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 hope to buy your dream house 3 years from now. Today, your dream house costs $247,900. You expect housing prices to rise by an average of 7.5% per year over the next 3 years. How much Will your dream house cost by the time you are ready to buy it?

The future value factor will decrease:

When you retire 36 years from now, you want to have $2 million. You think you can earn an average of 11.5% on your investments. To meet your goal, you are trying to decide whether to deposit a lump Sum today, or to wait and deposit a lump sum 3 years from today. How much more will you have to Deposit as a lump sum if you wait for 3 years before making the deposit?

Grandma Jenkins knows that she has between six and nine months left to live. She wants to leave each of her grandchildren $1,000 when she dies. For this purpose, she has established a trust fund And has deposited sufficient monies to provide for her twelve grandchildren. Today, she just Discovered that her daughter is going to have twins, increasing the number of her grandchildren to Thirteen. To ensure her final wish is fully funded, Grandma Jenkins needs to:

At a 3% rate of interest, you will quadruple your money in approximately ____ years.

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 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?

Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today, both Joe and Marie's investments are each worth $8,500. Which one of the following statements is correct Concerning their investments?

The future value will increase the shorter the period of time.

Interest earned only on the original principal amount invested is called _______________.

Alexander Industries just had a very profitable year. The owner has decided to invest $225,000 of the profits in a venture that pays an 8% rate of return for fifteen years. How much more would the Investment have been worth if the owner could have made 9% on this investment?

A deposit of $10,000 increased to $12,500 in 5 years. Determine the annual rate of interest used and calculate the balance at the end of year four.

Faith invests $4,500 in an account that pays 4% simple interest. How much money will she have at the end of eight years?

Present values increase as the discount rate increases.

Compound interest means that you earn:

You deposit $500,000 in a higher risk investment. Three years later, you receive $711,900 and withdraw your funds. Given this information calculate the balance at the end of year two.

When you were 26 years old, you received an inheritance of $1,500 from your grandfather. You invested that amount in Nu-Wave stock and have not touched the investment since then. Today, this Investment is worth $109,533.59. Nu-Wave stock has earned an average rate of return of 11.3% per Year over this time period. How old are you today?

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.