Skip to content

CFA Level I · CFA Level I Exam · The Time Value of Money in Finance

An investor wants to accumulate 100,000 in 10 years by making equal deposits at the end of each year into an account earning 5% annually. The annual deposit is closest to:

The required deposit is about 7,950 per year. Divide the target of 100,000 by the 10-year, 5% future value annuity factor of 12.5779. Simply dividing by 10 ignores interest earned, and using the present value factor overstates the deposit.

  1. A7,950Correct
  2. B10,000
  3. C12,950

Explanation

The future value annuity factor is (1.05^10 - 1)/0.05 = 12.5779. The deposit is 100,000 / 12.5779 = 7,950. Dividing 100,000 by 10 ignores interest, giving 10,000, and dividing by the present value factor (7.7217) gives 12,950.

Did you get it right without looking?

One question tells you little. A timed set on The Time Value of Money in Finance shows your real accuracy, how long you take and where you lose marks.

Practise The Time Value of Money in FinanceFree diagnostic mock

More The Time Value of Money in Finance questions