Finance 300
Homework # 4 – Time Value of Money
1. Future Value of a Single Cash Flow or Lump Sum
KFed needs your financial advice. He just got a $100,000 divorce settlement and would
like to invest it. You tell him that he should put his money into a Certificate of Deposit
(CD) that pays 10% interest per year. Thus, How much should KFed obtain at the end of
year 5?
1. Set up the timeline
2. Set up the formula
FV
N
= PV(1+I)
FV
5
=
$100,000 (1+.10)
FV
5
= $100,000 (1.610)
FV
5
= $161,051
KFed should get $161,051 at the end of year 5.
2. Present Value of a Single Cash Flow or Lump Sum
Beavis is your best friend. He was recently offered an investment that would pay him
$2,000 at the end of year 4. The interest rate quoted was 9% per year. What should be the
most Beavis should pay for this investment, in other words, what is the present value of
this investment?
1. Set up the timeline
0
1
PV: $100,000
FV?
2
3
I=10%
4
5
0
1
PV?
2
3
I=9%
4
FV $2,000
N
5
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View Full Document2. Set up the formula
PV
N
= FV
(1+I)
PV
4
= $2,000
= $2,000
= $1,417.43
(1.09)
1.411
After you figured out the PV of this investment, Beavis tells you that the price of this
investment is $3,500. Do you recommend that he buys this investment? Explain (Note :
you don’t need calculations here)
No, this investment is only worth $1,417.43 and this most anyone should pay for it.
If
you were to pay more than $1,417.73 for this investment, you would be taking an inferior
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 Spring '08
 Olander
 Finance, Time Value Of Money, Future Value, Napoleon, OJ, ARod

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