Exam 4: Time Value of Money 1: Analyzing Single Cash Flows

You invested $1,000 for five years in an account that earns 5 percent. However, today you learn that you are able to move the account into an investment that earns 10 percent. Which of the following statements is correct?

What annual rate of return is earned on a $4,000 investment made in year 2 when it grows to $8,000 by the end of year 8?

How many years will it take $100 to grow to $1,000 with an annual interest rate of 8 percent?

We call the process of earning interest on both the original deposit and on the earlier interest payments

You invested $2,000 in the stock market one year ago. Today, the investment is valued at $9,500. What return did you earn? What return would you need to suffer next year for your investment to be valued at the original $2,000?

How are future values affected by changes in interest rates?

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?

What annual rate of return is implied on a $700 loan taken next year when $800 must be repaid in year 3?

Ten years ago, Jane invested $1,000 and locked in a 7 percent annual interest rate for 30 years (end 20 years from now). James can made a 20-year investment today and lock in a 6 percent interest rate. How much money should he invest now in order to have the same amount of money in 20 years as Jane?

You double your money in five years. The reason your return is not 20 percent per year is because:

What is the value in year 4 of a $9,000 cash flow made in year 13 if interest rates are 7 percent in years "4 through 9" and increase to 11 percent after that?

You are scheduled to receive a $750 cash flow in one year, a $1,000 cash flow in two years, and pay a $300 payment in four years. If interest rates are 6 percent per year, what is the combined present value of these cash flows?

What is the value in year 3 of a $500 cash flow made in year 5 when interest rates are 6 percent?

As the production manager of HPG, Inc., you have received an offer from the supplier who provides the wires used in headsets. Due to poor planning, the supplier has an excess amount of wire and is willing to sell $750,000 worth for only $600,000. You already have one year's supply of wire on hand. This new wire would be used one year from today. What implied interest rate would your firm be earning if you purchased the wire?

Your firm receives an offer from the supplier who provides computer chips used to manufacture cell phones. Due to poor planning, the supplier has an excess amount of chips and is willing to sell $600,000 worth of chips for only $500,000. You already have two years' supply on hand. It would cost you $7,500 today to store the chips until your firm needs them in two years. What implied interest rate would you be earning if you purchased and store the chips?

What is the value in year 6 of a $1,000 cash flow made in year 2 if interest rates are 5 percent in years 3 and 4, and increase to 6 percent in the remaining years?

A deposit of $500 earns the following interest rates? 5 percent in the first year, 6 percent in the second year, and 8 percent in the third year. What would be the third year future value?

You deposit $10,000 in an account that doubles in "6" years. How many years will it take the account to be reduced to its original value if it loses 10 percent per year?

Consider a $500 deposit earning 5 percent interest per year for five years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

Assume you borrow $5,000 today and pay back the loan in one lump sum four years from today. You are charged 8 percent interest per year. What amount will you pay back and how much interest will you pay?