Tutorial for BGGE2044 Project Management and Finance - Finance

Tutorial 1 (Time Value of Money)

1. A woman has deposited $6,000 in a saving account. Bank pays interest at a rate of 9% per year.
Required: Compute the amount of interest that will be earned over 12-year period:
i) if the interest is simple? & ii) if the interest is compounded annually?

2. Suppose you are depositing an amount today in an account that earns 5% interest, compounded
annually. If your goal is to have $5,000 in the account at the end of six years, how much must you
deposit in the account today?

3. Calculate the present value of receiving a single amount of $1,000 in 20 years. The interest rate
for discounting the future amount is estimated at 10% per year compounded annually. Draw
timeline to depict the given information.

4.  What is the present value of receiving a single amount of $5,000 at the end of three years, if the
time value of money is 8% per year, compounded quarterly?

5. Calculate the present value on Jan 1, 2011 of an annuity of $500 paid at the end of each month of
the calendar year 2011. The annual interest rate is 12%. Assume compounding is done a) annually
and b) monthly.

6. A company expects a series of 24 monthly receipts of $3,600 each. The first payment will be
received 1 month from today. Determine the present value of this series assuming an interest
rate of 12% per year compounded semi-annually.

7. An amount of $10,000 was invested on Jan 1, 2011 at annual interest rate of 8%. Calculate the
value of the investment on Dec 31, 2013. Compounding is done on quarterly basis.

8.  An amount of $25,000 was invested on Jan 1, 2010 at annual interest rate of 10% compounded
on quarterly basis. On Jan 1, 2011 the terms or the agreement were changed such that
compounding was to be done twice a month from Jan 1, 2011. The interest rate remained the
same. Calculate the total value of investment on Dec 31, 2011.

9. Paul makes a single deposit today of $200. The deposit will be invested for 3 years at an interest
rate of 10% per year compounded semi-annually. What will be the future value of Paul's account
at the end of 3 years?

10. Mr A deposited $700 at the end of each month of calendar year 2011 in an investment account of
9% annual interest rate. Calculate the present value of the annuity on Dec 31, 2012.
Compounding is done on annual basis.

11.  Calculate the present value of 12 monthly deposits of $1,000 if each payment is made on the last
day of the month and the interest rate is 12%. Also calculate the total interest earned on the
deposits if the whole amount is withdrawn on the last day of 12th month compounded monthly.

12. Solve the problem below for the unknown Q assuming a 10% interest rate.
200

0 --------1--------2---------3---------4
Q

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13. What single payment sum of present value is equivalent to the follwing series of payment at a 10%
interest rate?

Year End of year payment ($)

1 1400
2 1320
3 1240
4 1160
5 1080

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