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Time Value of Money: Basics
Using Table 12A.1 and Table 12A.2 of this chapter, determine the answers to each of the following independent situations. (Round answers to the nearest whole number.)

(a) The future value in three years of $1,000 deposited today in a savings account with interest compounded annually at 8 percent.



(b) The present value of $5,000 to be received in five years, discounted at 10 percent.


(c) The present value of an annuity of $9,000 per year for six years discounted at 10 percent.



(d) An initial investment of $14,904 is to be returned in eight equal annual payments. Determine the amount of each payment if the interest rate is 12 percent.



(e) A proposed investment will provide cash flows of $50,000, $10,000, and $7,000 at the end of Years 1, 2, and 3, respectively. Using a discount rate of 20 percent, determine the present value of these cash flows.

(f) Find the present value of an investment that will pay $7,000 at the end of Years 10, 11, and 12. Use a discount rate of 12 percent.

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Keith Leannon
Keith LeannonLv2
28 Sep 2019

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Beacon Manufacturing, Inc. is planning to buy a new cutting machine. The machine costs $125,000, has an estimated life of ten years and no salvage value. The machine is expected to have the following impact:

Increment revenue............................................................................................ $30,000

Incremental expenses:

Expenses other than depreciation.................................................................... (8,000)

Straight-line depreciation............................................................................... (12,500)

Incremental net income..................................................................................... $9,500

All revenue and expenses other than depreciation will be received or paid in cash. Compute the following for this proposal:

1. What is the annual net cash flow expected from the cutting machine investment? $____________

1. What is the expected payback period of the cutting machine investment? ______ years

2. What is the expected return on average investment associated with the cutting machine? ____________%

3. What is the net present value of the cutting machine discounted at an annual rate of 10%, if the present value of a ten-year $1 annuity discounted at 10% is 6.145? $____________

4. What is the net present value of the cutting machine discounted at an annual rate of 20%, if the present value of a ten-year $1 annuity discounted at 20% is 4.192? $____________

buckeye healthcare corp. is proposing to spend 186,725 on aneight year project that hass estimated net cash flows of 35,000 foreach of the eight years.

a. compute the net present value using a rate of return of 12%use the present value of an annuity of $1 table.

b. based on the analysis prepared in part a is the rate ofreturn more than 12% or less than 125, explain

c. determine the internal rate of return by computing a presentvalue factor for an annuity of $1 and using the present value of anannuity of $1.

Part One: Quantitative Exercises
Questions Answers
1. Future Value. What is the future value of
a. $800 invested for 14 years at 11 percent compoundedannually?
b. $210 invested for 8 years at 9 percent compounded annually?
c. $650 invested for 12 years at 8 percent compoundedannually?
2. Present Value. What is the present value of
a. $803 to be received 18 years from now at a 10 percent discountrate?
b. $406 to be received 7 years from now at a 5 percent discountrate?
c. $400 to be received 10 years from now at a 9 percent discountrate?
3. Future Value of an Annuity. What is the future value of
a. $557 a year for 12 years at 5 percent compounded annually?
b. $748 a year for 9 years at 12 percent compounded annually?
c. $442 a year for 7 years at 11 percent compounded annually?
4. Present Value of an Annuity. What is the present valueof
a. $1,163 a year for 12 years at an 7 percent discount rate?
b. $329 a year for 6years at a 12 percent discount rate?
c. $365 a year for 20 years at a 14 percent discount rate?
5. How many years will it take to grow
a. $765 to a value of 2,028.19 at a compound rate of 14percent?
b. $321 to a value of 450.22 at a compound rate of 12 percent?
c. $881 to a value of 1,305.78 at a compound rate of 7percent?
6. Interest Rate. At what interest rate will it take togrow
a. $800to a value of 1,017.13 over 6 years?
b. $600 to a value of 1,082.08 over 5 years?
c. $401 to a value of 1,311.16 over 6 years?
7. Car Loans (Hint: P/Y=12). How much is a car loan with apayment of
a.$453 per month for 3 years at 6% interest per year?
b.$466 per month for 5 years at 15% interest per year?
c.$301 per month for 6 years at 7% interest per year?
8. Mortgages (Hint: P/Y=12).
What was the initial mortgage on thehouse?
a.$4,369.66 per month for 30 years at 8 percent interest?
b.$1,626.83 per month for 15 years at 4 percent interest?
c. $3,724.21 per month for 30 years at 18 percent interest?
9. Mortgages (Hint: P/Y=12). What is the payoff on a 30year, 6% mortgage of
a.$255,413 with a payment of 1,321.33 with 8 years remaining?
b.$530,493 with a payment of 3,180.57 with 12 years remaining?
c. $297,266 with a payment of 1,782.26 with 11 yearsremaining?

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