Exam 4: The Time Value of Money

Use the information for the question(s)below. Assume that you are 30 years old today and that you are planning on retirement at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.Assume that the rate of interest is 7%. -Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that your son remains in this private school through high school and that your current interest rate is 6%,then the present value of your son's private school education is closest to:

Consider a growing perpetuity that will pay $100 in one year.Each year after that,you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment.This pattern of payments will continue forever.If the interest rate is 11%,then the value of this perpetuity is closest to:

Taggart Transcontinental currently has a bank loan outstanding that requires it to make annual payments at the end of the next three years or to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years in the amount of $3,184,000.If the interest rate on the loan is 6%,then the annual payment the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:

You have an $8000 balance on your credit card,which charges 18% interest annually (1.5 per month).If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

Use the information for the question(s)below. Suppose that a young couple has just had their first baby,a daughter,and they wish to ensure that enough money will be available to pay for her college education.Currently,college tuition,books,fees,and other costs,average $12,500 per year.On average,tuition and other costs have historically increased at a rate of 4% per year. -Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:

You are saving for retirement.To live comfortably,you decide that you will need $2.5 million by the time you are 65.If you assume you are able to do that,and will live 20 more years (until age 85),the amount you can withdraw at the end of each of those years at an interest rate of 5% before your retirement fund is empty is closest to:

If the current rate of interest is 8% APR,then the future value of an investment that pays $500 every two years and lasts 20 years is closest to:

Which of the following statements regarding growing perpetuities is FALSE?

The British government has just issued a new consol bond that sells for £1000 and pays interest of 8%.The annual interest payment on this bond must be:

Use the figure for the question(s) below. -Which of the following statements regarding the timeline is FALSE?

Consider the following time line: If the current market rate of interest is 8%,then the present value of the cash flows on this timeline is closest to:

You are saving for retirement.To live comfortably,you decide that you will need $2.5 million by the time you are 65.Today is your 30th birthday,and you decide,starting today,and on every birthday up to and including your 65th birthday,that you will deposit the same amount into your savings account.Assuming the interest rate is 5%,the amount that you must set aside each year on your birthday is closest to:

Use the table for the question(s)below. -Draw a timeline detailing the cash flows from investment "B."

You are interested in purchasing a new automobile that costs $35,000.The dealership offers you a special financing rate of 6% APR (0.5%)per month for 48 months.Assuming that you do not make a down payment on the auto and you take the dealer's financing deal,then your monthly car payments would be closest to:

How do you calculate (mathematically)the present value of a(n): (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity

You have an investment opportunity that will cost you $10,000 today,but return $12,500 to you in one year.The IRR of this investment opportunity is closest to:

Use the following information to answer the question(s)below. Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now,$450,000 two years from now,and $650,000 three years from now. -If the appropriate interest rate is 10%,then Nielson Motors should:

Which of the following statements regarding annuities is FALSE?

Use the information for the question(s)below. Joe just inherited the family business,and having no desire to run the family business,he has decided to sell it to an entrepreneur.In exchange for the family business,Joe has been offered an immediate payment of $100,000.Joe will also receive payments of $50,000 in one year,$50,000 in two years,and $75,000 in three years.The current market rate of interest for Joe is 6%. -In terms of present value,how much will Joe receive for selling the family business?

The British government has a consol bond outstanding that pays ₤100 in interest each year.Assuming that the current interest rate in Great Britain is 5% and that you will receive your first interest payment immediately upon purchasing the consol bond,then the value of the consol bond is closest to: