Chapter 4 - Case Study for Time Value of Money Exercise

Q #Question

1What is the difference between simple interest and compound interest?

type in answer here

2Suppose you have $500 to invest and you believe that you can earn 8% per year over the next 15 years

A. How much would you have at the end of 15 years using compound interest?

Show your work here

B. How much would you have using simple interest?

Show your work here

3What is the relationship between present value and future value?

type in answer here

4Suppose you need $15,000 in 3 years.

A. If you can earn 6% annually, how much do you need to invest today?

Show your work here

B. If you could invest the money at 8%, would you have to invest more or less than at 6%? How much?

Show your work here

5What are some situations in which you might want to compute the implied interest rate?

Suppose you are offered the following investment choices:

A. You can invest $500 today and receive $600 in 5 years. The investment is considered low risk. What is your implied interest rate?

Show your work here

B. As an alternative, you can invest $500 in a bank account paying 4% annually. Which investment (A or B) would you choose?

Show your work here

6Suppose you want to buy some new furniture for your apartment.

You currently have $500 and the furniture you want costs $600.

If you can earn 6%, how long will you have to wait to buy the furniture?

Show your work here

7Many financial calculator are available on line

Go to the present value portion of the Moneychimp web site:

http://www.moneychimp.com/calculator/present_value_calculator.htm

and work the following example:

You need $40,000 in 15 years. If you can earn 9.8% interest, how much do you need to invest today?

Enter the answer from Moneychimp here

8You just made your first $5,000 payment to your retirement plan with an annual rate of return @ 7% ( you will not make any additional payments)

A. What will your account be worth when you retire in 45 years?

Show your work here

B. What if you don't make that first payment now, but wait another 10 years, what will your account be worth when you retire?

9You will need $25,000 to start your business in 7 years.

A.If you can earn 5% on an initial investment, how much will you have to deposit today?

Show your work here

B. What if you want to start in 5 years, instead of 7 years?

Show your work here

C. What if you can earn 7% instead of 5%?

Show your work here

10You are looking at an investment that will pay $1200 in 5 years if you invest $1000 today. What is the implied rate of interest?

A. What Formula would you use to find the answer?

Show the formula (set up the formula, do not need to hand calculate)

B. What is the Function that you would use in Excel

Show the Excel function and calculate the answer

11You are offered an investment that will double your money in 6 years. You have $10,000 to invest. What is the implied rate of interest?

A. Demonstrate the easy answer (rule of 72)

B.Show the excel function and calculate the value

12Suppose you have a 1-year old son and you want to provide $75,000 in 17 years towards his college education.

You currently have $5,000 to invest. What interest rate must you earn to have the $75,000 when you need it?

A. Set up the formula to solve the problem (do not need to calculate the answer)

B.Show the excel function and calculate the value

13You want to purchase a new car and you are willing to pay $20,000. Youcan invest at 10% per year andcurrently have $15,000.

How long will it take before you have sufficient funds to pay cash for the car?

A. Set up the formula, do not need to hand calculate

B. Show excel function and calculate the answer in Excel