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Managerial Economics (ARE) 143
University of California, Davis
Instructor: John H. Constantine
Chapter 6—Time Value of Money
Problem 1:
(a)
One Year Future Value What is the future value of $400 deposited for one year earning an
interest rate of 11 percent per year?
(b)
MultiYear Future Value How much would be in your savings account in 8 years after depositing
$150 today if the bank pays 7 percent per year?
(c)
A deposit of $350 earns the following interest rates:
8 percent in the first year,
7 percent in the second year, and
5 percent in the third year.
What would be the third year future value?
Problem 2:
(a)
What is the present value of a $400 payment in one year when the discount rate is 7 percent?
(b)
What is the present value of a $1,500 payment made in 5 years when the discount rate is 8
percent?
(c)
Compute the present value of a $850 payment made in 10 years when the discount rate is 12
percent.
(d)
Compute the present value of $1,000 paid in three years using the following discount rates; 6
percent in the first year, 7 percent in the second year, and 6 percent in the third year.
(e)
What would be more valuable, receiving $500 today or receiving $625 in three years when
interest rates are 9 percent? Why?
Problem 3:
How long will it take $2,000 to reach $6,000 when it grows at 10 percent per year?
Problem 4:
You invested $3,000 in the stock market one year ago. Today, the investment is valued at $3,500.
What
return did you earn?
What return would you suffer next year for your investment to be valued at the
original $3,000?
Problem 5:
People can become millionaires in their retirement years quite easily if they start saving early in employer
401(k) or 403(b) programs (or even if their employers don’t offer such programs).
Demonstrate the
growth of a $250 monthly contribution for 40 years earning 9 percent APR.
Problem 6:
(a)
Compute the future value in year 8 of a $1,000 deposit in year 1 and another $1,500 deposit at the
end of year 3 using a 10% interest rate.
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 Spring '08
 Brinkley,G
 Interest Rates, Time Value Of Money

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