Exam 9: The Time Value of Money

As the compounding rate becomes lower and lower, the future value of inflows approaches

Dan would like to save $1,500,000 by the time he retires in 30 years and believes he can earn an annual return of 8%. How much does he need to invest in each of the following years to achieve his goal?

Discounting refers to devaluing the item from the higher future value amount to the present value amount through the consideration of interest.

The interest factor for a future value (FV_IF) is equal to (1 + i)ⁿ

Ian would like to save $2,000,000 by the time he retires in 30 years. If he believes that he can achieve a 6% rate of return, how much does he need to deposit each year, starting one year from now, to achieve his goal?

Shah sets aside $2,000 each year for five years. After five years, he then withdraws the funds on an equal annual basis for the next four years. If Shah wishes to determine the amount of the annuity to be withdrawn in years 6 through 9, he should use the following two tables in this order:

Pedro Gonzalez will invest $5,000 at the end of each year. If the interest rate is 8%, what will the value be after three years?

If an individual's cost of capital were 6%, the person would prefer to receive $110 at the end of one year rather than $100 right now. PV = FV × PVIF (App. B: 6%, 1 period) = $110 × 0.943 = $104

Mr. Bubble wants to sell his bubble machine for $1,000,000, but it might take awhile before it is valued that high. He bought it for $149,000 and is earning annual interest of 10% on the machine. How long will Mr. Bubble have to wait before the machine is valued at $1,000,000?

If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account?

The interest factor for the future value of a single sum is equal to (1 + n)ⁱ.

Jeff believes he will need a $60,000 annual income during retirement. If he can achieve a 6% return during retirement and believes he will live 20 years after retirement, how much does he need to save by the time he retires? Assume he'll start drawing his money out one year after his retirement.

Discounted at 10%, $1,000 received at the end of each year for three years is worth less than $2,700 received today. PV_A = A × PV_IFA (App. D: 3 periods, 10%) = $1,000 × 2.487 = $2,487

Sara would like to evaluate the performance of her portfolio over the past 10 years. What compound annual rate of return has she achieved if she invested $12,000 ten years ago and now has $25,000?

Time value of money considers many changes to the value of the dollar such as interest, inflation, deflation, etc.

The time value of money concept becomes less critical as the prime rate of lending increases.

How much must you invest today at 8% interest in order to see your investment grow to $8,000 in 10 years?

If a father and mother set aside a certain amount each year for their daughter 's college fund, which table would be used to determine the amount necessary to be put away each year in order to reach a certain goal once the daughter attends college?

The interest factor for the present value of a single sum is equal to (1 + i)/i..

To determine the current worth of four annual payments of $1,000 at 4% annual interest, one would refer to a time value of money table for the present value of $1.