Question

Time Value of Money

Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank’s evaluation process, you have been asked to take an examination that covers several financial analysis techniques. The first section of the test addresses the time value of money. See how you would do by answering the following questions.

Required

1. The basic present value equation has four parts. What are they? Explain. ​

2. You have just made your first $ 5000 contribution to your individual superannuation account. Assuming you earn a 10.2% rate of return and make no additional contributions, what will your account be worth when you retire in 45 years?​​​​

3. You are offered $ 1000 today, $ 10 000 in 12 years, or $ 25 000 in 25 years. Assuming that you can earn 11% on your money, which should you choose? ​​​

4. To pay for your child’s education you wish to have accumulated $ 15 000 at the end of 15 years. To do this you plan on depositing an equal amount into the bank at the end of each year. If the bank is willing to pay 6% compounded annually, how much must you deposit each year to obtain your goal? ​​​​

Answer 1

1.