Question

You have applied for a job with a local bank. As part of its evaluation process, you must take an examination of the time value of money analysis covering the following questions. Please show your work. (Identify N, I/Y, PV, PMT, and FV)

1. What’s the future value of $100 after 3 years if it earns 8%, annual compounding?
2. What’s the present value of $100 to be received in 3 years if the interest rate is 8%, annual compounding?
3. What annual interest rate would cause $1,000 to grow to $2,000 in 8 years?
4. If a company’s sales are growing at a rate of 7.2% annually, how long will it take sales to double?.

Answer 1

Answer 1.

Present Value = $100
Period = 3 years
Interest Rate = 8%

N = 3
I/Y = 8%
PV = -100
PMT = 0

FV = 125.97

Future Value = $125.97

Answer 2.

Future Value = $100
Period = 3 years
Interest Rate = 8%

N = 3
I/Y = 8%
FV = 100
PMT = 0

PV = -79.38

Present Value = $79.38

Answer 3.

Present Value = $1,000
Future Value = $2,000
Period = 8 years

N = 8
PV = -1000
PMT = 0
FV = 2000

I/Y = 9.05%

Interest Rate = 9.05%

Answer 4.

Present Sales = $1
Future Sales = $2
Growth Rate = 7.20%

I/Y = 7.20%
PV = -1
PMT = 0
FV = 2

N = 9.97

Period = 9.97 years