Exam 3: The Time Value of Money Part 1

You have saved $1,250 for a used motorcycle that has a current price of $1,550.If your money is sitting in an account earning 2.25% per year,how long will it take for this account to grow to $1,550? Note: The motorcycle's price may have changed by the time your account reaches a value of $1,550.

The school district needs to pass a bond levy for funding to remodel existing schools and to build new schools.Expenditures for the new and remodeled buildings will begin two years after passage of the bond.If the school district receives all funding immediately after the passage of the bond and can invest the funds at a rate of 2.75% per year,how large must the bond be for the district to have $48,000,000 at the start of construction?

Rick decided he was tired of being a poor college student when he visited a local electronics store and experienced its finest home theatre system.He determined that he would invest today a portion of the remaining money he earned last summer cleaning animal cages at the veterinary clinic.He plans to invest the money into an international mutual fund for 2.5 years and expects to earn an average annual rate of return of 15%.If Rick wants to have $5,000 in the account at the end of this time,how much must he invest today?

Andy would like to buy a new car but must complete a two-year commitment to the Peace Corp before he will drive the new car.The current price of the car Andy wants to buy is $32,000,and the dealer expects the price of a similar new car to be $35,000 in two years.If Andy can earn an annual interest rate of 4% on his money,should he buy the car now or wait for two years? Why? Note: Storage costs if Andy purchases the car are $0.Please limit your considerations to the factors offered in the answer choices.

In January of 1997,the U.S.Consumer Price Index (CPI)stood at 159.1.By January of 2017,the level had risen to 242.84.What was the average annual rate of inflation over this time period as measured by the CPI?

Consider a two-year investment: Given a constant and positive interest rate,the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).

Which of the following will result in a future value greater than $100?

The question "How long will I have to wait to reach a certain future value?" is best answered by which form of the TVM equation?

The question "At what rate is my money growing over time?" is best answered by which form of the TVM equation?

Your father spent all of his adult life working in a small T-shirt making firm.His first year sales were $98,000 and his last year sales were $350,000.If the firm grew at an average rate of 3.35% per year,how many years did your father sell T-shirts at his firm?

$5,000 invested at an annual rate of 6% for 3 years has a smaller future value than $5,000 invested at an annual rate of 3% for 6 years.

In the equation r = (FV/PV)^1/n - 1,the r is sometimes referred to as the ________.

You currently have $3,500 invested at an annual rate of 8%.How long will it take for this investment to grow to a value of $5,000?

Consider the TVM equation: the variable "r" may be defined as the discount rate or the growth rate depending upon how the equation is being used.

Your grandmother places $13,000 into an account earning an interest rate of 7% per year.After 5 years the account will be valued at $18,233.17.Which of the following statements is CORRECT?

A furniture store has a love seat on sale for $699.00,with the payment due one year from today.The store is willing to discount the price at an annual rate of 5% if you pay today.What is the amount if you pay today?

A two-year investment of $200 is made today at an annual interest rate of 6%.Which of the following statements is TRUE?

You have just won the university lottery.If you graduate,you will receive a refund equal to the amount of tuition you paid in your first four years of school.However,you need money now and a firm that specializes in buying expected future cash flows has offered to discount the lottery winnings at a rate of 8% and pay you cash today in exchange for your future lottery winnings.Since you have studied finance,you insist that they discount the cash flows at 12% instead of 8% because there is some risk as to the certainty of your graduating.If the firm agrees to your demand,then this means they will increase the present value of what they will pay you today.

Harold's parents have offered him a $10,000 high school graduation gift with an option for another $20,000 upon graduation from college in four years.His friends tell him this is a $30,000 gift from his parents,but Harold already knows something about the time value of money.If the expected inflation rate over the next four years is expected to be 4% per year,what does Harold think the gift is worth in today's dollars? How should he explain his thinking to his friends?

At your birth,your grandparents put $5,000 into a college fund for you.Now you want to use the fund to pay your first year of college costs of $23,000.To have enough money in your college fund for your stated purpose,what annual rate of return would have to have been earned on the account over an 18-year period?