Exam 9: The Time Value of Money

Janice Hardin sets aside $5,000 each year for 10 years. She then withdraws the funds on an equal annual basis for the next 10 years. The two tables she should use in the correct order are:

If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account?

The interest factor for the present value of a single amount is the inverse of the future value interest factor.

Mr. Sheridan is selling his house for $280,000. He bought it for $55,000 15 years ago. What is the annual return on his investment, assuming monthly compounding?

A 20-year mortgage with monthly payments has a principal outstanding of $125,000. Interest is at 8% compounded semi-annually. What are the monthly payments?

Cash flow decisions that ignore the time value of money will probably not be as accurate as those decisions that do rely on the time value of money.

Samuel Johnson invested in gold Maple Leaf coins 10 years ago, paying $185 for each one-ounce gold coin. He could sell each coin for $734 today. What was his annual rate of return for this investment?

The amount of annual payments necessary to accumulate a desired total can be found by reference to the present value of an annuity table.

The Swell Computer Company has developed a new line of desktop computers. It is estimated that the cash returns generated by the new product line will be $800,000 per year for the next five years, and then $500,000 per year for 3 years after that (the cash returns occur at the end of each year). At a 9% interest rate, what is the present value of these cash returns? Solve as the sum of two annuities: one of $500,000 per period for 8 periods, and one of $300,000 per period for 5 periods.

Cheryl Gold signed a 20-year, 6% mortgage for $250,000. How much should the biweekly loan payments be? (Assume compounding biweekly.)

You have an opportunity to buy a $1,000 bond, which matures in 10 years. The bond pays $30 every six months. The current market interest rate is 8%. What is the most you would be willing to pay for this bond?

Sharon Smith will receive $1,000,000 in 50 years. The discount rate is 14%. As an alternative she can receive $2,000 today. Which should she choose?

Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12^th year (10 payments). The discount rate is 10%. The present value today of this deferred annuity is:

Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

The future value of a $1,000 investment today at 8% annual interest compounded semiannually for 5 years is:

Higher interest rates (discount rates) reduce the present value of amounts to be received in the future.

In January, Harold Black bought 100 shares of Country homes for $37.50 per share. He sold them ten years later for a total of $9,727.50. Calculate Harold's annual rate of return.

Canadian Coal Corporation (CCC) produced 420,000 metric tonnes of coal in 20X5. If CCC's coal production in 20X0 was 30,000 metric tonnes, what was CCC's average annual increase in production over the six years between 20X0 and 20X5?

Pension fund retirement accounts use the present value of an annuity to calculate the ending value upon retirement.

Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13%, how much money does she need to have on hand today to meet her obligations?