Question

Time Value of Money

The following situations test your comprehension of time value of money concepts. You will need your financial calculator. For each problem write the variable from the problem next to the variable in your calculator menu. Put a question mark next to the variable we are solving for, and put the answer to that variable on the “Answer” line. Remember that there has to be a negative number in your calculations for the formulas to work. If you get an error message on your calculator go back and make dollar variable negative.

1. Paulo has won the lottery. He is offered a series of payments of $1,200 per year for 20 years. What is the present value of these payments at an interest/discount rate of 6%?

PV =

FV =

I =

N =

Pmt =

Answer: ___________

2. Keesha’s grandmother died and left a trust for her that pays out $3,500 per year for 10 years. If Keesha invests the payments at 6%, what will her future value be?

PV =

FV =

I =

N =

Pmt =

Answer: ___________

3. Bob has been in an accident and the other party’s insurance company has offered either a one-time payout of $15,000, or a series of payments of $1,100 per year for 15 years. If Bob knows that the current investment rate of interest is 6%, what is the present value of the series of payments? Which should Bob take based on present values?

PV =

FV =

I =

N

Pmt =

Answer: ________

4. You want to buy a new car that costs $25,000. How much would your monthly payments be if you borrow the money for 5 years from a credit union at 4% annually (remember you make monthly payments so you have to get the term of the loan and the interest rate from annual periods to months)?

PV =

FV =

I =

N =

Pmt =

Answer: ________

5. You want to buy a house that costs $145,000, and because you have a good credit score you have been offered a 20 year loan at 3.75%. What is your monthly payment?

PV =

FV =

I =

N =

Pmt =

Answer: ________

Answer 1

1. Paulo has won the lottery. He is offered a series of payments of $1,200 per year for 20 years. What is the present value of these payments at an interest/discount rate of 6%?

PV = ?

FV = 0

I = 6

N = 20

Pmt = 1,200

Answer: -3,990.61214

2. Keesha’s grandmother died and left a trust for her that pays out $3,500 per year for 10 years. If Keesha invests the payments at 6%, what will her future value be?

PV = 0

FV = ?

I = 6

N = 10

Pmt = 3,500

Answer: -46,132.7823

3. Bob has been in an accident and the other party’s insurance company has offered either a one-time payout of $15,000, or a series of payments of $1,100 per year for 15 years. If Bob knows that the current investment rate of interest is 6%, what is the present value of the series of payments? Which should Bob take based on present values?

PV = ?

FV = 0

I = 6

N = 15

Pmt = 1,100

Answer: -10,683.47389

Bob should take the one time payment of $15,000 as it is greater than the PV of annual payments.

4. You want to buy a new car that costs $25,000. How much would your monthly payments be if you borrow the money for 5 years from a credit union at 4% annually (remember you make monthly payments so you have to get the term of the loan and the interest rate from annual periods to months)?

PV = 0

FV = 25,000

I = 4/12 = 0.3333333333

N = 5*12 = 60

Pmt = ?

Answer: -377.079718

5. You want to buy a house that costs $145,000, and because you have a good credit score you have been offered a 20 year loan at 3.75%. What is your monthly payment?

PV = 145,000

FV = 0

I = 3.75/12 = 0.3125

N = 20*12 = 240

Pmt = ?

Answer: -859.6880567

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