Time Value of Money - A nswer the following questions:

1. If you place $100 in a savings account today, what will be the value of the account in 5 years if the bank is paying 6% interest?

2. You hold $2,000 as a customer deposit, but the customer wants to make sure he does not loose on the opportunity cost of those dollars. You agree to pay the customer 10% interest during the holding period. At the end of 3 years you need to return the deposit and the interest to the customer. How much will you have to give the customer in 3 years?

3. If you deposit money today into an account which pays 8% interest, how long will it take for you money to double?

4. Your parents are planning to retire in 18 years. They currently have $250,000. They supplement those dollars with an annual payment into a retirement account of $20,000. What will be the value of all dollars if the funds can earn an interest rate of 5%? What will be the value of all dollars if the funds can earn an interest rate of 10%?

5. What is the present value of a security which promises to pay you $5,000 in 20 years? Assuming you can earn 7% interest.

6. What is the future value of a 5-year ordinary annuity which promises to pay you $300 each year? The rate of interest is 9%.

7. An investment pays you $100 at the end of each of the next 3 years. The investment will then pay you $200 at the end of Year 4, $300 at the end of year 5, and $500 at the end of year 6. If the rate of interest earned on the investment is 8%, what is the present value of this investment? What is its future value?

8. You are serving on a jury. A plaintiff is suing the city for injuries sustained after falling down an uncovered manhole. In the trial, the doctor testified that it will be 5 years before the plaintiff is able to return to work. The jury has already decided in favor of the plaintiff. You are the foreman of the jury and propose that the jury gives the plaintiff an award to cover the following items:

a) The present value of 2 years of back-pay ($34,000 and $36,000). 

b) The present value of 5 years of future salary. Assume that the salary would increase at a rate of 3 percent a year. 

c) $100,000 for pain and suffering

d) $20,000 for court costs

e) Assume an interest rate of 7%. What should be the size of the settlement?