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CHAPTER 5
INTRODUCTION TO VALUATION: THE
TIME VALUE OF MONEY
Answers to Concepts Review and Critical Thinking Questions
1. The four parts are the present value (PV), the future value (FV), the discount rate (r), and the life of
7. This will probably make the security less desirable. TMCC will only repurchase the security prior to
CHAPTER 5 - 2
Solutions to Questions and Problems
Basic
1. The time line for the cash flows is:
2. To find the FV of a lump sum, we use:
3. To find the PV of a lump sum, we use:
4. To answer this question, we can use either the FV or the PV formula. Both will give the same answer
since they are the inverse of each other. We will use the FV formula, that is:
CHAPTER 5 - 4
5. To answer this question, we can use either the FV or the PV formula. Both will give the same answer
since they are the inverse of each other. We will use the FV formula, that is:
CHAPTER 5 - 5
6. The time line is:
7. To find the length of time for money to double, triple, etc., the present value and future value are
irrelevant as long as the future value is twice the present value for doubling, three times as large for
tripling, etc. To answer this question, we can use either the FV or the PV formula. Both will give the
same answer since they are the inverse of each other. We will use the FV formula, that is:
CHAPTER 5 - 6
8. The time line is:
9. The time line is:
10. The time line is:
CHAPTER 5 - 7
11. The time line is:
12. The time line is:
13. The time line is:
CHAPTER 5 - 8
14. The time line is:
15. The time line is:
Notice that the interest rate is negative. This occurs when the FV is less than the PV.
Intermediate
CHAPTER 5 - 9
a. The time line is:
b. The time line is:
c. The time line is:
17. The time line is:
18. To find the FV of a lump sum, we use:
CHAPTER 5 - 10
19. The time line is:
20. The time line is:
CHAPTER 5 - 11
Calculator Solutions
CHAPTER 5 - 12
4.
Enter
4
$240
$297
N
I/Y
PV
PMT
FV
Solve for
5.47%
CHAPTER 5 - 13
Enter
6.5%
$1
$4
N
I/Y
PV
PMT
FV
Solve for
22.01
13.
Enter
115
$150
$1,350,000
N
I/Y
PV
PMT
FV
Solve for
8.24%
CHAPTER 5 - 14
17.
Enter
9
12%
$190,000
N
I/Y
PV
PMT
FV
Solve for
$68,515.90
