 = $10,000 (1 + 0.1)
FV15 = $10,000 (4.177)
FV15 = $41,770
(c) There is a positive relationship between both the interest rate used to compound a present sum
and the number of years for which the compounding continues and the eventual future sum that
results.
5-3.

(a) FVn
N
N
N
(b) FVn

= PV (1 + i)n
= ln (FVn/PV) / ln(1 + i)
= ln(30,000/20,000) / ln (1.07)
= 5.9918 years
= PV (1 + i)

10.25
FV10.25 = 20,000 (1.07)
FV10.25 = 40,014.16

2011 Pearson Education, Inc. Publishing as Prentice Hall

132

Titman/Keown/Martin

Financial Management, Eleventh Edition

(c) FVn = PV (1 + i)n

N
= ln (FVn/PV) / ln(1 + i)
N
= ln (30,000/20,000)/ln (1.11)
N
= 3.89 years
N
= ln (FVn/PV)/ln(1 + i)
N
= ln (30,000/20,000)/ln (1.03)
N
= 13.72 years
(d) There is an inverse relationship between the interest rate and the time required to achieve a
certain future sum as a result of compounded interest.
5-4.

5-5.

FVn

= PV (1 + i)

FV200

= 12,345(1.0398)200

FV200

= 30,300,773.41

FVn = PV (1 +

i
m

)mn
PV

Account
Theodore Logan III
Vernell Coles
Thomas Elliott
Wayne Robinson
Eugene Chung
Kelly Cravens
5-6.

(a) FVn
FV5
FV5
FV5
(b) FVn

$1,000
95,000
8,000
120,000
30,000
15,000

10%
12%
12%
8%
10%
12%

1
12
6
4
2
3

10
1
2
2
4
3

(1 +

FV5
FV5
FV5
FVn

2.594
1.127
1.268
1.172
1.477
1.423

= PV (1 + i)n
= $5000 (1 + 0.06)5
= $5000 (1.338)
= $6690
mn
= PV (1 + mi )
2 5

FV5

i
m

0.06
= $5,000 1 +

= $5,000 (1 + 0.03)10
= $5,000 (1.344)
= $6,720
= PV (1 + mi )mn
6 5

0.06
FV5 = 5,000 1 +

FV5 = $5,000 (1 + 0.01)30

FV5 = $5,000 (1.348)
FV5 = $6,740

2011 Pearson Education, Inc. Publishing as Prentice Hall

mn

PV (1 +

i
m

$2,594
107,065
10,144
140,640
44,310
21,345

mn

Solutions to End of Chapter ProblemsChapter 5

(c) FVn
FV5
FV5
FV5
FV5

133

= PV (1 + i)
= $5,000 (1 + 0.12)5
= $5,000 (1.762)
= $8,810
= PV (1 + mi )mn
n

2 5

0.12
FV5 = $5000 1 +

FV5 = $5,000 (1 + 0.06)10

FV5 = $5,000 (1.791)
FV5 = $8,955
mn
FV5 = PV (1 + mi )

6 5

0.12
FV5 = $5,000 1 +

FV5 = $5,000 (1 + 0.02)30

FV5 = $5,000 (1.811)
FV5 = $9,055
n
(d) FVn = PV (1 + i)
FV12 = $5,000 (1 + 0.06)12
FV12 = 5,000 (2.012)
FV12 = $10,060
(e) An increase in the stated interest rate will increase the future value of a given sum. Likewise, an
increase in the length of the holding period will increase the future value of a given sum.

5-7.

(a) FVn
FV5
FV5
FV5
(b) FVn

= PV (1 + i)n
= $6,000 (1 + 0.06)5
= $6,000 (1.338)
= $8,028
mn
= PV (1 + mi )
2 5

0.06
FV5 = $6,000 1 +

FV5 = $6,000 (1 + 0.03)10

FV5 = $6,000 (1.344)
FV5 = $8,064
mn
FVn = PV (1 + mi )

6 5

0.06
FV5 = $6,000 1 +

FV5 = $6,000 (1 + 0.01)30

FV5 = $6,000 (1.348)
FV5 = $8,088

2011 Pearson Education, Inc. Publishing as Prentice Hall

134

Titman/Keown/Martin

(c) FVn
FV5
FV5
FV5
FV5

Financial Management, Eleventh Edition

= PV (1 + i)n
= $6,000 (1 + 0.12)5
= $6,000 (1.762)
= $10,572
= PV (1 + mi )mn
2 5

0.12
FV5 = $6000 1 +

FV5 = $6,000 (1 + 0.06)10

FV5 = $6,000 (1.791)
FV5 = $10,746
mn
FV5 = PV (1 + mi )

6 5

0.12
FV5 = $6,000 1 +

FV5 = $6,000 (1 + 0.02)30

FV5 = $6,000 (1.811)
FV5 = $10,866
n
(d) FVn = PV (1 + i)
12
FV12 = $6,000 (1 + 0.06)
FV12 = $6,000 (2.012)
FV12 = $12,072
(e) An increase in the stated interest rate will increase the future value of a given sum. Likewise,
an increase in the length of the holding period will increase the future value of a given sum.
Furthermore, at any stated annual interest rate, the more compounding periods per year, the
higher the future value of a given sum.

5-8.

Year 1: FVn
FV1
FV1
FV1
Year 2: FVn
FV2
FV2
FV2
Year 3: FVn
FV3
FV3
FV3

= PV (1 + i)n
= 15,000(1 + 0.20)1
= 15,000(1.20)
= 18,000 books
= PV (1 + i)n
= 15,000(1 + 0.20)2
= 15,000(1.44)
= 21,600 books
= PV (1 + i)n
= 15,000(1 + 0.20)3
= 15,000(1.728)
= 25,920 books

The sales trend graph is not linear because this is a compound growth trend. With compound interest,
interest paid on the investment during the first period is added to the principal of the second period,
and interest in the second period is earned on the new total. Book sales growth was compounded;
thus the first year the growth was 20% of 15,000 books, the second year 20 % of 18,000 books, and
the third year 20% of 21,600 books.
2011 Pearson Education, Inc. Publishing as Prentice Hall

Solutions to End of Chapter ProblemsChapter 5

5-9.

Year 1: FVn
FV1
FV1
FV1

= PV (1 + i)n
= 10,000(1 + 0.15)1
= 10,000(1.15)
= 11,500 headphones

Year 2: FVn
FV2
FV2
FV2

= PV (1 + i)n
2
= 10,000(1 + 0.15)
= 10,000(1.322)
= 13,220 headphones

Year 3: FVn
FV3
FV3
FV3

= PV (1 + i)n
= 10,000(1 + 0.15)3
= 10,000(1.521)
= 15,210 headphones

The sales trend graph is not linear because this is a compound growth trend. With compound
interest, interest paid on the investment during the first period is added to the principal of the
second period, and interest in the second period is earned on the new total. Headphone sales
growth was compounded; thus the first year the growth was 15% of 10,000 headphones, the
second year 15% of 11,500 headphones, and the third year 15% of 13,220 headphones.

2011 Pearson Education, Inc. Publishing as Prentice Hall

135

136

Titman/Keown/Martin

5-10. FVn
FV35
FV35
FV35
FV40
FV40
FV40
5-11. YEAR
1
2
3

Financial Management, Eleventh Edition

= PV (1 + i)n
= 3,500(1.11)35
= 3,500 (1.575)
= 135,012
= 3500 (1.11)40
= 3500 (65.001)
= 227,503
Beginning Value
10,000
11,100
12,321

Compound Interest
1,100
1,221
1,355.31

End Value
11,100
12,321
13,676.31

Simple interest is the same 1,100 per year based on the original principal. The compound interest in
year 3 is 1,355.31, which is 255.31 more than simple interest.
= FVn/(1 + i)n
35
PV
= 2,000,000/(1.04)
PV
= 506,830.94
N@14% = ln (FVn/PV)/ln (1 + i)
N
= ln (2,000,000 / 506,830.94)/ln (1.14)
N
= 1.373/0.131
N
= 10.48 years

5-12. PV

5-13. (a) N
N
N
N
(b) N
N
N
N
(c) N
N
N
N
(d) N
N
N
N

= ln (FVn/PV)/ln (1+ i)
= ln (1,039.5/500)/ln (1.05)
= 0.732/ 0.049
= 15 years
= ln (FVn/PV)/ln (1 + i)
= ln (53.87/35)/ln (1.09)
= 0.432/0.086
= 5 years
= ln (FVn/PV)/ln (1 + i)
= ln (298.60/100)/ln (1.20)
= 1.094/0.182
= 6 years
= ln (FVn/PV)/ln (1 + i)
= ln (78.76/53)/ln (1.02)
= 0.396/0.02
= 19.8 years

2011 Pearson Education, Inc. Publishing as Prentice Hall

Solutions to End of Chapter ProblemsChapter 5

5-14. (a) FVn

$1,948
3.896
1/12
(3.896)
1.12
i
(b) FVn
$422.10
1.407
1/7
(1.407)
1.05
i
(c) FVn
$280.20
5.604
1/20
(5.604)
i
(d) FVn
$497.60
2.488
(2.488)1/5
i
5-15. (a) PV
PV
PV
PV
(b) PV
PV
PV
PV
(c) PV
PV
PV

= PV (1 + i)n
12
= $500 (1 + i)
12
= (1 + i)
=1+i
= 1+i
= 0.12 or 12%
= PV (1 + i)n
7
= $300 (1 + i)
7
= (1 + i)
=1+i
=1+i
= 0.05 or 5%
= PV (1 + i)n
= $50 (1 + i)20
20
= (1 + i)
=1+i
= 0.09 or 9%
= PV (1 + i)n
5
= $200 (1 + i)
5
= (1 + i)
=1+i
= 0.20 or 20%

1
= FVn
n
(1 + i )
1

= $800
10
(1 + 0.1)
= $800 (0.386)
= $308.80
1
= FVn
n
(1 + i)
1

= $300
5
(1
+
0.05)

= $300 (0.784)
= $235.20
1
= FVn
n
(1 + i)
1

= $1,000
8
(1 + 0.03)
= $1,000 (0.789)
2011 Pearson Education, Inc. Publishing as Prentice Hall

137

138

Titman/Keown/Martin

PV
(d) PV
PV
PV
PV

5-16. FVn
I
I
I

Financial Management, Eleventh Edition

= $789
1
= FVn
n
(1 + i)
1

= $1,000
8
(1 + 0.02)
= $1,000 (0.233)
= $233

= PV (1 + i)n
= (FVn/PV)1/n 1
1/7 1
= (12,000/4,510)
= 0.15 or 15%

5-17. (a) PV

1
= FVn
n
(1 + i)

PV
PV
(b) FVn
I
I
I

= 1,000/(1.10)30
= 57.31
n
= PV (1 + i)
1/n 1
= (FVn/PV)
1/30
= (1000/365)
= 3.42%

5-18. FVn

= PV (1 + i)

= ln (FVn/PV)/ln(1 + i)
= ln (330,000/45,530)/ln (1.045)
= 45 years

N
N
N

5-19. PV

1
= FVn
n
(1 + i)

PV
PV

= 398,930/(1.07)
= 59,999.95

5-20. FVn
I
I
I

28

= PV (1 + i)
= (FVn/PV)1/n 1
1/7 1
= (5,200/7,600)
= 5.28%
n

5-21. (a) FVn = PV (1 + i)n

I
I
I

= (FVn/PV)
1/30 1
= (20,000/900)
= 10.89%
1/n

2011 Pearson Education, Inc. Publishing as Prentice Hall

Solutions to End of Chapter ProblemsChapter 5

(b) FVn
I
I
I
(c) FVn
I
I
I

= PV (1 + i)
1/n 1
= (FVn/PV)
1/10 1
= (3500/900)
= 14.55%
= PV (1 + i)n
1/n 1
= (FVn/PV)
1/20 1
= (20,000/3,500)
= 9.11%
n

5-22. FVn
I
I
Thus, i

= PV (1 + i)n
= (FVn/PV)1/n 1
1/10 1
= (1079.5/500)
= 8%

5-23. FVn
I
I
Thus, i

= PV (1 + i)
= (FVn/PV)1/n 1
1/10 1
= (2376.5/700)
= 13%

5-24. FVn
N
Annual rate
Periodic rate
N
N

5-25. FVn
N
Annual Rate
Periodic Rate
N
N

= PV (1 + i)n
= ln (FVn/PV)/ln (1 + i)
= 16% with semiannual compounding
= (16%/2) = 8%
= ln(4/1)/ln(1.08)
= 18.01 semiannual periods = 9.00 years
= PV (1 + i)n
= ln (FVn/PV)/ln (1 + i)
= 10% with semiannual compounding
= (10%/2) = 5%
= ln (7/1)/ln(1.05)
= 39.88 semiannual periods = 19.94 years

5-26. I
I
Thus, i

= (FVn/PV)
= (27,027/10,000)1/5 1
= 22%

5-27. I
I
Thus, i

= (FVn/PV)
1/5 1
= (37,313/15,000)
= 20%

1/n

1/n

2011 Pearson Education, Inc. Publishing as Prentice Hall

139

140

Titman/Keown/Martin

5-28. PV
PV
PV

Financial Management, Eleventh Edition

1
= FVn
n
(1 + i)

= 300,000/(1.11)13
= 77,254.27

The better choice is the 100,000 today.

5-29. PV

1
= FVn
n
(1 + i)

For 10,000 12 years from now:

12
PV
= 10,000/(1.11)
PV
= 2,858.40
For 25,000 25 years from now:
25
PV
= 25,000/(1.11)
PV
= 1,840.20
1,000 today vs. 10,000 12 years from now (PV = 2,858.40) vs. 25,000 25 years from now
(PV = 1,840.20), the best choice is 10,000 in 12 years.

5-30. FVn
I
I
I

= PV (1 + i)n
= (FVn/PV)1/n 1
1/43 1
= (9500/0.12)
= 29.99%

or solve with financial calculator:

N
= 43
CPT I/Y = 29.99%
PV
= 0.12
PMT
=0
FV
= 9,500

5-31. FVn
I
I
I

= PV (1 + i)n
= (FVn/PV)
1/47 1
= (9,000/0.12)
= 26.98%
1/n

or solve with financial calculator:

N
= 47
CPT I/Y = 26.98%
PV
= 0.12
PMT
=0
FV
= 9,000

2011 Pearson Education, Inc. Publishing as Prentice Hall

Solutions to End of Chapter ProblemsChapter 5

141

5-32. Since this problem involves monthly payments we must first make, P/Y = 12. Then, N becomes the
number of months or compounding periods,
N
= 36
CPT I/Y = 11.62%
PV
= 999
PMT
= 33
FV
=0
5-33. rate (i)
= 8%
number of periods (n)
=7
payment (PMT)
= $0
present value (PV)
= $900
type (0 = at end of period) = 0
Future value
= $1,542.44
Excel formula: = FV(rate, number of periods, payment, present value, type)
= FV(0.08, 7, 0, 900, 0)
= 1,542.44
Notice that present value ($900) was entered as a negative value in the Excel formula.
5-34. number of periods (n)
= 20
payment (PMT)
= $0
present value (PV)
= $30,000
future value (FV)
= $250,000
type (0 = at end of period) = 0
i
= 11.18%
Excel formula: = RATE(number of periods, payment, present value, future value, type)
= RATE(20,0, 30000,250000,0)
= 0.1118 = 11.18%
Notice that present value ($30,000) was entered as a negative value in the excel formula.
5-35. EAR
EAR
EAR

= (1 + i/m)
12 1
= (1 + 0.12/12)
= 0.127 or 12.7%
mn

The loan at 12% compounded monthly is more attractive than the 13% loan compounded annually.
5-36. EAR
EAR
EAR

= (1 + i/m)
12 1
= (1 + 0.24/12)
= 0.268 or 26.8%
mn

The loan at 26% compounded annually is more attractive.

2011 Pearson Education, Inc. Publishing as Prentice Hall

142

Titman/Keown/Martin

Financial Management, Eleventh Edition

5-37. Since the first part of this problem involves daily compounding we must first, make P/Y = 365.
Then, N becomes the number of days in a year,
N
= 365
I/Y
= 4.95
PV
= 100
PMT
=0
CPT FV = 105.0742 or 5.0742%
Now lets look at monthly compounding; well see what $100 will grow to at the end of a year.
First, we make P/Y = 12.
N
= 12
I/Y
= 5.0
PV
= 100
PMT
=0
CPT FV = 105.1162 or 5.1162%
An alternative approach would be to use the EAR for both CDs.
mn 1
EAR
= (1 + i/m)
365 1
EAR
= (1 + (0.0495/365))
EAR
= 5.0742%
mn 1
EAR
= (1 + i/m)
12 1
EAR
= (1 + (0.05/12))
EAR
= 5.1162%
5-38. EAR
EAR
EAR

= (1 + i/m)
12 1
= (1 + (0.078/12))
= 8.08%
mn

So, the better deposit rate is at Burns Bank (8.08% vs. 8.00%)

2011 Pearson Education, Inc. Publishing as Prentice Hall