Time Value of Money exercises:
1.
Use future of present value techniques to solve the following problems
A.
Starting with $10,000, how much will you have in 10 years if you can earn 15 % on
your money? If you can earn only 8%?
At the end of 10 years, your $10,000 investment would grow to $40,460 at 15%, but only
$21,590 at 8% (about half as much).
FV
=
PV x FV factor
15%,10 yrs.
10000
+/-
PV
=
$10,000 x 4.406
15
I
=
$40,460
10
N
FV
$40,455.58
FV
=
PV x FV factor
8%,10yrs.
10000
+/-
PV
=
$10,000 x 2.159
8
I
=
$21,590
10
N
FV
$21,589.25
B
: If you inherited $25,000 today and invested all of it in a security that paid a 10% rate
of return, how much would you have in 25 years?
At the end of 25 years, your $25,000 investment would grow to $270,850 at a 10%
return.
FV
=
PV x FV factor
10%,25yrs.
25000
+/-
PV
=
$25,000 x 10.834
10
I
=
$270,850
25
N
FV
$270,867.65
C
: If the average new home costs $125,000 today, how much will it cost in 10 years if the
price increases by 5% each year?
At the end of 10 years the average new home, which costs $125,000 today, will cost
$203,625 if prices go up at 5% per year.
FV
=
PV x FV factor
5%,10yrs.
125000
+/-
PV
=
$125,000 x 1.629
5
I
=
$203,625
10
N
FV
$203,611.83