Question

Solve various time value of money scenarios:

1. Jeff just hit the jackpot in Las Vegas and won $25,000! If he invests it now at a 12% interest rate, how much will it be worth in 20 years?

2. Evan would like to have $2,000,000 saved by the time he retires in 40 years. How much does he need to invest now at a 10% interest rate to find his retirement goal?

3. Assume that Stephanie accumulates savings of $1 million by the time she retires. If she invests this savings at 8%, how much money will she be able to withdraw at the end of each year for 20 years?

4. Katelyn plans to invest $2,000 at the end of each year for the next seven years. Assuming a 14% interest rate, what will her investment be worth seven years from now?

5. Assuming a 6% interest rate, how much would Danielle have to invest now to be able to withdraw $10,000 at the end of each year for the next nine years?

6. Jim is considering a capital investment that costs $485,000 and will provide the following net cash inflows: 1st year.................$300,000 2nd year................$200,000 3rd year.................$100,000 Using a hurdle rate of 12%, find the NPV of the investment.

7. What is the IRR of the capital investment described in question 6

Answer 1

1. Jeff just hit the jackpot in Las Vegas and won $25,000! If he invests it now at a 12% interest rate, how much will it be worth in 20 years?

=25000*(1+.12)^20

=241157.33

2. Evan would like to have $2,000,000 saved by the time he retires in 40 years. How much does he need to invest now at a 10% interest rate to find his retirement goal?

=$2,000,000 *1/(1+.10)^40

=$44189.86

Assume that Stephanie accumulates savings of $1 million by the time she retires. If she invests this savings at 8%, how much money will she be able to withdraw at the end of each year for 20 years?

=1000000/((1-(1+0.08)^-20)/(0.08))

=101852.21

Katelyn plans to invest $2,000 at the end of each year for the next seven years. Assuming a 14% interest rate, what will her investment be worth seven years from now?

2000*((1-(1+0.14)^-7)/(0.14))

=8576.61

Assuming a 6% interest rate, how much would Danielle have to invest now to be able to withdraw $10,000 at the end of each year for the next nine years?

10000*((1-(1+0.06)^-9)/(0.06))

=68016.92

6. Jim is considering a capital investment that costs $485,000 and will provide the following net cash inflows: 1st year.................$300,000 2nd year................$200,000 3rd year.................$100,000

	Cash Flow	PV factor 12%	PV
0	-485000	1.0000	-485000
1	300000	0.8929	267857.1
2	200000	0.7972	159438.8
3	100000	0.7118	71178.02
NPV			13473.94
IRR using Excel IRR Funtion			14%