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ch05sm - Chapter 5 The Time Value of Money Self Study...

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1 Chapter 5 The Time Value of Money Self Study Problems 5.1 Amit Patel is planning to invest $10,000 in a bank certificate of deposit (CD) for five years. The CD will pay interest of 9 percent. What is the future value of Amit’s investment? Solution : Present value of the investment = PV = $10,000 Interest rate on CD = i = 9% No. of years = n = 5. 0 1 2 3 4 5 ├───┼───┼───┼────┼───┤ -$10,000 FV=? $15,386.24 = + = + = 5 ) 09 . 0 1 ( 000 , 10 $ ) 1 ( PV FV n i 5.2 Megan Gaumer expects to need $50,000 as a down payment on a house in six years. How much does she need to invest today in an account paying 7.25 percent? Solution : Amount Megan will need in 6 years = FV 6 = $50,000 No. of years = n = 6 Interest rate on investment = i = 7.25% Amount needed to be invested now = PV = ? 0 1 2 3 4 5 6 ├───┼───┼───┼────┼───┼───┤ PV = ? FV = $50,000 $32,853.85 = + = + = 6 ) 0725 . 0 1 ( 000 , 50 $ ) 1 ( FV PV n n i
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