Present & Future Values:
Lump Sums
Chapter
Five
Problem Set – Present & Future
Values
1. The town of Banff has a population of 5,000. If Banff’s population
is growing at 2.5% per year, what will it’s population be in 20 years?
($8,193)
2. Your father has agreed to help you purchase a new car, contingent
upon your finishing your degree and finding a job. If you believe
your new car will cost $25,000 when you purchase it 2 years from
today, how much must your dad set aside today, if you can earn 7%
on your funds? ($21,836)
3. You are named as the beneficiary of a trust fund established by a
wealthy relative. If the fund will pay you $50,000 on your 30th
birthday and you are 22 today, what is the value of the fund today,
given a discount rate of 10%. ($23,325)
4. You purchased Nortel at $3.10 two years ago. Today, Nortel is
trading at $3.80. What is your annually compounded rate of return
on your Nortel investment? (10.72%)
Problem Set – Present & Future
Values
5.
6.
7.
8.
9.
You have invested $5,000 at 8%. How long will it take for your money to
double? (9.01 years)
Last summer you started a lawn maintenance company. Sales were
$100,000 for the year. If you believe you can grow your sales by 25% per
year, what would your sales be after three years in business? ($195,312)
You have a choice between investing in Asset A, which pays 6% simple
interest or Asset B, which pays 5.75% compounded annually. If you intend
to keep the investment for 10 years, should you invest in Asset A or Asset
B? (A - $1,600; B - $1,749. Choose B)
Your company has been named as a defendant in a lawsuit. The potential
damages are $100,000, but it will take three years before payment is
required. How much should you set aside today to cover the potential
liability, given an 8% discount rate? ($79,383)
Today, you set aside $5,000 to fund your dream vacation, which you intend
to take 6 years from now. If the vacation will cost $10,000, what interest
rate must you earn to make it possible? (12.25%)
Problem Set – Present & Future
Values
10. You have invested $10,000 at 6%, compounded
quarterly. How much money will you have after 10
years? ($18,140.18)
11. Jack began saving for retirement at age 20 by putting
aside $5,000. Joe also set aside $5,000 but he waited
until he turned 30. Both Jack and Joe want to retire at
age 65. If both are able to earn 10% on their funds,
how much more money will Jack have on their
retirement date? (Jack: $364,452; Joe: $140,512;
Difference = $223,940)