Exam 5: The Time Value of Money

The price of a computer today is $400 and inflation is 5% per year.Therefore,in two years the price of the computer is expected to be $440.

Your parents are complaining about the price of items today compared to what they cost years ago.If an automobile that cost $12,000 in 1980 costs $40,000 in 2010,calculate the annual growth rate in the automobile's price.

You have a savings bond that will be worth $750 when it matures in 3 years,but you need cash today.If the current going rate of interest is 5%,what is your bond worth if you sell it today (rounded to the nearest dollar)?

You have contracted to buy a house for $250,000,paying $30,000 down and taking out a fully amortizing loan for the balance,at a 5.7% annual rate for 30 years.What will your monthly payment be if they make equal monthly installments over the next 30 years (to the nearest dollar)?

A certificate of deposit that pays 9.8% compounded monthly is better than a similar certificate of deposit that pays 10% compounded only once per year.

Frank Zanca is considering three different investments that his broker has offered to him.The different cash flows are as follows: Because Frank only has enough savings for one investment,his broker has proposed the third alternative to be,according to his expertise,"the best in town." However,Frank questions his broker and wants to calculate the present value of each investment.Assuming a 15% discount rate,what is Frank's best alternative?

The present value of a single future sum

You invest $1,000 at a variable rate of interest.Initially the rate is 4% compounded annually for the first year,and the rate increases one-half of one percent annually for five years (year two's rate is 4.5%,year three's rate is 5.0%,etc.).How much will you have in the account after five years?

You are ready to retire.A glance at your 401(k)statement indicates that you have $750,000.If the funds remain in an account earning 9.0%,how much could you withdraw at the beginning of each year for the next 25 years?

If you put $200 in a savings account at the beginning of each year for 10 years and then allow the account to compound for an additional 10 years,how much will be in the account at the end of the 20th year? Assume that the account earns 10% and round to the nearest $100.

Which of the following conclusions would be true if you earn a higher rate of return on your investments?

What is the present value of the following perpetuities? a.$200 per year discounted at 6% annually b.$500 per year discounted at 9% annually c.$1,000 per year discounted at 5% annually d.$550 per year discounted at 8% annually

Bob invested $2,000 in an investment fund on his 21st birthday.The fund pays 7% interest compounded semiannually.Bob is celebrating his 50th birthday today.Bob decides he wants to retire on his 60th birthday and he wants to withdraw $75,000 per year,the first withdrawal on his 60th birthday and the last withdrawal on his 90th birthday.Bob expects to receive $100,000 from his employer on his 55th birthday in recognition of his long service to the company.Assume Bob has not taken any money out of his investment fund since he initially funded it on his 21st birthday,and that he will deposit the $100,000 from his employer into the investment fund on his 55th birthday.The investment fund will be used to pay for Bob's retirement. If Bob makes no additional deposits into his investment fund,how much will be available for retirement at age 60? Since the amount in (a)is insufficient to meet his retirement goals,Bob decides to deposit equal annual amounts into the investment fund beginning on his 51st birthday and ending on his 59th birthday,so that he can meet his retirement goals.How much will each deposit be?

If you wish to accumulate $200,000 in the child's college fund after 18 years,and can invest at a 7.5% annual rate,how much must you invest at the end of each year if the first deposit is made at the end of the first year?

If you put $10,000 in an investment that returns 11 percent compounded monthly what would you have after 10 years (rounded to nearest $1)?

A retirement plan guarantees to pay you or your estate a fixed amount for 25 years.At the time of retirement you will have $100,000 to your credit in the plan.The plan anticipates earning 7% interest annually over the period you receive benefits.How much will your annual benefits be assuming the first payment occurs one year from your retirement date?

When using a financial calculator,cash outflows generally have to be entered as negative numbers,because a financial calculator sees money "leaving your hands."

Cindy wants $2.5 million for her retirement at age 65.Cindy is 25 years old today and plans to deposit equal amounts each year starting on her 26th birthday and ending on her 65th birthday.If her investments earn 6% per year,how much must each deposit be?

Today is your 21st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded daily.How much will be in the account on your 50th birthday?

The future value of an annuity will increase if the interest rate goes up,but the present value of the same annuity will decrease as the interest rate goes up.