1. Calculate the future value of $4,600 received today if it is deposited at 9 percent for three years.

2. Calculate the present value of $89,000 to be received in 15 years, assuming an opportunity cost of
14 percent.
3. Jeanie has deposited $33,000 today in an account which will earn 10 percent annually. She plans to
leave the funds in this account for seven years earning interest. If the goal of this deposit is to cover
a future obligation of $65,000, what recommendation would you make to Jeanie?
4. EcoSystems, Inc. is preparing a five-year plan. Today, sales are $1,000,000. If the growth rate in
sales is projected to be 10 percent over the next five years, what will the dollar amount of sales be
in year five?
5. Fred has inherited $6,000 from the death of Barney. He would like to use this money to buy Wilma
a new rockmobile costing $7,000 for their 10th anniversary celebration which will take place in 2
years from now. Will Fred have enough money to buy the gift if he deposits his money in an
account paying 8 percent compounded semi-annually?
6. Kay and Arthur are newlyweds and have just purchased a condominium for $70,000. Since the
condo is very small, they hope to move into a single-family house in 5 years. How much will their
condo worth in 5 years if inflation is expected to be 8 percent?
7. Calculate the present value of a $10,000 perpetuity at a 6 percent discount rate.
8. Calculate the future value of an annuity of $5,000 each year for eight years, deposited at 6 percent.
9. Calculate the present value of an annuity of $3,900 each year for four years, assuming an
opportunity cost of 10 percent.
10. Linda has decided to set up an account that will pay her granddaughter (Janice) $5,000 a year
indefinitely. How much should Linda deposit in an account paying 8 percent annual interest?
11. A wealthy industrialist wishes to establish a $2,000,000 trust fund which will provide income for
his grandchild into perpetuity. He stipulates in the trust agreement that the principal may not be
distributed. The grandchild may only receive the interest earned. If the interest rate earned on the
trust is expected to be at least 7 percent in all future periods, how much income will the grandchild
receive each year?
12. Cara establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year payments of
$960.43. Calculate the original principal amount.
13. A lottery administrator has just completed the state’s most recent $50 million lottery. Receipts from
lottery sales were $50 million and the payout will be $5 million at the end of each year for 10 years.
The expenses of running the lottery were $800,000. The state can earn an annual compound rate of
8 percent on any funds invested.
(a) Calculate the gross profit to the state from this lottery.
(b) Calculate the net profit to the state from this lottery (no taxes).

14. Kimberly has just won a $20 million lottery, which will pay her $1 million at the end of each year
for 20 years. An investor has offered her $10 million for this annuity. She estimates that she can
earn 10 percent interest, compounded annually, on any amounts she invests. She asks your advice
on whether to accept or reject the offer. What will you tell her? (Ignore Taxes)
15. Mr. Handyman has been awarded a bonus for his outstanding work. His employer offers him a
choice of a lump-sum of $5,000 today, or an annuity of $1,250 a year for the next five years. Which
option should Mr. Handyman choose if his opportunity cost is 9 percent?
16. In their meeting with their advisor, Mr. & Mrs. Smith concluded that they would need $40,000 per
year during their retirement years in order to live comfortably. They will retire 10 years from now
and expect a 20-year retirement period. How much should Mr. & Mrs. Smith deposit now in a bank
account paying 9 percent to reach financial happiness during retirement?
17. Jay is 30 years old and will retire at age 65. He will receive retirement benefits but the benefits are
not going to be enough to make a comfortable retirement life for him. Jay has estimated that an
additional $25,000 a year over his retirement benefits will allow him to have a satisfactory life.
How much should Jay deposit today in an account paying 6 percent interest to meet his goal?
Assume Jay will have 15 years of retirement.
18. You have been given a choice between two retirement policies as described below.
Policy A: You will receive equal annual payments of $10,000 beginning 35 years from now for 10
years.
Policy B: You will receive one lump-sum of $100,000 in 40 years from now. Which
policy would you choose? Assume rate of interest is 6 percent.

19. Joie is planning to attend college when she graduates from high school 7 years from now. She
anticipates that she will need $10,000 at the beginning of each college year to pay for tuition and
fees, and have some spending money. Joie has made an arrangement with her father to do the
household chores if her dad deposits $3,500 at the end of each year for the next 7 years in a bank
account paying 8 percent interest. Will there be enough money in the account for Joie to pay for her
college expenses? Assume the rate of interest stays at 8 percent during the college years.

20. During her four years at college, Rose received the following amounts of money at the end of each
year from her grandmother. She deposited her money in a saving account paying 6 percent rate of
interest. How much money will Rose have on graduation day?
Year $
1 100
2 200
3 300
4 400

21. You have provided your friend with a service worth $8,500. Your friend offers you the following
cash flow instead of paying $8,500 today. Should you accept his offer if your opportunity cost is 8
percent?
Year Cash Flow
1 $4,000
2 3,000
3 2,000
22. Calculate the present value of $5,800 received at the end of year 1, $6,400 received at the end of
year 2, and $8,700 at the end of year 3, assuming an opportunity cost of 13 percent.
23. Calculate the present value of $800 received at the beginning of year 1, $400 received at the
beginning of year 2, and $700 received at the beginning of year 3, assuming an opportunity cost of
9 percent.
24. Calculate the combined future value at the end of year 3 of $1,000 received at the end of year 1,
$3,000 received at the end of year 2, and $5,000 received at the end of year 3, all sums deposited at
5 percent.
25. You are considering the purchase of new equipment for your company and you have narrowed
down the possibilities to two models which perform equally well. However, the method of paying
for the two models is different. Model A requires $5,000 per year payment for the next five years.
Model B requires the following payment schedule. Which model should you buy if your
opportunity cost is 8 percent?
Year Payment (Model B)
1 $7,000
2 6,000
3 5,000
4 4,000
5 3,000

26. Last Christmas, Larry received an annual bonus of $1,500. These annual bonuses are expected to
grow by 5 percent for the next 5 years. How much will Larry have at the end of the fifth year if he
invests his Christmas bonuses (including the most recent bonus) in a project paying 8 percent per
year?

27. Calculate the present value of the following stream of cash flows, assuming that the firm’s
opportunity cost is 15 percent.
Years Amount
1–7 $12,000
8–10 14,000

28. Calculate the future value of $6,490 received today and deposited for five years in an account
which pays interest of 14 percent compounded semiannually.
29. Calculate the future value of $10,000 received today and deposited for six years in an account
which pays interest of 12 percent compounded quarterly.
30. Jeanne has just graduated from high school and has received an award for $5,000. She would like to
deposit the money in an interest earning account until she graduates from college (i.e., four years
from now). In her search for the highest interest earning account, she has narrowed the list down to
the following two accounts: 1) bank A pays 9 percent interest compounded annually, and 2) bank B
pays 8 percent interest compounded semi-annually. Which is the better offer, and how much will
Jeanne have upon graduation from college?
31. Janice borrows $25,000 from the bank at 15 percent to be repaid in 10 equal annual installments.
Calculate the end-of-year payment.
32. The following table presents the Sally’s Silly Service Company’s net earnings for the past six
years. Compute the growth rate in the company’s earnings.
Year Return
2002 $2,659
2001 2,500
2000 2,370
1999 2,100
1998 1,890
1997 1,728

33. Marc has purchased a new car for $15,000. He paid $2,500 as down payment and he paid the
balance by a loan from his hometown bank. The loan is to be paid on a monthly basis for two years
charging 12 percent interest. How much are the monthly payments?
34. You have been given the opportunity to earn $20,000 five years from now if you invest $9,524
today. What will be the rate of return to your investment?
35. Ten years ago, Tom purchased a painting for $300. The painting is now worth $1,020. Tom could
have deposited $300 in a savings account paying 12 percent interest compounded annually. Which
of these two options would have provided Tom with a higher return?
36. Find the equal annual end-of-year payment on $50,000, 15 year, and 10 percent loan.
37. A firm wishes to establish a fund which, in 10 years, will accumulate to $10,000,000. The fund will
be used to repay an outstanding bond issue. The firm plans to make deposits, which will earn 12
percent, to this fund at the end of each of the 10 years prior to maturity of the bond. How large must
these deposits be to accumulate to $10,000,000?
38. John borrowed $12,000 to buy a new car and expects to pay $564.87 per month for the next 2 years
to pay off the loan. What is the loan’s rate of interest?
39. The New York Soccer Association would like to accumulate $10,000 by the end of 4 years from
now to finance a big soccer weekend for its members. The Association currently has $2,500 and
wishes to raise the balance by arranging annual fund-raising events. How much money should they
raise at each annual fund-raising event assuming 8 percent rate of interest?

40. Ms. Day needs $20,000 to buy her dream car. In her search for the best (low cost) loan, she has
gathered the following information from three local banks. Which bank would you recommend Ms.
Day borrow from?
Bank Annual Payment Term (years)
A $8,326.40 3
B 6,309.15 4
C 5,411.25 5
41. A deep-discount bond can be purchased for $312 and in 20 years it will be worth $1,000. What is
the rate of interest on the bond?
42. Timothy borrows $6,930 from the bank. For a four-year loan, the bank requires annual end-of-year
payments of $2,281.86. Calculate the interest rate on the loan.
43. Tom is evaluating the growth rate in dividends of a company over the past 6 years. What is the
annual compound growth rate if the dividends are as follows:
Year Dividends
1997 $1.38
1998 1.52
1999 1.85
2000 1.80
2001 1.95
2002 2.15

44. To expand its operation, the International Tools Inc. (ITI) has applied for a $3,500,000 loan from
the International Bank. According to ITI’s financial manager, the company can only afford a
maximum yearly loan payment of $1,000,000. The bank has offered ITI, 1) a 3-year loan with a 10
percent interest rate, 2) a 4-year loan with a 11 percent interest rate, or 3) a 5-year loan with a 12
percent interest rate.
(a) Compute the loan payment under each option. (b) Which option should the company choose?

45. To buy his favorite car, Larry is planning to accumulate money by investing his Christmas bonuses
for the next five years in a security which pays a 10 percent annual rate of return. The car will cost
$20,000 at the end of the fifth year and Larry’s Christmas bonus is $3,000 a year. Will Larry
accumulate enough money to buy the car?
46. Mr. & Mrs. Pribel wish to purchase a boat in 8 years when they retire. They are planning to
purchase the boat using proceeds from the sale of their property which is currently worth $90,000
and its value is growing at 7 percent a year. The boat is currently worth $200,000 increasing at 5
percent per year. In addition to the value of their property, how much additional money should they
deposit at the end of each year in an account paying 9 percent annual interest in order to be able to
buy the boat upon retirement?

47. Herbert has opened a retirement fund account which pays 7 percent interest and requires $5,000
annual deposits. Herbert will retire in 15 years and expects 10 years of retirement life. What is the
maximum annual retirement benefit Herbert can get during his retirement years?

48. Brian borrows $5,000 from a bank at 8 percent annually compounded interest to be repaid in five
annual installments. Calculate the principal paid in the third year.
49. Nancy would like to accumulate $10,000 by the end of 3 years from now to buy a sports car from
her friend, Jim. She has $2,500 now and would like to save equal annual end-of-year deposits to
pay for the car. How much should she deposit at the end of each year in an account paying 8
percent interest to buy the car?
50. To expand its operation, International Tools Inc. has applied to the International Bank for a 3-year,
$3,500,000 loan. Prepare a loan amortization table assuming 10 percent rate of interest.

51. Ken borrows $15,000 from a bank at 10 percent annually compounded interest to be repaid in six
equal installments. Calculate the interest paid in the second year.
52. Suzy wants to buy a house but does not want to get a loan. The average price of her dream house is
$500,000 and its price is growing at 5 percent per year. How much should Suzy invest in a project
at the end of each year for the next 5 years in order to accumulate enough money to buy her dream
house with cash at the end of the fifth year? Assume the project pays 12 percent rate of return.
53. Assume you have a choice between two deposit accounts. Account X has an annual percentage rate
of 12.25 percent but with interest compounded monthly. Account Y has an annual percentage rate
of 12.20 percent with interest compounded continuously. Which account provides the highest
effective annual return?

54. Congratulations! You have just won the lottery! However, the lottery bureau has just informed you
that you can take your winnings in one of two ways. Choice X pays $1,000,000. Choice Y pays
$1,750,000 at the end of five years from now. Using a discount rate of 5 percent, based on present
values, which would you choose? Using the same discount rate of 5 percent, based on future values,
which would you choose? What do your results suggest as a general rule for approaching such
problems? (Make your choices based purely on the time value of money.)
55. Nico is the new assistant branch manager of a larger Florida-based bank and the branch manager
has asked him a question to test his knowledge. The question he asked is which rate should the
bank advertise on monthly-compounded loans, the nominal annual percentage rate or the effective
annual percentage rate? Which rate should the bank advertise on quarterly-compounded savings
accounts? Explain. As a consumer, which would you prefer to see and why?