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

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?

The rate of return used when computing a present value is referred to as the ______ rate while the rate used when computing a future value is referred to as the _____ rate.

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?

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 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. The I.M Smart Co. will earn $525 interest in the second year.

The James Co. plans on saving money to buy some new equipment. The company is opening an account today with a deposit of $15,000 and expects to earn 4% interest. After 3 years, the firm Wants to add an additional $50,000 to the account. If the account continues to earn 4%, how much Money will the James Co. have in their account five years from now?

An investor is considering depositing $20,000 in an account earning 5% compounded quarterly for the next three years. Afterwards, he will take this amount and contribute $200 quarterly for the next Four years at a rate of 4% compounded semi-annually. Finally, over the next two years, he will Withdraw $1,000 annually at a rate of 3.5% compounded monthly. Determine the future value at the End of this time period.

You are supposed to receive $2,000 five years from now. At an interest rate of 6%, what is that $2,000 worth today?

You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded annually, how long will you have to wait to buy the stereo?

The larger the future value, the larger the present value.

Sampson, Inc. invested $1.325 million in a project that earned an 8.25% rate of return. Sampson sold their investment for $3,713,459. How much sooner could Sampson have sold the company if They only wanted $3 million from the project?

Alpo, Inc. invested $500,000 to help fund a company expansion project scheduled for eight years from now. How much additional money will they have eight years from now if they can earn 9% Rather than 7% on this money?

Provide a definition of compounding.

Discounting is the process of finding the present value of some future amount.

Your grandmother invested one lump sum 42 years ago at 3.5% interest. Today, she gave you the proceeds of that investment which totaled $28,204.37. How much did your grandmother originally Invest?

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

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. At the end of one year, both Jamie and Chris will have the same amount in their accounts.

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.

Calculating the present value of a future cash flow to determine its value today is called:

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?