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

Tomas earned $89 in interest on his savings account last year and has decided to leave the $86 in his account this coming year so it will earn interest.This process of earning interest on prior interest earnings is called:

You want to have $35,000 in cash to buy a car 3 years from today.You expect to earn 3.6 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?

Precision Engineering invested $125,000 at 6 percent interest,compounded annually for 3 years.How much interest on interest did the company earn over this period of time?

Starlite Industries will need $2.2 million 4.5 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 3.6 percent interest,compounded annually.How much money must the company deposit today to fully fund the equipment purchase?

South Central Bank pays 2.5 percent interest,compounded annually,on its savings accounts.Northern Bank pays 2.5 percent simple interest on its savings accounts.You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today.The amount you must deposit today:

Eight years from now,you will be inheriting $100,000.What is this inheritance worth to you today if you can earn 7.25 percent interest,compounded annually?

The present value of a lump sum future amount:

You have $500 today and want to triple your money in 6 years.What interest rate must you earn if the interest is compounded annually?

You and your sister are planning a large anniversary party 3 years from today for your parents' 50^th wedding anniversary.You have estimated that you will need $6,500 for this party.You can earn 2.6 percent compounded annually on your savings.How much would you and your sister have to deposit today in one lump sum to pay for the entire party?

Lew has $3,600 that he wants to invest for 5 years.He can invest this amount at his credit union and earn 2.2 percent simple interest.Or,he can open an account at Compass Bank and earn 2.15 percent interest,compounded annually.If he decides to invest at Compass Bank for 5 years,he will:

The relationship between the present value and the investment time period is best described as:

What is the future value of $5,700 invested for 18 years at 9 percent compounded annually?

Stephen claims that he invested $6,000 six years ago and that this investment is worth $28,700 today.For this to be true,what annual rate of return did he have to earn? Assume the interest compounded annually.

Eleven years ago,you deposited $3,200 into an account.Seven years ago,you added an additional $1,000 to this account.You earned 9.2 percent,compounded annually,for the first 4 years and 5.5 percent,compounded annually,for the last 7 years.How much money do you have in your account today?

Jamie earned $14 in interest on her savings account last year.She has decided to leave the $14 in her account so that she can earn interest on the $14 this year.The interest earned on last year’s interest earnings is called:

Jenny needs to borrow $5,500 for four years.The loan will be repaid in one lump sum at the end of the loan term.Which one of the following interest rates is best for Jenny?

Assume the total cost of a college education will be $325,000 when your child enters college in 16 years.You presently have $40,000 to invest and do not plan to invest anything further.What annual rate of interest must you earn on your investment to cover the entire cost of your child's college education?

Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now.Which one of the following terms refers to the $5,318?

You have $1,500 today in your savings account.How long must you wait for your savings to be worth $4,000 if you are earning 1.1 percent interest,compounded annually?

You have just made your first $5,000 contribution to your retirement account.Assuming you earn a rate of return of 5 percent 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?