FUNDAMENTAL OF FINANCIAL MANAGEMENT
Fall 2019
TUTORIAL: TIME VALUE OF MONEY
1. Suppose you make an investment of $1,000 now. This first year the investment
returns 12%, the second year it returns 6%, and the third year it returns 8%. How
much would this investment be worth at the end of the third year, assuming no
withdrawals are made in between?
2. A wealthy relative gives Barney $5,000 to help provide for his new born child’s
university fee. He decides to invest this money at 10% p.a. until his child is ready to go
to university. How much will be in the account 18 years from now?
3. Barney wants to provide $20,000 for his new born child’s education, which will
begin 18 years from today. How much should Barney invest now, if the interest rate is
10% p.a.?
4. Barney lends $100,000 to John, his cousin for a total of 10 years at 5% p.a.
a. How much does John have to pay after 10 years (if using simple interest
rate)?
b. How much does John have to pay after 10 years (if using compounded
interest rate)?
c. Assume that Barney lends $100,000 to John, using simple interest rate,
but wants to receive the payment which is equal to that if using compounded interest.
What should the interest rate be?
5. How long will it take for a $1,000 investment to double in size when invested at
the rate of 8% per year?
6. How long will it take for a $3,000 investment to grow to $10,000 if invested at 5%
interest
a. compounded annually?
b. compounded quarterly?
1000 ( 1+12%)(1+6%)(1+8%)
5000(1+10%)^18
20,000 = X(1+10%)^18
100,000(1 + 10x 5%) = 150,000
100,000 ( 1+5%)^10 = 162,889.4627
162,889.4627 = 100,000( 1+10X) => X = 6.2%
10,000 = 3,000 ( 1+ 5%) ^
2,000 = 1,000( 1 + 8%)^ n => n = 9.006 = 10 years
10,000 = 3,000 ( 1+ 0.05/4 ) ^4t => t = 24.23 years = 97 quaters
