CHAPTER 2

Time Value of Money

You have $10,000 available for investment in

stock. You are looking for a growth stock that
can grow your investment to $35,000 over five
years. What kind of growth rate are you looking for'?

$100

Short Case Studies with Excel

2.63 The state of Florida sold a total of 72.2 million

Years

4)]( F / P, i . 4).

$100( F/ P, i, 2)) (P/ F. i. 2).

2.59 Henry Cisco is planning to make two deposits,

$25,000 now and $30,000 at the end of six yea rs.
He wants to withdraw C each year for the first six
years and (C + $1,000) each year for the next
six years. Determine the value of C the deposits earn 10% interest compounded annually.
Solving for Unknown Interest Rote

2.60 At what rate of interest compounded manually

will an investment double in five years? Find
the answers by using (1) the exact formula and
(2) the Rule of 72.
2.61 Determine the interest rate i that makes the
pairs of cash flows shown in the accompanying
diagrams economically equivalent.

Yeurs

Years

lottery tickets at $1 each during the first week

of January 2003. As pi ize money, a total of
$36.1
million will be distributed over the next 21
years ($1,952,381 at the beginning of each
year). The distribution of the first-year prize
money occurs now. and the remaining lottery
proceeds are put into the states educational
reserve funds, which earn interest at the rate or
6% compounded annually. After the last prize
distribution has been made (at the beginning
of year 21), how much will be left over in the
reserve account?
A newspaper headline reads Millionaire Babies: How to Save Our Social Security Syster. It sounds a little wild, but the concept
expressed in the title of this case study is probably the point of an economic plan proposed
by a member of Congress. Senator Bob Kei rey. DNebraska, has proposed giving even
newborn baby a $1,000 government savings
account at birth, followed by five annual contributions of $500 each. If the funds are left
untouched in an investment account, Kerre;
says, then by the time each baby reaches age
65, his or her $3,500 contribution will have
grown to $600,000 over the years. even at
medium returns for a thrift-savings plan. At
about 9.4 % compounded annually, the balance would grow to be $1,005,132. (He
would you calculate this number?) With about
4 million babies born each year, the proposal
would cost the federal government $4 billion
annually. Kerrey offered this idea in a speech
devoted to tackling Social Security reform.
About 90% of the total annual Social Security
tax collections of more than $300 billion is
used to pay current beneficiaries, which is the
largest federal program. The remaining 10% is

Problems
invested in interest-bearing government bonds
that finance the day-to-day expenses of the
federal government. Discuss the economics of
Senator Bob Kerrey s Social Security savings
plan.

2.65 Kevin Jones. Texas Tigerss quarterback, agreed

to an eight-year, $50 million contract that at the
time made him the highest-paid player in professional football history. The contract included
a signing bonus of $11 million and called for

annual salaries of $2.5 million in 2003, $1.75

million in 2004, $4.15 million in 2005, $4.90 million in 2006, $5.25 million in 2007, $6.2 million
in 2008, $6.75 million in 2009, and $7.5 million
in 2010. The $11-million signing bonus was
prorated over the course of the contract so that
an additional $1.375 million was paid each year
over the eight-year contract period. With the
salary paid at the beginning of each season,
what is the worth of his contract at an interest
rate of 6%?