Instructions:
You are required to use a financial calculator or spreadsheet (Excel) to solve 10 problems
on the applications of the time value of money. You are required to show
the following 4 steps for each problem (sample questions and solutions are provided for
guidance):
(i) Develop the timeline (linear representation of the timing of cash flows)
(ii) Identify the time value of money variable (PV, FV, PMT, N or Rate) which needs to
be calculated in the question.
(iii) Identify the values of the remaining four variables (PV, FV, PMT, N or Rate) from
the question. Be sure to input positive or negative signs.
(iv) Calculate the correct value of the variable identified in step (ii).
Assignment Problems
1. On the day Harry was born, his parents put $1400 into an investment account that
promises to pay a fixed interest rate of 4 percent per year. How much money will Harry
have in this account when he turns 21? Round to two decimal places.
2. At what rate must $287.50 be compounded annually for it to grow to $572.86 in 8
years? Submit your answer as a percentage and round to two decimal places.
3. How much money must be put into a bank account yielding 6.42% (compounded
annually) in order to have $1,671 at the end of 11 years? Round to two decimal
places.
4. Biff deposited $9,000 in a bank account, and 12 years later he closes out the account,
which is worth $18,000. What annual rate of interest has he earned over the 12 years?
Submit your answer as a percentage and round to two decimal places.
5. How much money do you need to place into a bank account that pays a 2.05% rate in
order to have $600 at the end of 9 years? Round to two decimal places.
6. Your grandparents deposit $2,000 each year on your birthday, starting the day you are
born, in an account that pays 7% interest compounded annually. How much will you have
in the account on your 21st birthday, just after your grandparents make their deposit
(round to nearest $1)? Round to two decimal places.
7. Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be
repaid in 48 equal monthly payments. The annual interest rate on the loan is 10
percent. What is your monthly payment? Round to two decimal places.
8. Your company has received a $50,000 loan from an industrial finance company. The
annual payments are $6,202.70. If the company is paying 9 percent interest per year, how
many loan payments must the company make? Round to the nearest number of periods.
9. You are ready to retire. A glance at your 401(k) statement indicates that you have
$950,000. If the funds remain in an account earning 8.5%, how much could you withdraw
at the beginning of each year for the next 25 years? Round to two decimal places.
10. If you wish to accumulate $240,000 in the child’s college fund after 18 years, and can
invest at a 6.5% annual rate, how much must you invest at the end of each year if the first
deposit is made at the end of the first year? Round to two decimal places.