Question

TIME VALUE OF MONEY

1. Assume you put $5,000 into an investment fund today that will pay 4% compounded annually for 10 years. What will the fund be worth in 10 years? How much of this is interest?  

2. It is the beginning of 20Y1 and it’s time to renew your security alarm service! The alarm company offers two plans for three years of coverage. Under the first plan, $1,000 annual payments are due at the end of 20Y1, 20Y2, and 20Y3. Under the second plan, a single payment of $2,500 is due at the beginning of 20Y1 (now). The interest rate is 8%. What is the better deal for you?

3. Assume you purchased a car that costs $14,000. The car dealership is offering financing at 5% per year. How much is your annual payment assuming you financed the car for 5 years? How much did the car actually cost?

Answer 1

Answer to Question 1:
Amount Invested (Present Value) = $5,000
Rate (r ) = 4%
Time (n ) = 10 years
Value of Investment in 10 years (Future Value) = ??

Future Value = Present Value * (1 + r) ^ n
Future Value = $5,000 * (1 + 0.04)^ 10
Future Value = $5,000 * 1.04 ^ 10
Future Value = $5,000 * 1.48024
Future Value = $7,401.20

The value of fund will be worth $7,401.20 in 10 years.

Interest = Value of Fund In 10 years – Amount invested
Interest = $7,401.20 - $5,000.00
Interest = $2,401.20