Exam 9: Time Value of Money

Assume that you will receive $2,000 a year in Years 1 through 5,$3,000 a year in Years 6 through 8,and $4,000 in Year 9,with all cash flows to be received at the end of the year.If you require a 14 percent rate of return,what is the present value of these cash flows?

What were the ratios of workers paying into Social Security to retirees receiving benefits for 1950 and 2009,respectively?

In 1981 the average tuition for one year at a certain state school was $1,800.Thirty years later,in 2011,the average cost was $13,700.What was the growth rate in tuition over the 30-year period?

Because we usually assume positive interest rates in time value analyses,the present value of a three year annuity will always be less than the future value of a single lump sum,if the annuity payment equals the original lump sum investment.

You have just purchased a life insurance policy that requires you to make 40 semiannual payments of $350 each,where the first payment is due in 6 months.The insurance company has guaranteed that these payments will be invested to earn you an effective annual rate of 8.16 percent,although interest is to be compounded semiannually.At the end of 20 years (40 payments),the policy will mature.The insurance company will pay out the proceeds of this policy to you in 10 equal annual payments,with the first payment to be made one year after the policy matures.If the effective interest rate remains at 8.16 percent,how much will you receive during each of the 10 years?

Net present value is preferred to internal rate of return for capital budgeting decisions because

You have a 30-year mortgage with a simple annual interest rate of 8.5 percent.The monthly payment is $1,000.What percentage of your total payments over the first three years goes toward the repayment of principal?

You are currently at time period 0,and you will receive the first payment on an annual payment annuity of $100 in perpetuity at the end of this year.Six full years from now you will receive the first payment on an additional $150 in perpetuity,and at the end of time period 10 you will receive the first payment on an additional $200 in perpetuity.If you require a 10 percent rate of return,what is the combined present value of these three perpetuities?

The greater the number of compounding periods within a year,the greater the future value of a lump sum invested initially,and the greater the present value of a given lump sum to be received at maturity.

Your parents start saving for your sister's college education.She will begin college when she turns age 18 and will need $4,000 at that time and at the end of each of the following 3 years.They will make a deposit at the end of this year in an account which pays 6 percent compounded annually,and an identical deposit at the end of each year with the last deposit occurring when she turns age 18.If an annual deposit of $1,484 will allow them to reach their goal,how old is your sister now?

Which of the following statements is correct?

The savings rate of individuals in the U.S.has trended higher since the 1980s and it is now higher than the savings rate of most other developed countries.

Your company must make payments of $100,000 each year for 10 years,with the first payment to be made 10 years from today.To prepare for these payments,your company must make 10 equal annual deposits into an account which pays a simple interest rate of 7 percent,daily compounding (360-day year).Funds will remain in the account during both the accumulation period (the first 10 years)and the distribution period (the last 10 years),and the same interest rate will be earned throughout the entire 20 years.The first deposit will be made immediately.How large must each deposit be?

A capital budgeting project is acceptable if the rate of return required for such a project is greater than the project's internal rate of return.

You have just taken out an installment loan for $100,000.Assume that the loan will be repaid in 12 equal monthly installments of $9,456 and that the first payment will be due one month from today.How much of your third monthly payment will go toward the repayment of principal?

You will receive a $100 annual perpetuity,the first payment to be received now,at Year 0,a $300 annual perpetuity payable starting at the end of Year 5,and a $200 semiannual (2 payments per year)perpetuity payable starting midway through Year 10.If you require an effective annual interest rate of 14.49 percent,what is the present value of all three perpetuities together at Year 0? (Hint: The semiannual annuity can be thought of as two annual annuities. )

Your lease calls for payments of $500 at the end of each month for the next 12 months.Now your landlord offers you a new 1-year lease which calls for zero rent for 3 months,then rental payments of $700 at the end of each month for the next 9 months.You keep your money in a bank time deposit that pays a simple annual rate of 5 percent.By what amount would your net worth change if you accept the new lease? (Hint: Your return per month is 5%/12 = 0.4166667%. )

Which of the following statements is correct?

Assume that you can invest to earn a stated annual rate of return of 12 percent,but where interest is compounded semiannually.If you make 20 consecutive semiannual deposits of $500 each,with the first deposit being made today,what will your balance be at the end of Year 20?

Which of the following statements concerning the internal rate of return is false?