Additional TVM Problems:

1. Would you rather receive $1,000 today, or $2,000 in 10 years if the discount rate is 8 percent?

2. Suppose you deposit $1,000 in an account at the end of each of the next four years. If the account earns 12 percent, how much will be in the account at the end of seven years?

3. Calculate the present value of $5,000 in 12 years at a stated annual interest rate of 10 percent, compounded quarterly.

4. World Transportation, Inc., is expected to initiate its quarterly dividend of $1 five years from today and the dividend is expected to remain constant permanently. What is the price of World Transportation stock if the stated annual interest rate is 12 percent, compounded quarterly?

5. IDEC Pharmaceuticals is considering a drug project that costs $100,000 today and is expected to generate end-of-year cash flow of $50,000 forever. At what discount rate would IDEC be indifferent between accepting or rejecting the project?

6. Ernie Els wants to save money to meet two objectives. First, he would like to be able to retire 30 years from now with a retirement income of $300,000 per year for 20 years beginning at the end of the 31 years from now. Second, he would like to purchase a cabin in the mountains 10 years from now at an estimated cost of $350,000. He can afford to save only $40,000 per year for the first 10 years. He expects to earn 7 percent per year from investments. Assuming he saves the same amount each year, what must Ernie save annually from years 11 – 30 to meet his objectives?

7. Your younger brother has come to you for advice. He is about to enter college and has two options open to him. His first option is to study engineering. If he does this, his undergraduate degree would cost him $12,000 a year for four years. Having obtained this, he would need to gain two year of practical experience: In the first year he would earn $20,000, in the second year he would earn $25,000. He would then need to obtain his master’s degree, which will cost $15,000 a year for two years. After that he will be fully qualified and can earn $40,000 per year for 25 years.
His other alternative is to study accounting. If he does this, he would pay $13,000 a year for four years and would then earn $31,000 per year for 30 years.
The effort involved in the two careers is the same, so he is only interested in the earning the jobs provide. All earnings and costs are paid at the end of the year. What advice would you give him if the market interest rate is 5 percent? A day later he comes back and says he took your advice, but in fact, the market interest rate was 6 percent. Has your brother made the right choice?