Exam 5: The Time Value of Money

A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. Determine the amount of these annual payments (to the nearest dollar).

What monthly rate of interest will yield an annual effective rate of interest of 14%?

The payment or receipt of a series of equal cash flows per period, at the end of each period, for a specified amount of time is called a(n):

Inco purchased a computer for $200,000 and this machine is expected to generate annual cash flows of $48,271 over the next 5 years. What is the expected rate of return on this investment?

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?

If your parents put $2,000 a year into an IRA account for you in each of your last 4 teenage years (age 16,17,18, and 19), how much would the IRA account have in it at your retirement 45 years later if the account earned 12% each year? (Assume end-of-year payments.)

The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years. At a discount rate of 14 percent, what is the present value of this stream of lease payments?

BB&C bank has agreed to lend you $30,000 today, but you must repay $42,135 in 3 years. What rate is the bank charging you?

Baggos has seen their EPS increase from $0.30 to $3.16 in seven years. What has been the growth rate of Baggos's EPS?

If you invest $10,000 in a 4-year certificate of deposit (CD) paying 10 percent interest compounded annually, determine how much the CD will be worth at the end of 4 years.

Jenny Genius wants to purchase a new car. She knows that she can afford to pay $250 per month and that her bank will charge her 8% interest on the car loan. She intends to pay off the car in five years. Interest will be compounded monthly. Of the following, which is the most expensive vehicle in her price range that she could consider?

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%.

What is the present value of $1,000 received 2 years from today if the nominal interest rate is 9% and compounded monthly?

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?

Compare the difference between compound interest and simple interest.

You have just won a $5 million lottery to be received in twenty annual equal payments of $250,000. What will happen to the present value of your winnings if the interest rate increases during the next 20 years.

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?

Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump sum, he found that he would receive $22,500 annually (end of year) for 20 years. Joe is 75 years old and wants his money now. He has been offered $140,827 to sell his ticket. What rate of return is the buyer expecting to make if Joe accepts the offer?

The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a nine year time period. Determine the compound annual growth rate.

Using the "Rule of 72," about how long will it take a sum of money to double in value if the annual interest rate is 9 percent?