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HOMEWORK PROBLEMS
Chapter 3, Applying Time Value Concepts
1. In questions involving the time value of money, there are three pieces of information
that must be known. What are they?
2. You wish to deposit enough money for your child to attend college. You anticipate
that she will need $100,000 at age 18. If you deposit the money at the date of her
birth and you anticipate that you can earn a rate of return of 9%, how much will you
need to deposit? What would be the impact on the amount you need to deposit if you
wait until your child is 5 years old?
3. You wish to have $50,000 in 20 years and you anticipate that you can earn 7% on
your investments. To determine how much you will need to invest today, solve this
problem as a:
A. future value problem
B. present value problem
4. Your budget indicates that you can save $300 a month or $3,600 a year for your
retirement. If you are 25 years old and wish to retire at age 55, how much will you
have in your retirement account if you can invest your funds at 12%? What would be
the impact on your total retirement savings if you do not begin investing until you are
30?
Homework Problems to accompany Personal Finance, Third Edition by Jeff Madura
5. The interest rate that you receive on an investment has a significant impact on how
much you will need to invest to generate a given return. If you wish to receive
$5,000 a year for 20 years from an investment, how much will you need to invest if
the rate of return is:
A. 9%
B. 6%
6. Using the “Future Value of $1” table, answer each of the following questions:
A. Approximately how long would it take to double your money at a 7% rate of
return?
B. How long would it take to triple your money at 9%?
C. What interest rate would double your money in slightly over 14 years?
D. What interest rate would double your money in slightly less than 5 years?
7. For each of the following decisions, indicate whether you should use future value of
$1, present value of $1, future value of a $1 ordinary annuity, or present value of $1
ordinary annuity:
A. Saving for the down payment on a house on a monthly basis
B. Determining how much you will have in 10 years if you invest your tax refund
this year
C. Determining how much you will need invested on the date you retire to enable
you to withdraw $20,000 a year for 30 years
D. Determining how much you will need to invest today to have enough to take a
vacation at the end of two years if you know what the vacation will cost
Homework Problems to accompany Personal Finance, Third Edition by Jeff Madura
8. You determine that you will need $1,000,000 in order to retire at age 60. If you can
save $6,080 a year starting at age 30, approximately what interest rate will you need
to earn to achieve your goal?
9. You wish to save enough money for your son’s college education. You determine
that his college expenses will be $25,000 per year for four years. You wish to have
enough money on deposit at the beginning of his freshman year to enable him to
withdraw $25,000 each year for the four years and have nothing left after the last
withdrawal. If your son is currently 2 years old and will enter college at age 18, how
much will you need to deposit each year to have the desired amount on deposit at the
beginning of his freshman year? Assume that you can invest your funds at 9%.
10. You wish to purchase a new car costing $25,000. You can finance the car for five
years at a rate of 12%. Approximately what will be your total annual car payments?
Homework Problems to accompany Personal Finance, Third Edition by Jeff Madura