Exam 4: Introduction to Valuation: The Time Value of Money

You want to have $2.5 million saved on the day you retire. Explain how you can minimize the amount of cash you must invest in order to achieve this goal.

Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares?

Skyline Industries will need $1.8 million 5 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 5.25 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 8 percent interest. Approximately how long must you wait for your investment to double in value?

Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II) Increasing the interest rate III) Increasing the time period IV) Decreasing the amount of the lump sum investment

Elaine has just received an insurance settlement of $25,000. She wants to save this money until her daughter goes to college. If she can earn an average of 6.5 percent, compounded annually, how much will she have saved when her daughter enters college 8 years from now?

Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?

When you were born, your parents opened an investment account in your name and deposited $500 into the account. The account has earned an average annual rate of return of 4.8 percent. Today, the account is valued at $36,911.22. How old are you?

Scott has $4,800 that he wants to invest for 3 years. He can invest this amount at his credit union and earn 4 percent simple interest. Or, he can open an account at Trust Bank and earn 3.65 percent interest, compounded annually. If he decides to invest at Trust Bank for 3 years, he will:

Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent interest, compounded annually. At the end of three years:

You want to have $35,000 in cash to buy a car 4 years from today. You expect to earn 8 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose?

What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?

Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value?

How long will it take to double your savings if you earn 3.6 percent interest, compounded annually?

Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:

You have just made your first $3,000 contribution to your individual retirement account. Assuming you earn a 9 percent rate of return and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing?

Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626?

Second Union Bank pays 5 percent simple interest on its savings account balances, whereas Third Street Bank pays 5 percent compounded annually. If you made a $12,000 deposit in each bank, how much more money would you earn from your Third Street Bank account at the end of 15 years?

Your coin collection contains ten 1949 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2050, assuming they appreciate at a 6.1 percent annual rate?