Group Tutorial Time Value of Money
TUTORIAL : TIME VALUE OF MONEY
1. Assume that you purchase a 6-year, 8 percent savings certificate for RM1,000. If interest is
compounded annually, what will be the value of the certificate when it matures?
2. What is the present value of RM10,000 received;
a. 12-years from today when the interest rate is 4% per year?
b. 20-years from today when the interest rate is 8% per year?
c. 6-years from today when the interest rate is 2% per year?
3. What is the future value of RM1,000 a year for five years at a 6% rate of interest?
4. Anwar has offered to give you either RM5,000 today or RM10,000 in 10 years. If the interest
rate is 7% per year, which option is preferable?
5. Tok Pah has put some money in an account for Najeeb on the day his was born. Now, Najeeb
18 years old and has allowed to withdraw the money for the first time. The account currently
has RM3,996 in it and pays an 8% interest rate.
a. How much money would be in the account if Najeeb left the money there until his 25th
birthday?
b. What if Najeeb left the money until his 65th birthday?
c. How much money did Tok Pah originally put in the account?
6. Mahadir just inherited the family business, and having no desire to run the family business, he
has decided to sell it to an entrepreneur. In exchange for the family business, he has been
offered an immediate payment of RM100,000. He will also receive payments of RM50,000 in
one year, RM50,000 in two years, and RM75,000 in three years. The current market rate of
interest is 6%. In terms of present value, how much will he receive for selling the family
business?
7. You have decided to buy a perpetuity. The bond makes one payment at the end of every year
forever and has an interest rate of 5%. If you initially put $1000 into the bond, what is the
payment every year?
8. You are thinking about investing in a dinar gold that will produce $10,000 worth of ore in the
first year. As the ore closest to the surface is removed it will become more difficult to extract
the gold. Therefore, the value of the gold that you saving will decline at a rate of 8% per year
forever. If the appropriate interest rate is 6%, what is the value of this gold operation?
9. Assume that Zahid are 30 years old today, and that he has planning on retirement at age 65.
His current salary is $45,000 and he expect his salary to increase at a rate of 5% per year as
long as his work. To save for his retirement, he plans on making annual contributions to a
retirement account. His first contribution will be made on his 31st birthday and will be 8% of
1
Group Tutorial Time Value of Money
this year's salary. Likewise, he expects to deposit 8% of his salary each year until he reaches
age 65. Assume that the rate of interest is 7%.
a. What is the present value (at age 30) of his retirement savings?
b. What is the future value at retirement (age 65) of his savings?
10. Muhyiddin’s son is about to start kindergarten in a private school. Currently, the tuition is
$12,000 per year, payable at the start of the school year. He expects annual tuition increases to
average 6% per year over the next 13 years.
a. What is the present value of Muhyiddin son's private school education assuming that
his son remains in this private school through high school and that his current interest
rate is 6%?
b. If the appropriate interest rate is 8%, what is the present value of $500 paid at the end
of each of the next 40 years?
c. If the appropriate interest rate is 8%, what is present value of $500 paid at the beginning
of each of the next 40 years?
