1.

The present value of P100,000 expected in two years from today at

a discount rate of 6% is:
PV = 100,000 / (1.06^2) = 89,000 (using PV formula for lumpsum)
2. An initial investment (OUTFLOW) of P400,000 will produce an end
of year cash flow of P480,000 (INFLOW). What is the NPV of the
project at a discount rate of 20%?
NPV = -400,000 + (480,000/1.2) = 0
3. What is the present value of the following cash flow at a discount
rate of 9%?

PV = (100,000/1.09) + (150,000/(1.09^2)) + 200,000/(1.09^3)

= 372,431.81
NOTE: First payment is on YEAR 1, not on YEAR 0. Therefore,
you still need to apply the formula to compute for the PV, n=1.
REFER to #7 for comparison.

4. What is the present value of P1000 per year annuity for five years at
an interest rate of 12%?
PV = 1000 * 3.60478 = 3,604.78 (Use the PV-Annuity formula,
or the table)
5. At an interest rate of 10%, which of the following cash flows should
you prefer?

PV(A) = 777.61; PV(B) = 714.50; PV(C) = 746.05; A is

preferred

(Compute for the PV of each amount for each option, add, then
compare with the other options. The highest PV (assuming
you are the investor) is the best option.)

6. John House has taken a P250,000 mortgage on his house at an

interest rate of 6% per year. If the mortgage calls for twenty equal
annual payments, what is the amount of each payment?
250,000/11.47 = 21,796.14
Sharing my strategy: If the problem is looking for PMT,

establish first if the given amount is a PV or a FV amount.

Once established, (in this case, P250,000 is PV since John
is acquiring the loan NOW)
establish if the PMT you are looking for is LUMP-SUM or
ANNUITY, or PERPETUITY. Once established , (In this case,
TWENTY EQUAL ANNUAL PAYMENTS is annuity)
Use the APPROPRIATE formula to compute for the PMT.
(in this case, P250, 000 is a PV and an ANNUITY.
Therefore, use the PV formula for ANNUITY formula, or
the table for PV of Annuity table should be used)

7. What is the net present value of the following cash flow at a

discount rate of 11%?

NPV = -120,000 + (300,000/1.11) -(100,000/(1.11^2)) =

69,108.03
First cash flow is on T=0.

Therefore, its already a PV.

8. Mr. Hopper is expected to retire in 30 years and he wishes

accumulate P1,000,000 in his retirement fund by that time. If the
interest rate is 12% per year, how much should Mr. Hopper put into
the retirement fund each year in order to achieve this goal?
Future value annuity factor = 241.3327;
payment = 1,000,000/241.3327 = 4143.66
Since you are looking for the PMT, refer to my strategy in 6.

P1,000,000 is a FV ( wishes accumulate)

PMT is ANNUITY. ( how much should Mr. Hopper put into the
retirement fund each year?)
Therefore, use FV of annuity formula (or the table for FV
of Annuity) to compute for the PMT.

9. If the present value of a cash flow generated by an initial

investment of P200,000 is P250,000, what is the NPV of the
project?
NPV = -200,000 + 250,000 = 50,000
ALWAYS REMEMBER: NPV problems are always PV problems.
All you need to establish if the TYPE OF CASH flow (lump-sum,
annuity, uneven) to apply the appropriate formula.

10. Suppose you have $1,500 and plan to purchase a 5-year

certificate of deposit (CD) that pays 3.5% interest, compounded
annually. How much will you have when the CD matures?
$1,781.53 (FV formula)

An obvious FV problem

11. Suppose the U.S. Treasury offers to sell you a bond for $747.25.
No payments will be made until the bond matures 5 years from now,
at which time it will be redeemed for $1,000. What interest rate
would you earn if you bought this bond at the offer price?
6%
REMEMBER, n and r problems are always FV problems.

establish if the TYPE OF CASH flow (lump-sum, annuity,

uneven)
Using the established formula, compute for the FACTOR
Using the given n and the computed FACTOR, use the
table to find the r

Note: the to be used table would depend on bullet number

one above.

12. Janice has $5,000 invested in a bank that pays 3.8% annually.
How long will it take for her funds to triple?
29.46 (or using the table, the answer is BETWEEN 25 and
30 years)
refer to #11 strategy.

FV is when its tripled. = 5,000 x 3

Its a lump-sum.
Use FV for lump-sum formula to find the FACTOR
Use the given r and the computed FACTOR, and the table
for Future Value for lump-sum to find n.

13. You want to buy a new sports car 3 years from now, and you plan
to save $4,200 per year, beginning one year from today. You will
deposit your savings in an account that pays 5.2% interest. How

much will you have just after you make the 3rd deposit, 3 years
from now?
$13,267 FVA

PV or FV? How much will you have just after you make the 3rd
deposit FV
LUMP-SUM, ANNUITY, UNEVEN? $4,200 per year ANNUITY
Since its ANNUITY, Ordinary or DUE? beginning one year
from today DUE
TADAH! Apply the appropriate formula or table.

14. You just inherited some money, and a broker offers to sell you an
annuity that pays $5,000 at the end of each year for 20 years. You
could earn 5% on your money in other investments with equal risk.
What is the most you should pay for the annuity?
$62,311 PVA
Obviously, its a PV of annuity problem.
15. Whats the future value of $1,200 after 5 years if the appropriate
interest rate is 6%, compounded monthly?
$1,618.62
Obviously, its a FV problem. The trick is its a NON-ANNUAL
PERIOD.
16. Master Card and other credit card issuers must by law print the
Annual Percentage Rate (APR) on their monthly statements. If the
APR is stated to be 18.00%, with interest paid monthly, what is the
card's EAR%?
19.56%
EAR problem. Refer to the formula.
17. Suppose you borrowed $12,000 at a rate of 9.0% and must repay
it in 4 equal installments at the end of each of the next 4 years.
How large would your payments be?
$3,704.02 AMORTIZATION

LOANS are AMORTIZATION problems. PMT is always annuity.

Refer to my amortization strategy from the lecture.

18. You have a chance to buy an annuity that pays $550 at the
beginning of each year for 3 years. You could earn 5.5% on your
money in other investments with equal risk. What is the most you
should pay for the annuity?
$1,565.48 PVAD
refer to #13.

19. 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?
$16,112 FVAD
refer to #13
20.
Suppose Community Bank offers to lend you $10,000 for one
year at a nominal annual rate of 8.00%, but you must make interest
payments at the end of each quarter and then pay off the $10,000
principal amount at the end of the year. What is the effective
annual rate on the loan?
8.24%

EAR problem.