Exam 4: The Time Value of Money

A perpetuity will pay $1000 per year,starting five years after the perpetuity is purchased.What is the present value (PV)of this perpetuity on the date that it is purchased,given that the interest rate is 4%?

What is the interest rate of an investment that pays $65 million next year with a current value of $58 million?

Trial and error is the only way to compute the internal rate of return (IRR)when interest is calculated over five or more periods.

What is the PV of an investment that will pay you $1,500 every year,forever,starting in one year's time,if the interest rate is 8%?

Which of the following is true about perpetuities?

You are offered an investment opportunity that costs you $28,000,has a net present value (NPV)of $2278,lasts for three years,has interest rate of 10%,and produces the following cash flows: The missing cash flow from year 2 is closest to:

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then what is the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education?

The present value (PV)of a stream of cash flows is just the sum of the present values of each individual cash flow.

A bank offers a home buyer a 25-year loan at 8% per year.If the home buyer borrows $120,000 from the bank,how much must be repaid every year?

Define the following terms: (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity

An investor receives $250,000 at the end of each of the next 5 years.What is the present value of her investment,given that the interest rate is 5%?

Kresta can invest in a scheme which will pay $10,000 at the end of each of the next four years.She must make an investment at the start of the first year of $32,000.Should she make this investment,given that the interest rate is 7%?

An annuity will pay you $5,000 per year for 25 years.What is the FV of this annuity at the end of 25 years,if your interest rate is 8%?

Joey buys a bond for $10,000 that will mature in 25 years.He will receive a single payment of $150,000 when the bond reaches maturity.What is the interest rate?

You are borrowing money to buy a car.If you can make payments of $300 per month starting one month from now at an interest rate of 4%,how much will you be able to borrow for the car today if you finance the amount over four years?

An investment of $6000 at the start of the year will pay $1000 at the end of the year for a set number of years.What is the minimum number of years these payments must be made for if the investment is to be worthwhile,given that the interest rate is 6%?

Investment X and Investment Y are both growing perpetuities with initial cash flow of $100.Both investments have the same interest rate (r).The present value of Investment X is $5,000,while the present value of Investment Y is $4,000.Which of the following is true?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%,then the present value (PV)of this stream of cash flows is closest to:

Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years.He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year.What is the net present value (NPV)of this investment if the interest rate is 4%?

Use the information for the question(s) below. Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. -Suppose a second entrepreneur approaches Joe and offers him $250,000 today for the business.Should Joe accept the new entrepreneur's offer or stick with the original offer of $100,000 and the series of payments over three years? Why?