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Time Value
Ch. 9
How do we approach this problem?
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For each problem, identify the formula and
process you would use.
FV = Future Value
PV = Present Value
A = Annuity payment/receipt
Click for answers within each frame
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You invest $9,000 today at 9%. What will you
have in the bank after 2 years?
(Click for answer)
This is Future Value because you are looking
for what an amount today will be worth in the
future. You would use the FV = PV x FVIF
formula
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Jean Spilicing will receive $8,000 a year for the
next 15 years from her trust. If a 7 percent
interest rate is applied, what is the value of the
payments?
This is Present Value of an Annuity, because you
are looking for the current value of a future
stream of payments. You would use the PVA =
A x PVIFA formula
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The Clearinghouse Sweepstakes has just
informed you that you have won $1 million.
The amount is to be paid out at the rate of
$20,000 a year for the next 50 years. If a 10%
rate is applied, should she be willing to sell out
her future rights now for $160,000?
This is Present Value of an Annuity, because
you are looking for the current value of a
fturue stream of payments. You would use the
PVA = A x PVIFA formula
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Your uncle offers you a choice of $30,000 in 50
years or $95 today. If the money is discounted at
12 percent, which should you choose?
You want to bring the two dollar amounts to the
same time frame. Because you’re given the
interest rate for discounting, that implies that
you want to bring the 30,000 back to today's
value. So use PV = FV x PVIF
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Jim Thomas borrows $70,000 toward the
purchase of a home at 12 percent interest. His
mortgage is for 30 years. How much will his
annual payment be?
This is looking for today’s value of payments
into the future. So that would be the present
value of annuity payments. You would use the
PVA = A x PVIFA formula. You would know
that PVA of 70,000 and the interest factor of
30 years and 12 percent, so you would solve
for the annuity payment.
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Mr. Nailor invests $400 each month in the bank
at 4% interest, which is compounded quarterly.
At the end of ten years, what will Mr. Nailor’s
investment be worth?
This is asking what the value of payments will
be worth in the future. That is Future Value of
an Annuity, so you would use FVA = A x FVIFA
formula.
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Frank Bell has just retired from the telephone
company. His total pension funds have an
accumulated value of $200,000 and his life
expectancy is 16 more years. His pension fund
manager assumes he can earn a 12 percent return
on his assets. What will be his yearly annuity for the
next 16 years?
We have a pool of money today, and are looking at
today’s value of payments that go into the future.
So that would be the present value of an annuity.
You would use the PVA = A x PVIFA formula. You
would know that PVA of 200,000 and the interest
factor of 16 years and 12 percent, so you would
solve for the annuity payment.
Capital Budgeting
Decisions
Ch. 12
Three Methods
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Payback
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Internal Rate of Return
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Net Present Value
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Clues for Payback
Which alternative would you select under the
payback period?
 At what point would the purchase pay for itself ?
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Clues for Internal Rate of Return
Cost of capital is x%
 What is the return?
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Clues for Net Present Value
Cost of capital or discount percentage
 What is the value of the project?
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