Exam 2: How to Calculate Present Values

You would like to have enough money saved to receive a growing annuity for 25 years, growing at a rate of 4 percent per year, with the first payment of $60,000 occurring exactly one year after retirement. How much would you need to save in your retirement fund to achieve this goal? The interest rate is 12 percent.

Briefly explain the concept of risk.

A safe dollar is always worth less than a risky dollar because the rate of return on a safe investment is generally low and the rate of return on a risky investment is generally high.

What is the present value of $10,000 per year in perpetuity at an annual interest rate of 10 percent? Assume the perpetuity starts in one year.

Briefly explain continuous compounding.

What is the six-year present value annuity factor at an interest rate of 9 percent?

If the present value of cash flow X is $240, and the present value of cash flow Y is $160, then the present value of the combined cash flows is:

You would like to have enough money saved after your retirement such that you and your heirs can receive $100,000 per year in perpetuity. How much would you need to have saved at the time of your retirement in order to achieve this goal? (Assume that the perpetuity payments start one year after the date of your retirement. The annual interest rate is 12.5 percent.)

For $10,000, you can purchase a five-year annuity that will pay $2,358.65 per year for five years. The payments occur at the beginning of each year. Calculate the effective annual interest rate implied by this arrangement.

If the future value annuity factor at 10 percent and five years is 6.1051, calculate the equivalent present value annuity factor:

An initial investment of $500 produces a cash flow of $550 one year from today. Calculate the rate of return on the project.

If the present value of $600, expected one year from today, is $400, what is the one-year discount rate?

The present value of a $100 per year perpetuity at 10 percent per year interest rate is $1,000. What would be the present value of this perpetuity if the payments were compounded continuously?

John House has taken a 20-year, $250,000 mortgage on his house at an interest rate of 6 percent per year. What is the remaining balance (or value)of the mortgage after the payment of the fifth annual installment?

Which of the following statements regarding the net present value rule and the rate of return rule is false?

The net present value formula for one period is:

What is the difference between simple interest and compound interest?

The one-year discount factor, at a discount rate of 25 percent per year, is:

The opportunity cost of capital is higher for safe investments than for risky ones.

"Accept investments that have positive net present values" is called the net present value rule.