Name: Vahia Ralliza Dotarot

Course/Subject: Financial Markets

TIME VALUE OF MONEY

STRAIGHT PROBLEMS

Show your solutions in answering the problem after each situation.

1. Mr. Garcia inherited P10,000 from Aivz. He wants to use the money to buy his wife a
new washing machine (which costs P12,000) for their 5th wedding anniversary which will
take place 3 years from now.Will Mr. Garcia have enough money to buy the gift if he
deposits his money in an account paying 10% compounded semi-annually?
FV = P10,000(1+1.10/2)(3x2)
FV = P10,000(1+0.5)6
FV = P10,000(1.340095641)
FV = P13,400.96

2. Linda decided to open an account that will pay her daughter P6,000 a year indefinitely.
How much money shouldLinda deposit in an account paying a 12% annual interest?
PV = P6,000/12%
PV = P50,000

3. What is the present value of an annuity of P10,000 each year for 5 years? Assume that
the opportunity cost is 10%
PVA5 = P10,000/(1.10)1 + P10,000/(1.10)2 + P10,000(1.10)3 + P10,000(1.10)4 +
P10,000(1.10)5
PVA5 = P9,090.90 + P8,264.46 + P7,513.15 + P6,830.13 + P6,209.21
PVA5 = P37,907.85

4. Mr. Geronimo is 30 year old and will retire at age 60. An insurance agent estimated that
an additional P50,000 a year over Mr. Geronimo’s retirement benefits will allow him to
lead a satisfactory life. How much should Mr. Geronimo deposit today in an account
paying 6% interest to meet his goal? Assume that Mr. Geronimo will spend 15 years in
retirement.
PMT = P50,000 n = 15 r = 6%
PV60 = (P50,000/0.06) X (1- 1/(1.06)15)
PV60 = P485612.4494

FV = P485612.4494 n = 30 r = 6%
P30 = P485612.4494 (1.06)-30
P30 = P84,550.04714
5. Mr. Pangilinan is thinking of setting up a fund which will accumulate P10,000,000 in 10
years. The fund will be used to repay an oustanding bond issue. He plans to make
deposits (which will earn 12%) to this fund at the endof each of the 10 years prior to the
maturity of the bond. How large must the deposits be to accumulate P10,000,000?
Answer: = (1+.12)10-1/12%
= 17.549
= P10,000,000/17.549
= P569,833.04

6. Ms. Soliva wants to accumluate P20,000 by the end of 3 years to buy an ipod from her
friend Boncales. She has P5,000 at present and would like to save equal, annual, end-
of-year deposits to pay for the ipod. How much should she deposit at the end of each
year in an account paying an 8% interest to enable her to buy the iPod?
P5,000(1.08)-3 = P3,969.16
P20,000 – P3,969.16 = P16,030.84
P16,030.84 = R(1- (1.08)-3/.08)
P16,030.84/(1- (1.08)-3/.08) = R(1- (1.08)-3/.08) /(1- (1.08)-3/.08)
R = P6,220.50

7. Mr Lawas wants to buy a house but does not want to apply for a loan. The average price
of his dreams house is P1,000,000 which grows at a rate of 3% per year. How much
money should Lawas place in an investment plan/scheme so that at the end of each
year for the next 5 years, she will have accumulated enough money to buy his dream
house with cash at the end of the fifth year? Assume that the plan/scheme pays a 10%
rate of return.
FV = 1,000,000(1.03)5
FV = P1,159,274.07
P1,159,274.07 = R [(1+.10)5 – 1/10%]
R = P1,159,274.07/6.1051
R = P189,886.17