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Chapter 1

1. Calculating the Future Value of Property. Josh Collins plans to buy a house for $210,000. If that real
estate is expected to increase in value by 3 percent each year, what will its approximate value be six
years from now?

Solution: $210,000  1.194 = $250,740

LO: 1-2
Topic: Future value
LOD: Intermediate
Bloom tag: Apply

2. Using the Rule of 72. Using the rule of 72, approximate the following amounts.
a. If the value of land in an area is increasing 6 percent a year, how long will it take for property
values to double?
b. If you earn 10 percent on your investments, how long will it take for your money to double?
c. At an annual interest rate of 5 percent, how long will it take for your savings to double?

Solution:
a. about 12 years (72/6)
b. about 7.2 years (72/10)
c. about 14.4 years (72/5)
LO: 1-2
Topic: Time value of money – number of periods
LOD: Basic
Bloom tag: Apply

3. Determining the Inflation Rate. In 2013, selected automobiles had an average cost of $16,000. The
average cost of those same automobiles is now $24,000. What was the rate of increase for these
automobiles between the two time periods?

Solution: ($24,000 – $16,000) / $16,000 = .50 (50 percent)

LO: 1-2
Topic: Time value of money – interest rates and inflation
LOD: Intermediate
Bloom tag: Apply

4. Computing Future Living Expenses. A family spends $46,000 a year for living expenses. If prices
increase by 2 percent a year for the next three years, what amount will the family need for their living
expenses after three years?

Solution: $46,000  1.061 = $48,806 (Future value of single amount for 3 years at 2 percent)
LO: 1-2
Topic: Future value
LOD: Basic
Bloom tag: Apply

5. Calculating Earnings on Savings. What would be the yearly earnings for a person with $6,000 in
savings at an annual interest rate of 2.5 percent?

Solution: $6,000  .025 = $150

LO: 1-4
Topic: Time value of money – interest rates and inflation
LOD: Basic
Bloom tag: Apply

6. Computing the Time Value of Money. Using a financial calculator or time value of money tables in the
Chapter Appendix, calculate the following.
a. The future value of $450 six years from now at 7 percent.
b. The future value of $900 saved each year for 10 years at 8 percent.
c. The amount a person would have to deposit today (present value) at a 6 percent interest rate to
have $1,000 five years from now.
d. The amount a person would have to deposit today to be able to take out $600 a year for 10 years
from an account earning 8 percent.

Solution: a. $450  1.501 = $675.45

b. $900  14.487 = $13,038.30
c. $1,000  0.747 = $747
d. $600  6.710 = $4,026
LO: 1-4
Topic: Present value
LOD: Intermediate
Bloom tag: Apply

7. Calculating the Future Value of a Series of Amounts. Elaine Romberg prepares her own income tax
return each year. A tax preparer would charge her $80 for this service. Over a period of 10 years, how
much does Elaine gain from preparing her own tax return? Assume she can earn 3 percent on her
savings.

Solution: $80  11.464 = $917.12

LO: 1-4
Topic: Future value
LOD: Advanced
Bloom tag: Apply

8. Calculating the Time Value of Money for Savings Goals. If you desire to have $20,000 for a down
payment for a house in five years, what amount would you need to deposit today? Assume that your
money will earn 4 percent.

Solution: $20,000 x 0.822 (present value of single amount) = $16,440

LO: 1-4
Topic: Present value
LOD: Intermediate
Bloom tag: Apply

9. Calculating the Present Value of a Series. Pete Morton is planning to go to graduate school in a program
of study that will take three years. Pete wants to have $15,000 available each year for various school and
living expenses. If he earns 4 percent on his money, how much must be deposited at the start of his
studies to be able to withdraw $15,000 a year for three years?

Solution: $15,000 x 2.775 (present value of a series) = $41,625

LO: 1-4
Topic: Present value
LOD: Advanced
Bloom tag: Apply

10. Using the Time Value of Money for Retirement Planning. Carla Lopez deposits $3,400 a year into her
retirement account. If these funds have an average earning of 9 percent over the 40 years until her
retirement, what will be the value of her retirement account?

Solution: $3,400 x 337.882 (future value of a series) = $1,148,799

LO: 1-4
Topic: Future value
LOD: Intermediate
Bloom tag: Apply

11. Calculating the Value of Reduced Spending. If a person spends $15 a week on coffee (assume $750 a
year), what would be the future value of that amount over 10 years if the funds were deposited in an
account earning 3 percent?

Solution: $750 x 11.464 (future value of a series) = $8,598.

LO: 1-4
Topic: Future value
LOD: Basic
Bloom tag: Apply
12. Calculating the Present Value of Future Cash Flows. A financial company advertises on television that
they will pay you $60,000 now in exchange for annual payments of $10,000 that you are expected to
receive for a legal settlement over the next 10 years. If you estimate the time value of money at 10
percent, would you accept this offer?

Solution: (1) calculate the future value of the annual payment $10,000 × 15.937 = $159,370
(2) calculate the present value of that future flow: $159,370 × 0.386 = $61,516.82
(3) the $60,000 being offered now is less than the present value of the future flow.
LO: 1-4
Topic: Present value
LOD: Advanced
Bloom tag: Apply; Analyze

13. Calculating the Potential Future Value of Savings. Tran Lee plans to set aside $2,400 a year for the next
six years, earning 4 percent. What would be the future value of this savings amount?

Solution: $2,400 × 6.633 = (future value of a series) = $15,919.20

LO: 1-4
Topic: Future value
LOD: Basic
Bloom tag: Apply

14. Determining a Loan Payment Amount. If you borrow $8,000 with a 5 percent interest rate, to be repaid
in five equal yearly payments, what would be the amount of each payment? (Note: Use a financial
calculator or the present value of an annuity table in the Chapter Appendix.)

Solution: $8,000 / 4.329 = $1,848

LO: 1-4
Topic: Annuity payments
LOD: Advanced
Bloom tag: Apply
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