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The Time value of Money
1
...
Five years at an interest rate of 5% per year
...
Ten years at an interest rate of 5% per year
...
Five years at an interest rate of 10% per year
...
Why is the amount of interest earned in part (a) less than half the amount of interest earned
in part (b)?
a
...
055 = 2,552
...
0510 = 3,257
...
15 = 3, 221
...
Because in the last 5 years you get interest on the interest earned in the first 5 years as well as
Interest on the original $2,000
...
What is the present value of $10,000 received
a
...
Twenty years from today when the interest rate is 8% per year?
c
...
Timeline:
PV = 10,000/1
...
97
b
...
0820 = 2,145
...
Timeline:
PV = 10,000/1
...
71
3
...
If the interest
rate is 7% per year, which option is preferable
...
07
10 =
5, 083
...
4
...
$100 received in one year
ii
...
$300 received in ten years
a
...
b
...
What is your ranking if the interest rate is 20% per year?
a
...
9090909
124
...
662987
b
...
2380952
156
...
173976
c
...
33333
80
...
45167
5
...
He
will be
paying you $10,000 at the end of this year, $20,000 at the end of the following year, and
$30,000
at the end of the year after that (three years from today)
...
5% per year
...
What is the present value of your windfall?
b
...
05 + 1, 000/ 1
...
053 = 952 +907 +864 = 2,723
Once you know the present value of the cash flows, compute the future value (of this present value)
at
date 3
...
053 = 3,152