Exam 5: The Time Value of Money

The great grandparents of one of your classmates sold their munitions factory to the government in beginning of 1898 during the Spanish-American War for $150,000. If these proceeds had been invested at 6% from then until the end of 2001, what would the legacy to your classmate's family be worth at the end of 2001 (assume whole years)?

Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have earned over a five-year period if the interest had compounded annually?

There are three factors that affect the future value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.

The present value of future cash flows minus initial cost is called:

Which one of the following statements concerning interest rates is correct?

Mr. Miser, who is 35 years old, has just inherited $11,000 and decides to use the windfall towards his retirement. He places the money in a bank, which promises a return of 6% per year until his planned retirement at age 65. If his funds earn 6% interest compounded annually, how much will he have at retirement? Repeat the analysis for both semi-annual and continuous compounding.

Luis has a management contract which grants him a lump sum payment of $20 million be paid upon the completion of his first five years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 4.5 percent on these funds. How much must the company set aside each year for this purpose?

You are to receive $75 per year indefinitely. The market rate of interest for these types of payments is 8%. The price you would pay for this stream is:

Which of the following amounts is closest to the end value of investing $5,000 for 14 months at a stated annual interest rate of 6 percent compounded monthly?

Which of the following amounts is closest to the end value of investing $7,500 for 2 1/2 years at an effective annual interest rate of 12.36%? Interest is compounded semiannually.

Tobi owns a perpetuity that will pay $1,500 a year, starting one year from now. He offers to sell you all of the remaining payments after the next 25 payments have been paid. What price should you offer him for payments 26 onward if you desire a rate of return of 8 percent? What does your offer price illustrate about the value of perpetuities?

The future value table provides the factors for the:

Which of the following statements is true?