Exam 5: The Time Value of Money

Nukin' Gnats Pest Control wants to offer a contract to its customers that would protect the property of their existing customers against termite infestation.Should termites invade a customer's home, Nukin' Gnats will pay for the repairs to the home provided the customer has maintained service with Nukin' Gnats.The corporation must develop an account with a value of $500,000.They will accumulate this account over three years, after which they will offer this new contract provision.How much must be deposited annually (rounded amount) to accumulate the needed funds if they can get 5% interest at their local bank?

Finding the compound sum of $1,000 to be received at the beginning of each of the next 5 years requires calculating the

Sherry Smart is buying a $350,000 home and will pay the mortgage monthly for 30 years.She has a good credit score and has qualified for a 5.125% loan interest.How much will she be paying monthly for the home?

Bill Swill decides to try his luck at Powerball where the projected winnings are $12,000,000.If he wins, he can choose the annuity option (to be paid over 20 years) or a lump sum settlement that he can invest at 8% interest.How much must the lump sum option be to make the lump sum option equal to the annuity option (rounded)?

John borrowed $20,000 to finance his college education.If the finance charge on the loan is 6 percent, and he will pay off the loan in 10 equal, annual, end of year payments, how much total interest will he pay?

Keith Stone has a 10-year old daughter, Kate, who will be entering college in 8 years.Keith estimates college costs to be $16,000, $17,000, $18,000 and $19,000 payable at the beginning of each of Kate's four years in college.How much must Keith save each year (assume end of year payments) for each of the next 8 years to have enough savings to pay for Kate's education? Assume Keith can earn 9% on his savings.

If the present value of a given sum is equal to its future value, then

You wish to have $10,000 per year as a retirement supplement for 20 years (from age 65-85).You are now 40 years old.How much must you save each year for the next 25 years if you assume your savings will earn 12% annually?

Alabama Power has preferred stock that pays an annual dividend of $9.44.If the security has no maturity, what is its value to an investor who wishes to obtain a 9 percent rate of return?

Compare the difference between compound interest and simple interest.

The more frequent the compounding the

What is/are the difference(s) between simple interest and compound interest?

The present value of a single amount can be represented as

Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of the accident.What is the present value (at the time of the accident) of the payment? Assume interest rates are 9%.

Which of the following is worth more?

The amount of simple interest is equal to the product of the principal times times .

Annuity due calculations are especially important when dealing with

Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40 year working life and then retire.What will Billy have if the account will earn 10 percent compounded annually?

Mr.Moore is 35 years old today and is beginning to plan for his retirement.He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60.He expects to live to the maximum age of 80 and wants to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays.The account is expected to earn 10 percent per annum for the entire period of time.Determine the size of the annual deposits that must be made by Mr.Moore.

Jackie plans to open her own book store in 10 years.To raise the "seed" money she has committed $10,000 she now has in a mutual fund.In addition, she plans to save $2,000 per year (end of year) for the next 5 years and $3,000 per year (end of year) for the following 5 years.How much "seed" money will Jackie have in 10 years if the investments earn 10 percent per year compounded annually?