Chapter 4 Worksheet on PV and FV with Answers

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High Point University *

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2020

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Finance

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Feb 20, 2024

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Chapter 4 Worksheet on Present and Future Value 1) Consider a one-year discount bond that pays $1,000 one year from now. If the rate of discount is 7 percent, the present value of the bond is. a. $930.00. b. $934.58. $1000 *.9346 = 934.60 c. $993.00. d. $993.46. 2) Consider a one-year discount bond that pays $1,500 one year from now. If the rate of discount is 4 percent, the present value of the bond is a. $1,560.00. b. $1,540.00. c. $1,440.00. d. $1,442.31. 1500 * .9615= 3) What is the Net Present Value of this stream of cash flows at 8%? PV Factor Time Now -$750 * 1.0 -750 Y1 -$300 *.9259 -277.77 Y2 $500 *.8573 428.65 Y3 $900 * .7938 714.42 Y4 $1,500 *.7350 1,102.50 1,217.80 4) What is the expected Future Value in 10 years of $10,000 invested in a mutual fund returning 7% per year? 10,000 *1.9672 = 19,672 … 7.1% ~ 2x 5) What is the expected Future Value in 5 years of $10,000 invested in a mutual fund earning 5% per year? 10,000 * 1.2763 = 12,673 6) Mr. Smith invested $10,000 5 years ago in a mutual fund which now has a value of $14,693. What is the average % return for his investment? 10,000 * FV factor = 14,693 FV factor = 14,693 / 10000 = 1.4693 find this factor on the PV worksheet look across the 5 year row to find 1.4963 under 8%... 8% is the answer 7) What is the future value of $7,000 invested per year in a mutual fund generating 7% for 30 years? This is an annuity … future value of an annuity… 7% 30 Years the FV factor is 94.461 … $7000 * 94.461 = 661,277 1

8) Marvin Wiley a star freshman basketball player at HPU is considering 2 options. Which should he choose? A) Sign a guaranteed contract with the NBA for $10,000,000 now. B) Plan to sign a contract for $15,000,000 3 years from now. Marvin believes there is a 10% chance per year that he may be injured and not be eligible for any contract. Plus Marvin believes his discount rate is 5%. Total = 15% 15,000,000 *.6575 = 9,862,500 9) Your salary is $60,000 now, how much will you be making in 40 years if you expect the salary to increase at 5% per year? 60,000 * 7.0400 = 422,400 10) The Hulk wants to have $2,000,000 in his retirement account. He wants to invest an equal amount at the end of every year. a. How much per year if the account earns 8% per year over 30 years? Logic = the future value of an annuity (end of year) =$2,000,000. Future value factor 8% 30 years = 113.283 so the answer is 2,000,000 / 113.283 $17,655 b. How much per year if the account earns 8% per year over 40 years? Future Value Annuity Factor 8% 40 years = 259.057 2,000,000 / 259.057 = $7,720 c. How much per year if the account earns 10% per year over 30 years? Future Value Annuity Factor 10% 30 years = 164.494 2,000,000 / 164.494 = 12,159 d. How much per year if the account earns 10% per year over 40 years? Future Value Annuity Factor 10% 40 years = 442.593 2,000,000 / 442.593 = 4,519 11) Peter Parker received a $15,000 bonus which he invested in a mutual fund. a. If the fund generates an 8% return how much will Peter have in the fund in 30 years ? Future Value 8% 30 years = 10.0627 15,000 * 10.0627 = 150,941 b. If the fund generates an 8% return how much will Peter have in the fund in 40 years? Future Value 8% 40 years = 21.7245 15,000 * 21.7245 = 325,868 2

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