Exam 4: The Time Value of Money Part 2

Amounts of money can be added or subtracted only if they are at the same point in time.

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay with 10 equal annual end-of-the-year payments of $14,902.95,then you have just repaid what type of loan?

Your company just sold a product with the following payment plan: $40,000 today,$35,000 next year,and $30,000 the following year.If your firm places the payments into an account earning 6% per year,how much money will be in the account after collecting the last payment?

It is fortunate that we have formula,calculator,and spreadsheets as tools to solve for variables of the TVM equation,because there is no real way to visualize the timing and amount of cash flows.

You have an annuity of equal annual end-of-the-year cash flows of $500 that begin three years from today and last for a total of ten cash flows.Using a discount rate of 4%,what are those cash flows worth in today's dollars?

The main variables of the TVM equation are ________.

You have accumulated $1,200,000 for your retirement.How much money can you withdraw in equal annual beginning-of-the-year cash flows if you invest the money at a rate of 5% for thirty years?

The present value of a $100 three-year annuity due (first cash flow occurs today)discounted at a rate of 10% is equal to ________.

The present value of a lottery received as an annuity due is less than the present value of a lottery whose cash flows are received as an ordinary annuity.(Assume that the interest rate used to discount the cash flows is positive and equal between the two choices and that the magnitude and number of cash flows are equal for the two choices.Only the timing of the cash flows differs between the two choices.)

Your department at work places $8,000 every year-end into an account earning 5%.The money is used when the corporate office fails to fully finance your profitable projects.The money has not been touched since the first deposit was made exactly six years ago.If the most recent deposit was made today,how much money is currently in the account?

You are saving money for a down payment on a new house.You intend to place $7,500 at the end of each year for three years into an account earning 5% per year.At the end of the fourth year,you will place $10,000 into this account.How much money will be in the account at the end of the fourth year?

Amortization tables are common and can be used for all but which of the following?

Once you begin making payments on an amortization schedule for a loan such as a mortgage or car loan,most contracts clearly state that you may NOT pay off the loan early.

The future value of a combination of positive and negative cash flows cannot be determined.

Johnson has an annuity due that pays $600 per year for 15 years.(Note: There are 15 annual cash flows with the first cash flow occurring today.)What is the value of the cash flows 14 years from today (immediately after the last deposit is made)if they are placed in an account that earns 7.50%?

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the interest of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end of 10 years,then you have just repaid what type of loan?

You have just won the Publisher's Clearinghouse lottery of $50,000 per year for twenty years,with the first payment today followed by nineteen more start-of-the-year cash flows.At an interest rate of 4%,what is the present value of your winnings?

If we discount the annual payments from winning the lottery at 10%,the corresponding present value is greater than if we discount the annual payments at 12%.

Given positive equal annual cash flows and a positive interest rate,the present value of an annuity will be greater than the sum of the cash flows.

Given a positive interest rate and a positive cash flow,an ordinary annuity always has a greater present value than an annuity due of the same size and number of cash flows.