Chapter 1 Problems
1. Calculating the Future Value of Property. Ben Collins plans to buy a house for $220,000. If
that real estate is expected to increase in value 3 percent each year, what would its
approximate value be seven years from now?
Solution: $220,000 ¿ 1.230 = $270,600
LO: 1-2
Topic: Future value
LOD: Intermediate
Bloom tag: Apply
2. Using the Rule of 72. Using the rule of 72, approximate the following:
a. If land in an area is increasing 6 percent a year, how long will it take for property values to
double?
b. If you earn 10 percent on your investments, how long would it take for your money to
double?
c. At an annual interest rate of 5 percent, how long would it take for your savings to double?
Solution: a. about 12 years (72/6)
b. about 7.2 years (72/10)
c. about 14.4 years (72/5)
LO: 1-2
Topic: Time value of money – number of periods
LOD: Basic
Bloom tag: Apply
3. Determining the Inflation Rate. In 2006, selected new automobiles had an average cost of
$16,000. The average cost of those same motor vehicles is now $28,000. What was the rate
of increase for this item between the two time periods?
Solution: ($28,000 – $16,000) / $16,000 = .75 (75 percent)
LO: 1-2
Topic: Time value of money – interest rates and inflation
LOD: Intermediate
Bloom tag: Apply
4. Computing Future Living Expenses. A family spends $48,000 a year for living expenses. If
prices increase by 2 percent a year for the next three years, what amount will the family need
for its living expenses?
Solution: $48,000 ¿ 1.061 = $50,928 (Future value of single amount for 3 years at 2 percent)
LO: 1-2
Topic: Future value
LOD: Basic
Bloom tag: Apply
5. Calculating Earnings on Savings. What would be the yearly earnings for a person with
, $8,000 in savings at an annual interest rate of 2.5 percent?
Solution: $8,000 ¿ .025 = $200
LO: 1-4
Topic: Time value of money – interest rates and inflation
LOD: Basic
Bloom tag: Apply
6. Computing the Time Value of Money. Using time value of money tables, calculate the
following:
a. The future value of $450 six years from now at 7 percent.
b. The future value of $900 saved each year for 10 years at 8 percent.
c. The amount that a person would have to deposit today (present value) at a 6 percent
interest rate in order to have $1,000 five years from now.
d. The amount that a person would have to deposit today in order to be able to take out
$600 a year for 10 years from an account earning 8 percent.
Solution: a. $450 ¿ 1.501 = $675.45
b. $900 ¿ 14.487 = $13,038.30
c. $1,000 ¿ 0.747 = $747
d. $600 ¿ 6.710 = $4,026
LO: 1-4
Topic: Present value
LOD: Intermediate
Bloom tag: Apply
7. Calculating the Future Value of a Series of Amounts. Elaine Romberg prepares her own
income tax return each year. A tax preparer would charge her $80 for this service. Over a
period of 10 years, how much does Elaine gain from preparing her own tax return. Assume
she earn 3 percent on her savings.
Solution: $80 ¿ 11.464 = $917.12
LO: 1-4
Topic: Future value
LOD: Advanced
Bloom tag: Apply
8. Calculating the Time Value of Money for Savings Goals. If you desire to have $20,000 for a
down payment for a house in five years, what amount would you need to deposit today?
Assume that your money will earn 5 percent.
Solution: $20,000 x 0.784 (present value of single amount) = $15,680.
LO: 1-4
Topic: Present value
LOD: Intermediate
Bloom tag: Apply
,9. Calculating the Present Value of a Series. Pete Morton is planning to go to graduate school
in a program of study that will take three years. Pete wants to have $15,000 available each
year for various school and living expenses. If he earns 4 percent on his money, how much
must he deposit at the start of his studies to be able to withdraw $15,000 a year for three
years?
Solution: $15,000 x 2.775 (present value of a series) = $41,625
LO: 1-4
Topic: Present Value
LOD: Advanced
Bloom tag: Apply
10. Using the Time Value of Money for Retirement Planning. Carla Lopez deposits $3,200 a
year into her retirement account. If these funds have an average earning of 9 percent over
the 40 years until her retirement, what will be the value of her retirement account?
Solution: $3,200 x 337.890 (future value of a series) = $1,081,248
LO: 1-4
Topic: Future value
LOD: Intermediate
Bloom tag: Apply
11. Calculating the Value of Reduced Spending. If a person spends $15 a week on coffee
(assume $750 a year), what would be the future value of that amount over 10 years if the
funds were deposited in an account earning 3 percent?
Solution: $750 x 11.464 (future value of a series) = $8,598.
LO: 1-4
Topic: Future value
LOD: Basic
Bloom tag: Apply
12. Calculating the Present Value of Future Cash Flows. A financial company that advertises
on television will pay you $60,000 now in exchange for annual payments of $10,000 that you are
expected to receive for a legal settlement over the next 10 years. If you estimate the time value
of money at 10 percent, would you accept this offer?
Solution: (1) Calculate the future value of the annual payment $10,000 X 15.937 =
$159,370
(2) Calculate the present value of that future flow: $159,370 X 0.386 = $61,516.82
(3) Compare: the $60,000 being offered now is less than the present value of the future flow,
so you would not accept this offer.
LO: 1-4
Topic: Present value
LOD: Advanced
Bloom tag: Apply, analyze
, 13. Calculating the Potential Future Value of Savings. Tran Lee plans to set aside $2,400 a year
for the next six years, earning 4 percent. What would be the future value of this savings
amount?
Solution: $2,400 X 6.633 = (future value of a series) = $15,919.20
LO: 1-4
Topic: Future Value
LOD: Basic
Bloom tag: Apply
14. Determining a Loan Payment Amount. If you borrow $8,000 with a 5 percent interest rate to
be repaid in five equal payments at the end of the next five years, what would be the amount of
each payment? (Note: Use the present value of an annuity table in the Chapter Appendix.)
Solution: $8,.329 = $1,848
LO: 1-4
Topic: Annuity payments
LOD: Advanced
Bloom tag: Apply
Chapter 2 Problems
1. Determining the Future Value of Education. Jenny Franklin estimates that as a result of
completing her master’s degree, she will earn $7,000 a year more for the next 40 years.
a. What would be the total amount of these additional earnings?
b. What would be the future value of these additional earnings based on an annual interest rate
of 6 percent? (Use Table 1–B in the Chapter 1 Appendix.)
Solution:
a. $7,000 ¿ 40 = $280,000
b. $7,000 ¿ 154.760 = $1,083,320
LO: 2-1
Topic: Future Value
LOD: Intermediate
Bloom tag: Apply
2. Comparing Living Costs. Brad Edwards is earning $45,000 a year in a city located in the
Midwest. He is interviewing for a position in a city with a cost of living 12 percent higher than
where he currently lives. What is the minimum salary Brad would need at his new job to maintain
the same standard of living?
Solution: $45,000 ¿ 1.12 = $50,400
LO: 2-2
Topic: Cost-of-living considerations and comparisons
LOD: Basic
Bloom tag: Apply
1. Calculating the Future Value of Property. Ben Collins plans to buy a house for $220,000. If
that real estate is expected to increase in value 3 percent each year, what would its
approximate value be seven years from now?
Solution: $220,000 ¿ 1.230 = $270,600
LO: 1-2
Topic: Future value
LOD: Intermediate
Bloom tag: Apply
2. Using the Rule of 72. Using the rule of 72, approximate the following:
a. If land in an area is increasing 6 percent a year, how long will it take for property values to
double?
b. If you earn 10 percent on your investments, how long would it take for your money to
double?
c. At an annual interest rate of 5 percent, how long would it take for your savings to double?
Solution: a. about 12 years (72/6)
b. about 7.2 years (72/10)
c. about 14.4 years (72/5)
LO: 1-2
Topic: Time value of money – number of periods
LOD: Basic
Bloom tag: Apply
3. Determining the Inflation Rate. In 2006, selected new automobiles had an average cost of
$16,000. The average cost of those same motor vehicles is now $28,000. What was the rate
of increase for this item between the two time periods?
Solution: ($28,000 – $16,000) / $16,000 = .75 (75 percent)
LO: 1-2
Topic: Time value of money – interest rates and inflation
LOD: Intermediate
Bloom tag: Apply
4. Computing Future Living Expenses. A family spends $48,000 a year for living expenses. If
prices increase by 2 percent a year for the next three years, what amount will the family need
for its living expenses?
Solution: $48,000 ¿ 1.061 = $50,928 (Future value of single amount for 3 years at 2 percent)
LO: 1-2
Topic: Future value
LOD: Basic
Bloom tag: Apply
5. Calculating Earnings on Savings. What would be the yearly earnings for a person with
, $8,000 in savings at an annual interest rate of 2.5 percent?
Solution: $8,000 ¿ .025 = $200
LO: 1-4
Topic: Time value of money – interest rates and inflation
LOD: Basic
Bloom tag: Apply
6. Computing the Time Value of Money. Using time value of money tables, calculate the
following:
a. The future value of $450 six years from now at 7 percent.
b. The future value of $900 saved each year for 10 years at 8 percent.
c. The amount that a person would have to deposit today (present value) at a 6 percent
interest rate in order to have $1,000 five years from now.
d. The amount that a person would have to deposit today in order to be able to take out
$600 a year for 10 years from an account earning 8 percent.
Solution: a. $450 ¿ 1.501 = $675.45
b. $900 ¿ 14.487 = $13,038.30
c. $1,000 ¿ 0.747 = $747
d. $600 ¿ 6.710 = $4,026
LO: 1-4
Topic: Present value
LOD: Intermediate
Bloom tag: Apply
7. Calculating the Future Value of a Series of Amounts. Elaine Romberg prepares her own
income tax return each year. A tax preparer would charge her $80 for this service. Over a
period of 10 years, how much does Elaine gain from preparing her own tax return. Assume
she earn 3 percent on her savings.
Solution: $80 ¿ 11.464 = $917.12
LO: 1-4
Topic: Future value
LOD: Advanced
Bloom tag: Apply
8. Calculating the Time Value of Money for Savings Goals. If you desire to have $20,000 for a
down payment for a house in five years, what amount would you need to deposit today?
Assume that your money will earn 5 percent.
Solution: $20,000 x 0.784 (present value of single amount) = $15,680.
LO: 1-4
Topic: Present value
LOD: Intermediate
Bloom tag: Apply
,9. Calculating the Present Value of a Series. Pete Morton is planning to go to graduate school
in a program of study that will take three years. Pete wants to have $15,000 available each
year for various school and living expenses. If he earns 4 percent on his money, how much
must he deposit at the start of his studies to be able to withdraw $15,000 a year for three
years?
Solution: $15,000 x 2.775 (present value of a series) = $41,625
LO: 1-4
Topic: Present Value
LOD: Advanced
Bloom tag: Apply
10. Using the Time Value of Money for Retirement Planning. Carla Lopez deposits $3,200 a
year into her retirement account. If these funds have an average earning of 9 percent over
the 40 years until her retirement, what will be the value of her retirement account?
Solution: $3,200 x 337.890 (future value of a series) = $1,081,248
LO: 1-4
Topic: Future value
LOD: Intermediate
Bloom tag: Apply
11. Calculating the Value of Reduced Spending. If a person spends $15 a week on coffee
(assume $750 a year), what would be the future value of that amount over 10 years if the
funds were deposited in an account earning 3 percent?
Solution: $750 x 11.464 (future value of a series) = $8,598.
LO: 1-4
Topic: Future value
LOD: Basic
Bloom tag: Apply
12. Calculating the Present Value of Future Cash Flows. A financial company that advertises
on television will pay you $60,000 now in exchange for annual payments of $10,000 that you are
expected to receive for a legal settlement over the next 10 years. If you estimate the time value
of money at 10 percent, would you accept this offer?
Solution: (1) Calculate the future value of the annual payment $10,000 X 15.937 =
$159,370
(2) Calculate the present value of that future flow: $159,370 X 0.386 = $61,516.82
(3) Compare: the $60,000 being offered now is less than the present value of the future flow,
so you would not accept this offer.
LO: 1-4
Topic: Present value
LOD: Advanced
Bloom tag: Apply, analyze
, 13. Calculating the Potential Future Value of Savings. Tran Lee plans to set aside $2,400 a year
for the next six years, earning 4 percent. What would be the future value of this savings
amount?
Solution: $2,400 X 6.633 = (future value of a series) = $15,919.20
LO: 1-4
Topic: Future Value
LOD: Basic
Bloom tag: Apply
14. Determining a Loan Payment Amount. If you borrow $8,000 with a 5 percent interest rate to
be repaid in five equal payments at the end of the next five years, what would be the amount of
each payment? (Note: Use the present value of an annuity table in the Chapter Appendix.)
Solution: $8,.329 = $1,848
LO: 1-4
Topic: Annuity payments
LOD: Advanced
Bloom tag: Apply
Chapter 2 Problems
1. Determining the Future Value of Education. Jenny Franklin estimates that as a result of
completing her master’s degree, she will earn $7,000 a year more for the next 40 years.
a. What would be the total amount of these additional earnings?
b. What would be the future value of these additional earnings based on an annual interest rate
of 6 percent? (Use Table 1–B in the Chapter 1 Appendix.)
Solution:
a. $7,000 ¿ 40 = $280,000
b. $7,000 ¿ 154.760 = $1,083,320
LO: 2-1
Topic: Future Value
LOD: Intermediate
Bloom tag: Apply
2. Comparing Living Costs. Brad Edwards is earning $45,000 a year in a city located in the
Midwest. He is interviewing for a position in a city with a cost of living 12 percent higher than
where he currently lives. What is the minimum salary Brad would need at his new job to maintain
the same standard of living?
Solution: $45,000 ¿ 1.12 = $50,400
LO: 2-2
Topic: Cost-of-living considerations and comparisons
LOD: Basic
Bloom tag: Apply
