Exam 5: The Time Value of Money

Kay owns two annuities that will each pay $500 a month for the next 12 years. One payment is received at the beginning of each month while the other is received at the end of each month. At a discount rate of 7.25 percent, compounded monthly, what is the difference in the present values of these annuities?

The present value of a set of cash flows is:

The present value table provides the factors for the:

Thorton will receive an inheritance of $500,000 three years from now. Thorton's personal discount rate corresponds to a 10% interest rate compounded semiannually. Which of the following values is closest to the amount that Thorton should accept today for the right to his inheritance?

You have deposited $1,500 in an account that promises to pay 8% compounded quarterly for the next five years. How much will you have in the account at the end?

Suzette is going to receive $10,000 today as the result of an insurance settlement. In addition, she will receive $15,000 one year from today and $25,000 two years from today. She plans on saving all of this money and investing it for her retirement. If Suzette can earn an average of 11% on her investments, how much will she have in her account if she retires 25 years from today?

The potential owner/managers of the yet to be formed new In-Line Blade Company are evaluating the prospects for the business. The new equipment is expected to be $5.5 million and have after tax cash flows of $400,000 for the first two years, $750,000 in the next two years, and $1,200,000 thereafter indefinitely. The owners estimate that they require a 15% rate of return. What is the value of the In-Line Blade Company; should they go forward with the investment?

If a student borrows $20,000 to start a business as a 5 year, 10% loan, the annual payment is:

Your aunt, in her will, left you the sum of $5,000 a year forever with payments starting immediately. However, the news is better. She has specified that the amount should grow at 5% per year to maintain purchasing power. Given an interest rate of 12%, what is the PV of the inheritance?

A perpetuity differs from an annuity because:

Jim Mayer has deposited $7,000 in a guaranteed investment account with a promised rate of 7% compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a car after graduation. How much of a down payment will he be able to make?

As the winner of the Housecleaners sweepstakes, you are entitled to one of the following prizes: A. $999,999 immediately. B. $100,000 per year forever. C. $180,000 per year for the next 10 years starting immediately. D. $400,000 payable every 2 years over 20 years. E. $39,000 next year growing by 6% forever. In terms of present values, which prize should be chosen if r = 9%? PV = $999,999 PV = $1,111,111 PV = $1,259,144 PV = $1,747,090 PV = $1,300,000

If you invest $100,000 today at 12% per year over the next 15 years, what is the most you can spend in equal amounts out of the fund each year over that time.

An annuity factor:

Discounting cash flows involves:

You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

Which of the following amounts is closest to the net present value of a project that contributes $10,000 at the end of the first year and $5,000 at the end of the second year. The initial cost is $8,000 and the appropriate interest rate is 10%.

What is the present value of 10 payments of $500 each received every 24 months at a discount rate of 12%?

Joe, a freshman in college, needs $55,000 in 4 years to buy the car of his dreams. If his investments earn 6% interest per year, how much must he invest today to have that amount at graduation? If he invested once a year for four years beginning today until the end of the 4 years how much must he invest?

An S&L provides a loan with 15 yearly repayments of $8,000 with the first payment beginning immediately. Which of the following amounts comes closest to the present value of the loan if the interest rate is 7%?