Time Value of Money Practice Problems

1. Find the present value (rounded to the nearest dollar) of:

a. $15,000 due in 5 years at 8% compounded annually

b. $25,000 due in 8½ years at 10% compounded semi-annually

c. $9,500 due in 4 years at 12% compounded quarterly

2. Compute the future value (rounded to the nearest dollar) of the following investments:

a. $10,209 invested to earn interest at 8% compounded annually for 5 years

b. $10,907 invested to earn interest at 10% compounded semi-annually for 8½ years

c. $5,920 invested to earn interest at 12% compounded quarterly for 4 years

d. $4,166 invested to earn interest at 6% compounded semi-annually for 10 years

3. U-Crane Company has just borrowed $100,000. The loan is to be repaid in regular annual payments

made at the end of each year. What is the amount of each annual payment under the following sets of

terms:

a. Interest rate of 10% compounded annually; repayment in five annual payments

b. Interest rate of 12% compounded annually; repayment in ten annual payments

4. Compute the present value for each of the following situations, assuming an interest rate of 10%

compounded annually (round amounts to the nearest dollar):

a. a single payment of $30,000 due five years from now

b. a series of payments of $5,000 each, due at the end of each year for five years

c. a 5–year, 10% loan of $25,000, with interest payable annually, and the principal due in 5

years

5. Compute the future value amounts (rounded to the nearest dollar) in each of the following situations,

assuming an interest rate of 10% compounded annually:

a. a $20,000 lump-sum investment today that will earn interest at 10% compounded annually

over five years

b. a $10,000 lump-sum investment today that will earn interest at 12%, compounded

semi-annually, to provide money for a child’s college education 10 years from now

6. Kenneth J. Nelson has just purchased a new car for $35,000. He paid $5,000 down and signed a note

for the remaining $30,000. The interest rate on the note is 6% compounded monthly. Compute the

amount of Mr. Nelson’s monthly payment assuming Mr. Nelson plans to pay off the $30,000 note in

25 monthly payments.

7. Brian Johnson’s grandparents want to give him some money when he graduates from high school.

They have offered Brian the following three choices:

a. Receive $15,000 immediately

b. Receive $10,000 immediately along with $1,250 at the end of every six months for the next

four years

c. Receive $1,600 at the end of every six months for the next four years along with $10,000 to

be received in a lump sum at the end of four years

Assuming an interest rate of 10% compounded semi-annually, which option should Brian choose to

have the largest amount of money at the end of four years?