Exam 19: compound Interest and the Concept of Present Value

Consider the following items of information: I.The target recovery period. II.The discount rate. III.The timing (i.e. ,year)of a cash flow. Which of the above items would be needed to calculate the present value of a cash flow?

Uncle Roscoe,a wealthy relative,has given you a choice of receiving $10,000 today or $3,000 at the end of each year for the next four years.Which table factor(s)should be used to most efficiently determine the "value" of the $3,000 cash-flow stream?

Lawson Company invests $60,000 today and has $148,560 by the end of eight years.What is the firm's compound annual interest rate?

The procedure used to compute the present value of a series of cash flows is known as:

The sum of the discount factors applicable to individual cash flows in a series of equal cash flows is called the:

You received a $5,000 loan at the end of each of your four years of college.Aunt Rose agreed to pay off your loans at the end of your fourth year of school.How much will she have to pay? Assume a 4% interest rate compounded annually on student loans.

All other things being equal,which of the following would be the most attractive to an investor?

You are a sports agent who is representing Jack Lofton,a star football player,in contract negotiations with the New York Landmarks.The Landmarks have offered Lofton a four-year contract,with annual raises and performance bonuses that will result in a growing cash-flow stream for Lofton each year.Which table factor(s)should you use to most efficiently determine the "value" of the contract?

A series of equal cash flows is called a(n):

Nelson Company owes money to Nash Company for the purchase of equipment.Nash Company has given Nelson the following payment options: I.Immediate payment in full of $38,000. II.Annual payments of $15,000 made at the end of each of the next three years. III.A single payment of $48,000 made at the end of three years. Assume that both Nelson and Nash use a 10% interest rate compounded annually.What option would prefer,and what is the present value of that option? A.Option I,$34,542. B.Option I,$38,000. C.Option II,$37,305. D.Option III,$34,164. E.Option III,$36,048. Essay Questions

You received a $5,000 loan at the end of each of your four years of college.Your grandparents agreed to pay off your loans at the end of your fourth year of school.Assume a 4% annual compound interest rate on student loans.How much will they have to deposit when you start school so that they will have enough money to pay off your loans after four years? Their interest rate is 6% compounded annually.

You want to buy a new car in five years.You want to have saved $25,000 by then.You can invest $4,000 at the end of each of the next five years at an interest rate of 6% compounded annually.Will you have enough money at the end of the fifth year?

Norton Company has a 12% compound annual interest rate.If the firm invests $60,000 today,how much will have accumulated by the end of eight years?

The procedure used to compute the future value of a series of cash flows is known as:

Nelson Company owes money to Nash Company for the purchase of equipment.Nash Company has given Nelson the following payment options: I.Immediate payment in full of $38,000. II.Annual payments of $15,000 made at the end of each of the next three years. III.A single payment of $48,000 made at the end of three years. Assume that both Nelson and Nash use a 10% interest rate compounded annually.What option would Nash prefer,and what is the present value of that option? A.Option I,$34,542. B.Option I,$38,000. C.Option II,$37,305. D.Option III,$34,164. E.Option III,$36,048.

The main idea behind the time value of money is that:

The time value of money and present value are important business concepts. Required: Briefly explain these concepts to someone with a limited business background.

The time value of money and present value are important business concepts. Required: Differentiate between the concepts discounting and compounding.

You estimate that it will take five years to complete your college education.Your parents want to invest enough money today at an interest rate of 8% compounded annually to allow you to withdraw $10,000 at the end of each year for the next five years,with nothing left at the end.The amount of money to invest today is:

All other things being equal,which of the following would be most attractive to an investor?