Exam 4: The Time Value of Money

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 the NPV of this opportunity is closest to:

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%. -The present value (at age 30)of your retirement savings is closest to:

Use the following information to answer the question(s)below. Your great aunt Matilda put some money in an account for you on the day you were born.This account pays 8% interest per year.On your 21st birthday the account balance was $5033.83. -The amount of money that your great aunt Matilda originally put in the account is closest to:

Use the following information to answer the question(s)below.Consider the following four alternatives: 1.$132 received in two years. 2.$160 received in five years. 3.$200 received in eight years. 4.$220 received in ten years. -The ranking of the four alternatives from most valuable to least valuable if the interest rate is 6% per year would be:

Which of the following statements is FALSE?

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%. -The future value at retirement (age 65)of your savings is closest to:

If the current rate of interest is 8% APR,then the future value of an investment that pays $250 per quarter and lasts 20 years is closest to:

Which of the following statements is FALSE?

You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15-year fixed rate mortgage (180 months)at 9% APR (0.75% month).If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:

At an annual interest rate of 7%,the future value of $5000 in five years is closest to:

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%,then the present value of this stream of cash flows is closest to:

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 costs continue to increase an average of 4% per year,tuition and other costs for one year for this student in 18 years when she enters college will be closest to:

Use the following information to answer the question(s)below.Consider the following four alternatives: 1.$132 received in two years. 2.$160 received in five years. 3.$200 received in eight years. 4.$220 received in ten years. -The ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year would be:

Use the following information to answer the question(s)below. Your great aunt Matilda put some money in an account for you on the day you were born.This account pays 8% interest per year.On your 21st birthday the account balance was $5033.83. -The amount of money that would be in the account if you left the money there until your 65th birthday is closest to:

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year.As the ore closest to the surface is removed it will become more difficult to extract the ore.Therefore,the value of the ore that you mine will decline at a rate of 8% per year forever.If the appropriate interest rate is 6%,then the value of this mining operation 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 15%,then Nielson Motors should:

You are looking for a new truck and see the following advertisement."Own a new truck! No money down.Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120.The interest rate for the deal advertised is closest to:

Consider the following timeline: If the current market rate of interest is 7%,then the future value of the cash flows on this timeline as of year 3 is closest to:

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:

Define the following terms: (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity