# solution

Time Value of Money 1: Exercise 1. Suppose you invest \$225,000 with an interest rate of 12% per year. What is the future value of this investment in 8 years? Draw a timeline of cash flow of this investment. 2. Suppose you need \$1,500,000 to buy a new house in five years. You can earn an interest rate of 8% per year on your money. How much do you have to deposit today? 3. Suppose you deposit \$150,000 into a bank account with an interest rate of 6% per year for 25 years. How much will you receive at the end of year 25? What is the effect of compounding? 4. You are considering a three year investment plan. If you deposit \$10,550 in the bank today, you will receive \$14,450 in three years. What is the interest rate for this investment? 5. You plan to deposit \$10,500 today and leave the money in the bank for 8 years. The bank offers 8% interest rate per year for your deposit. How much will you receive at the end of eight years? 6. You plan to purchase a \$30,000 car in 4 years. There is an investment opportunity that will pay you 5% per year on your money. How much do you need to invest today? 7. You have \$20,000 to invest today. In 6 years you would like \$45,000 back. What is the interest rate of the investment that you would need to invest in?

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