Time Value of Money Exercises

1. What is the balance in an investment account at the end of 10 years if $5,000 is invested today
and the account earns 8% interest compounded annually? What would the value be after 50
years? After 100 years?

2. What is the present value of the following future amounts:

Future Value Discount rate Number of periods

$15,000 6% 5
$37,000 9% 10
$596,000 11% 4
$1,178,000 9.5% 12

3. Calculate the present value of the following cash inflows assuming an 11% discount rate.
Year Cash flow
1 17,000
2 17,000
3 17,000
4 17,000
5 17,000
6 100,000

4. Consider the following two mutually exclusive projects

Year Cash Flow Project 1 Cash Flow Project 2

0 -150,000 -150,000
1 $40,000 $100,000
2 $90,000 $80,000
3 $120,000 $60,000

a) Calculate the net present value (NPV) of each project assuming an 8% discount rate.

b) Calculate the Internal Rate of Return (IRR) for each project.

5. Anne Jones checked her lottery ticket once again. The numbers matched; she had won the
$10,000,000 grand prize. The lottery provided two options for payment of the grand prize.
First, the winner could take $1,000,000 immediately, with the remainder payable in $1,000,000
instalments over nine years, starting one year from now. The alternative payment option was
an immediate lump sum payment of $7,000,000.

Anne believes that she can earn a rate of return of 7 per cent on any money she receives.
 a) Which payment option would you suggest that Anne select?

b) What Interest rate would make these two options equivalent?

6. You are planning to establish a retirement savings plan by setting aside money at the end of
each year. It is your hope to retire at age 55 with a pension income of $100,000 per year
received at the end of each year, for 20 years, from the money accumulated in this fund. You
expect to earn 8% per year on the fund assets as they accumulate, and on retirement, you
expect to purchase a 20 year annuity earning 6% on the undrawn balance. You are now 30 years
of age. Ignore inflation.
a. How much money will be required in the retirement fund to purchase the annuity when you
are 55?
b. Starting now, you plan to make annual (at year end) contributions to the retirement fund of
$13,000. Will that be sufficient to meet your goal? If not,
i. What rate of return would you need on the fund to reach your goal with these
contributions?
ii. Assuming the 8% return, how much would you have to contribute annually to
reach your goal?

7. Hilroy Company does not currently pay a dividend. Companies with similar risk are expected to
generate a return of 12%. It is now January 2009.
a. If the market expects the company to begin an end-of-year dividend of $2.00 per share
beginning in 2012, and that the divided will grow at a constant rate of 3% per year
thereafter, what would be the price of the stock per share be on January 1, 2012?
b. What would the current stock price be (January 1, 2009)?
c. If an investor bought the stock at the current price and sold the stock on January 1, 2012
at the price estimated in part a, what would be the annual rate of return?
d. The company has an outstanding issue of preferred shares, with a current yield of 7%. If
the annual dividend is $8.00, what would be the price of the preferred share?

8. You are considering purchasing a 3-year corporate bond, with an annual coupon rate of 4%
(coupons paid semi-annually) on a principal value of $100. The yield to maturity desired in the
market is 4% (2% semi-annually). What is the market price of the bond? What would the price
of the bond be if the market demanded a 5% (2.5% semi-annually) yield?