Exam 4: The Time Value of Money Part 2

You are paid to teach graduate-level classes for the university and want to determine how much money the university makes from your graduate-level classes.Based on historical data,you estimate that your graduate classes for the next six years will generate an average annual revenue of $99,850.If you discount these cash flows at an annual rate of 7.30%,what is the present value of the expected cash flows?

You sign a contract to pay back all of the interest and principal of a loan at the maturity date.This is an example of a discount loan.

What is the future value in year thirty-five of an ordinary annuity cash flow of $4,000 per year at an interest rate of 11.0% per year?

Your firm intends to finance the purchase of a new construction crane.The cost is $2,500,000.What is the size of the annual ordinary annuity payment if the loan is amortized over a ten-year period at a rate of 7.50%?

Present value calculations do which of the following?

You have $50,000 invested in an account paying 3.50%.If you just finished paying your total college expenses for the coming year and your college costs $19,000 per year,how many years will your money last? (Treat your costs like an annuity with the first payment one year from today.)Use a financial calculator.

Assume a five-year equal payment amortization schedule with an annual interest rate of 7% and annual payments.If the beginning principal is $8,000,then the first interest payment will be how large?

A trend among universities is to guarantee tuition to incoming freshmen for a four-year period.Further,the annual amount due is collected in equal payments collected every three months.Although the payments are equal as well as equally spaced,this is NOT an example of an annuity because the payments are made every three months rather than on a monthly or annual basis.

Solving for an unknown interest rate given the PV,FV,PMT,and N is an iterative (or trial-and-error)process.

Arvidas recently won the Central States Lottery of $3,500,000.The lottery pays either a total of twenty $175,000 payments per year with the first payment today (i.e.,an annuity due),or $2,000,000 today.At what interest rate would Arvidas be financially indifferent between these two payout choices?

You have decided to endow the insert your name here Chair in Finance at the State University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today)and is invested at a rate that pays out 4.50% per year forever?

What type of loan requires both principal and interest payments as you go by making equal payments each period?

You estimate that the drive-through coffee kiosk you own will generate ordinary annuity after-tax cash flows of $120,000 per year for the next ten years.If you discount these cash flows at an annual rate of 11%,what is the present value of your expected cash flows?

When solving for future value,we use the term compounding of cash flows rather than the term discounting of cash flows.

You currently have $67,000 in an interest-earning account.From this account,you wish to make 10 year-end payments of $8,500 each.What annual rate of return must you make on this account to meet your objective?

Weston Inc.just agreed to pay $8,000 today,$10,000 in one year,and $15,000 in two years to a landowner to explore for,but not extract,valuable minerals.If the landowner invests the money at a rate of 5.5% compounded annually,what is the investment worth two years from today?

A wealthy man just died and left his pet dogs the following estate: $20,000 per year for the next 11 years with the first cash flow today.At a discount rate of 4.2%,what is the doggy estate worth in today's dollars?

Jusef has won the $3,800,000 state lottery and intends to save all of the money for his retirement.He chooses to receive an annual cash flow of $190,000 for twenty years,with the first payment to be received one year from today.How much money will be in his retirement account in twenty years if he can reinvest his money at an annual rate of 8.75%?

Marie has a $1,200,000 investment portfolio and she wishes to spend $87,500 per year as an ordinary annuity.If the investment account earns 5% annually,how long will her portfolio last? Use a calculator to determine your answer.

Which of the following choices will result in a greater future value at age 65? Choice number 1 is to invest $3,000 per year from ages 20 through 26 (a total of seven investments)into an account and then leave it untouched until you are 65 (another 39 years).Choice number 2 is to begin at age 27 and make $3,000 deposits into an investment account every year until you are 65 years old (a total of 39 investments).Each account earns an average of 10% per year.(The investments are end-of-year payments.)