Exam 9: The Time Value of Money

Carol Thomas will pay out $6,000 at the end of year two and $8,000 at the end of year three. Then Carol will receive $10,000 at the end of year four. With an interest rate of 10%, what is the net value of the payments versus receipts in today's dollars?

The concept of time value of money is important to financial decision making because

The present value of an annuity table provides a "shortcut" for calculating the future value of a steady stream of payments, denoted as A. The same value can be calculated directly from the following equation:

The present value of a positive future inflow can become negative as discount rates become higher and higher.

Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment and begins investing one year from now?

To calculate "Future or Present Values of an "Annuity Due," we must assume that payments happen twice as often. Annuities Due simply move TVM calculations back to the beginning of a year, rather than the end.

In evaluating capital investment projects, current outlays must be judged against the current value of future benefits.

A dollar today is worth more than a dollar to be received in the future because

John Doeber borrowed $150,000 to buy a house. His loan cost was 16% annually because of his bad credit score. He promised to repay the loan in 5 years on a quarterly basis.. How much are the quarterly payments?

Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years?

As the interest rate increases, the interest factor (IF) for the present value of $1 increases.

In determining the future value of a single amount, one must consider

You will deposit $2,000 today. It will grow for five years at 12% interest, but compounded semi-annually. You will then withdraw the funds annually over the next four years at the end of each year, with an annual interest rate of 8%. Your annual withdrawal will be approximately ______.

The amount of annual payments necessary to accumulate a desired future total can be found by reference to the present value of an annuity table.

Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.

A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be?

Ambrin Corp. expects to receive $2,000 at the end of each year for 10 years. Then the corporation expects to receive $3,500 per year for the following 10 years, at the end of each year. What is the approximate present value of this 20-year cash flow? Use an 8% discount rate.

Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside at the end of each year?

The future value is the same concept as the way money grows in a bank account.

Cash flow decisions that ignore time value of money will probably not be as accurate as those decisions that do consider time value of money.