ACC241: Time Value of Money
Name: Adam Newman
Time Value of Money – Some examples –-
Ignore income taxes on all problems
Please complete the below and bring to class on Wednesday, December 2nd.
You should read
the Appendix 3, Time Value of Money, and the summary starting on page 2 of this exercise.
If $10,000 is deposited today in an account earning 5%, how much will be in the account after 3
years? After 10 years?
What can you conclude about the effect of time?
fter 3 years: 11576.25
After 10 years: 16288.95
How much would you pay today for a savings certificate that returns $16,289 in 10 years if you want
to earn a 5% rate of return?
A 10% rate of return?
What can you conclude about the effect of
5% return: $10,000
10% return: 6287.5
Your uncle sets up a trust fund for you, depositing $10,000 in an account that earns 6% compounded
You cannot touch the money until your uncle dies.
If he dies 8 years from now, how much
will be in your trust fund?
If he dies 16 years from now, will there be twice as much money?
In 8 years : 15938.48
In 16 Years: no, 25,403.52
You won the Lottery!
The prize is $5,000,000, to be paid in equal installments of $250,000 over 20
Alternatively, you can settle for an immediate cash payment of $3,000,000.
If you assume
that you could earn an average 6% interest (in safe investments) over the next 20 years, which
payment alternative is the better deal? (ignore income taxes)
3,000,000 * 1.06^20= 9,621,406.42
The lump sum is a better deal
If Kinko’s buys another copy machine for $20,000, it will generate net annual cash flows of $5,000 a
year for 5 years, after which it will be worthless.
is 10%, should they invest in
the copier? (ignore income taxes)
5,000*6.105 = 30,525 yes they should invest