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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