Time Value of Money

Show all work (not only answer)

1. What is the present value of the following cash flow stream at a rate of 4.0%?

Years: 0 1 2 3

CFs: -$500 $2,450 $3,175 $4,400

2. You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?

3. You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?

4 . If sales grow at 5% per year, how long before sales double?

5. Bank A pays 4% interest compounded annually on deposits, while Bank B pay 3.5%

compounded daily. Based on the EAR (or EFF%), which bank should you use? Explain.

(hint: calculate each EAR and then compare two EARs.)