Exam 3: Time Value of Money: an Introduction

A lender lends $10,000, which is to be repaid in annual payments of $2000 for 6 years. Which of thefollowing shows the timeline of the loan from the lender's perspective?

If the interest rate is 5%, the one-year discount factor is equal t?

What is the future value (FV) of $20,000 in four years, assuming the interest rate is 12% per year?

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

You see on eBay that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?

Explain why a dollar today is worth more than a dollar tomorrow?

Is there a need to distinguish between cash inflows and outflows on a timeline?

What is one of the prerequisite conditions for the Valuation Principle to work?

What is the future value (FV) of $10,000 in eight years, assuming the interest rate is 10% per year?

Sara wants to have $500,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $500,000 in 20 years' time?

What is the present value (PV) of $100,000 received five years from now, assuming the interest rate is 8% per year?

An investment will pay $205,000 in one year's time for an investment of $183,000 today. If the market interest rate is 8% over the same period, should this investment be made?

You have a used CD store. At an estate sale, you can purchase 260 compact discs for $400. You believe you could sell the CDs for an average of $2.50 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

A tenant wants to lease a building for $48,000 per year. She signs a five-year rental agreement that states that she will pay $24,000 every six months for the next five years. Which of the following is the timeline for her rental payments, assuming she makes the first payment immediately?

The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.

How does arbitrage help the Law of One Price?

Consider the following timeline: If the current market rate of interest is 8%, then the value as of year 1 is closest to:

A company intends to install new management software for its warehouse. The software will cost $50,000 to buy and will cost an additional $150,000 to install and implement. It is anticipated that it will save the company $45,000 through reductions in staff and $65,000 in general inventory costs in the first year after installation. What is the benefit to the company in the first year if they choose to install the software?

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the future value of this cash flow?

If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.