Exam 3: The Time Value of Money Part 1

In four years your oldest child will be in 10th grade,at which point you and your family plan to vacation in Europe.You estimate that you will need $25,000 for the trip.How much do you need to set aside today if you can place your money in an investment vehicle earning an average of 4.25% per year?

The one-time payment of money at a future date is often called a ________.

You gave your little sister two rabbits for Easter three years ago and now she has 64 of the cute little bunnies.What is the average annual rate of increase in the number of rabbits your sister owns? Note: Your parents are not very pleased with you right now.

Your firm has sold a fleet of 50 cars to a local firm at a discounted price of $23,000 each (a total of $1,150,000)due in six months.You are willing to discount the purchase price at an annual rate of 3% if the firm pays cash today.What is the least amount of money you will accept if the firm pays your company today?

To determine the present value of a future amount,one should ________ the future cash flows.

Median U.S.wages in 2014 were $53,675,compared to the median wage in 1990 of $28,960.What was the average annual increase in median wages over this 24-year period?

Current annual dividends for Simpsons Frozen Foods Inc.,are $1.35 per share.Four years ago,dividends per share were exactly $1.00.What has been the rate of growth for Simpsons' dividends per share?

Your parts supplier gives you one-quarter of a year to pay for parts ordered today,or offers you a discount if you pay cash at purchase.You have just purchased $94,500 worth of parts from your supplier and the discount is at an annual rate of 10%.How much will you pay for the parts if you pay today?

Your friend,Justin,started college at the age of 18 with $40,559 already saved.He has this money because 18 years ago when he was born his parents placed money into a special college savings account earning 7.00% per year.How much money did Justin's parents place into his college account?

The television commercial pitchman tells you he can double your money with a risk-free investment in just 10 years.If this is true,what interest rate must this risk-free investment earn on an annual basis? Solve this question using the Rule of 72 and then in a more exact fashion using a formula,your calculator,or computer.In today's rate environment,is the interest rate that you solved for a realistic annual rate of return for a risk-free investment?

$1,000 received 5 years from today discounted at an annual rate of 10% has a smaller present value than $1,000 received 10 years from today discounted at an annual rate of 5%.

A $200 deposit today that earns an annual interest rate of 5% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.

Consider the TVM equation: The greater the interest rate,other things remaining equal,the greater the present value.

Compare and contrast the discount rate with the compound (or growth)rate.

You intend to buy a vacation home in eight years and plan to have saved $75,000 for a down payment.How much money would you have to place today into an investment that earns 9% per year to have enough for your desired down payment?

A two-year investment of $300 is made today at an annual interest rate of 4%.Which of the following statements is TRUE?

Assume you put $2,000 into a tax-free investment and leave it there for 45 years at an annual rate of 8%.According to the Rule of 72,your investment will grow to a value of about $64,000.

In 1930,the highest paid player in major league baseball was Babe Ruth of the New York Yankees,with an annual salary of $80,000.In 2017,the highest paid player in major league baseball was Clayton Kershaw of the Los Angeles Dodgers with a salary of $35,571,000.What was the average annual rate of growth in the top baseball salary over this time period?

The Rule of 72 can be used to quickly estimate interest rates necessary to double your money in a given time period without the use of a spreadsheet or calculator.However,the rule does NOT work for estimating growth rates.

An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%.How much interest is earned in the first year and how much in the second year of this investment?