Exam 5: Introduction to Valuation: the Time Value of Money

An investor is considering depositing $10,000 in an account earning 3% compounded monthly for the next two years. Afterwards, he will take this amount and contribute $500 monthly for the next three years at a rate of 5% compounded annually. Finally, over the next three years, he will withdraw $500 annually at a rate of 4.5% compounded semi-annually. Determine the future value at the end of this time period.

How long will it take for money to tripe at a rate of 4.5% compounded quarterly?

The future value of a single sum will increase more rapidly when the interest rate increases.

Last year, you deposited $25,000 into a retirement savings account at a fixed rate of 7.5%. Today, you could earn a fixed rate of 8% on a similar type account. However, your rate is fixed and cannot be adjusted. How much less could you have deposited last year if you could have earned a fixed rate of 8% and still have the same amount as you currently will when you retire 40 years from today?

Suppose that r and t are greater than zero, which statement is correct?

Some time ago, Richard purchased five acres of land costing $123,400. Today, that land is valued at $189,700. How long has he owned this land if the price of land has been increasing at 5.5% per year?

The greater the number of years, the:

Neal wants to borrow $2,500 and has received the offers from his local banks. Which offer should Neal accept if he wants to repay the loan in one single payment two years from now?

You are scheduled to receive $18,000 in five years. When you receive it, you will invest it for five more years at 8.6% per year. How much will you have at the end of this time? What would be an equivalent Present Value?

Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $6,000 to invest today and can earn 10% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?

Some financial advisors recommend you increase the amount of federal income taxes withheld from your pay cheque each month so that you will get a larger refund come April. That is, you take home less today but get a bigger lump sum when you get your refund. Based on your knowledge of the time value of money, what do you think of this idea? Explain.

The process of accumulating interest on an investment over time to earn more interest is called:

The value today of future cash flows discounted at the appropriate discount rate is called the _____ value.

The I.C. James Co. invested $10,000 six years ago at 5% simple interest. The I.M. Smart Co. invested $10,000 six years ago at 5% interest which is compounded annually. Both the I.C. James Co. and the I.M. Smart Co. will earn $500 interest in the first year.

Your grandfather placed $2,000 in a trust fund for you. In 10 years the fund will be worth $5,000. What is the rate of return on the trust fund?

Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris deposits $1,000 into an account that pays 4% simple interest. Both deposits were made today. Chris will never earn any interest on interest.

The present value interest factor is calculated as:

Stephen invests $2,500 in an account that pays 6% simple interest. How much money will Stephen have at the end of three years?

Dale invests $500 in an account that pays 6% simple interest. How much more could he have earned over a thirty year period if the interest had compounded annually?

The Smith Co. has $450,000 to invest at 5.5% interest. How much more money will they have if they invest these funds for eight years instead of five years?