Exam 9: The Time Value of Money

The present 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:

Mr. Darden is selling his house for $200,000. He bought it for $164,000 10 years ago. What is the annual return on his investment?

If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account?

In January, 2000, Harold Black bought 100 shares of Country Homes for $37.50 per share. He sold them in January 2010 for a total of $9,715.02. Calculate Harold's approximate annual rate of return.

Kimberly Ford invested $10,000 10 years ago at 16%, compounded quarterly. How much has she accumulated?

An amount of money to be received in the future is worth less today than the stated amount.

Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. How much are the annual payments?

An annuity may best be defined as

A dollar today is worth more than a dollar to be received in the future because

If Gerry makes a deposit of $1,500 at the end of each quarter for five years, how much will he have at the end of the five years assuming a 12% annual return and quarterly compounding?

Discounted at 6%, $1,000 received three years from now is worth less than $800 received today. PV = FV × PV_IF (App. B: 3 periods, 6%) = $1,000 × .840 = $840

Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment and begins investing one year from now?

You have an opportunity to buy a $1,000 bond that matures in 10 years. The bond pays $30 every six months. The current market interest rate for similar bonds is 8%. What is the most you would be willing to pay for this bond?

If an individual's cost of capital were 6%, the person would prefer to receive $110 at the end of one year rather than $100 right now. PV = FV × PV_IF (App. B: 6%, 1 period) = $110 × 0.943 = $104

Sara would like to evaluate the performance of her portfolio over the past 10 years. What compound annual rate of return has she achieved if she invested $12,000 10 years ago and now has $25,000?

Jeff believes he will need a $60,000 annual income during retirement. If he can achieve a 6% return during retirement and believes he will live 20 years after retirement, how much does he need to save by the time he retires, assuming he'll start drawing his money out one year after his retirement?

Ambrin Corp. expects to receive $2,000 per year for 10 years starting one year from now, and $3,500 per year for the next 10 years at the end of each year. What is the approximate present value of this 20-year cash flow? Use an 11% discount rate.

Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.

Ali Shah sets aside $2,000 each year for five years. He then withdraws the funds on an equal annual basis for the next four years. If Ali wishes to determine the amount of the annuity to be withdrawn in years 6 through 9, he should use the following two tables in this order: