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

Isaac and Faith both want to have $5,000 in three years. Isaac expects to earn 8% on his investments and Faith expects a 7% rate of return. Which one of the following statements is correct concerning the amount of money they each need to invest today?

You wish to have $200,000 at the end of twenty years. In the last five years, you withdraw $1,000 annually at a rate of 3.8% compounded quarterly. During the middle ten years, you contribute $500 monthly at a rate of 2.8% compounded semi-annually. Given this information, determine the initial deposit that has to be made at the start of the first five years at a rate of 4% compounded monthly.

Today, you earn a salary of $42,500. What will be your annual salary 10 years from now if you earn annual raises of 3.2%?

Six years ago, Home Health Industries (HHI) adopted a plan to expand its services next year. At the time the plan was adopted, HHI set aside $125,000 in excess funds to be held for this purpose. As of today, that money has increased in value to $186,408. What rate of interest is the firm earning on these funds?

You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using compound interest. You should:

Explain what compounding is and the relationship between compound interest earned and the number of years over which an investment is compounded.

Present values are always smaller than future values when both r and t are positive

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. All else equal, Jamie made the better investment.

Provide a graphical illustration of future value over a ten year time span given rates of return of 0%, 5%, 10%, 15% and 20%.

What is the present value of $36,500 to be received five years from today if the discount rate is 6.75%?

You received a $1 savings account earning 5% on your 1^stbirthday. How much will you have in the account on your 40^thbirthday if you don't withdraw any money before then?

Thirty years ago, your father invested $6,000. Today that investment is worth $67,270.98. What is the average rate of return your father earned on this investment?

You want to have $260,000 saved 15 years from now. How much less do you have to deposit today to reach this goal if you can earn 8% rather than 7% on your savings?

During years 2 and 3 combined, the account earned $10 compound interest. How much was in simple interest?

An account was opened with $1,000 three years ago. Today, the account balance is $1,157.63. If the account earns simple interest, how long will it take until the account has earned a total of $225 in interest?

New Metals, Inc. is planning on expanding their operations when the economy strengthens in a few years. At that time they will need to purchase additional equipment. Four years ago, they set aside $300,000 in a special account for this purpose. Today, that account is worth $383,048.98. What rate of interest is New Metals earning on this money?

You are scheduled to receive $30,000 in three years. When you receive it, you will invest it for seven more years at 5.5% per year. How much will you have at the end of this time? What would be an equivalent Present Value?

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

You own a classic automobile that is currently valued at $67,900. If the value increases by 8% annually, how much will the automobile be worth 15 years from now?

An account was opened with an investment of $1,000 ten years ago. The ending balance in the account is $1,500. If interest was compounded annually, what rate was earned on the account?