Exam 9: The Time Value of Money

Sponge Bob will receive a payment of $5,000 per year for seven years beginning three years from today. At a discount rate of 9%, what is the present value of this deferred annuity?

Calculation of the yield of an investment provides the total return over multiple years.

Mr. Fish wants to build a house in eight years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

The farther into the future any given amount is received, the larger its present value. Time amplifies the growth of money. Consequently, to achieve a certain future value, more time means that you can start with less.

Carol Thomas will pay out $6,000 at the end of year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13%, what is the net value of the payments versus receipts in today's dollars?

A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement, you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given the following information, how much will your annual benefits be? Present value of $1 PV_IF = .178 Future value of $1 FV_IF = 5.604 Present value of annuity PV_IFA = 9.129 Future value of annuity FV_IFA = 51.16

Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside beginning a year from now?

You are to receive $12,000 at the end of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

The formula PV = FV(1 + n)ⁱ will determine the present value of $1.

Sara Shouppe has invested $100,000 in an account at her local bank. The bank will pay her a constant amount each year for six years, starting one year from today, and the account's balance will be 0 at the end of the sixth year. If the bank has promised Ms. Shouppe a 10% return, how much will they have to pay her each year?

The time value of money is not a useful concept in determining the value of a bond or in capital investment decisions.

The future value of an annuity table provides a "shortcut" for calculating the future value of a steady stream of payments, denoted as A.The same value can be calculated directly from the following equation:

If Allison has saved $1,000,000 upon retirement, how much can she live on each year if she can earn 6% per year and will end with $0 when she expects to die 25 years after retirement?

Cash flow decisions that ignore the time value of money will probably not be as accurate as those decisions that do rely on the time value of money.

A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be? Present value of $1 PV_IF = .215 Future value of $1 FV_IF = 4.661 Present value of annuity PV_IFA = 9.818 Future value of annuity FV_IFA = 45.762

To save for her newborn son's college education, Lea Wilson will invest $1,000 at the beginning of each year for the next 18 years. The interest rate is 12%. What is the future value?

If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to a "future value of $1" table.

Gary Kiraly wants to buy a new Italian sports car in three years. The vehicle is expected to cost $80,000 at that time. If Gary should be so lucky as to find an investment yielding 12% over that three-year period, how much would he have to invest now in order to accumulate $80,000 at the end of the three years?

As the compounding rate becomes lower and lower, the future value of inflows approaches

After 10 years, 100 shares of stock originally purchased for $500 were sold for $900. What was the yield on the investment? Choose the closest answer.