Exam 5: The Time Value of Money

The present value of $1,000 to be received in 5 years is ________ if the discount rate is 12.78%.

The price of a computer today is $400 and inflation is 5% per year.Therefore,in two years the price of the computer is expected to be $440.

Today is your 21^st birthday and your bank account balance is $25,000.Your account is earning 6.5% interest compounded daily.How much will be in the account on your 50^th birthday?

Frank Zanca is considering three different investments that his broker has offered to him.The different cash flows are as follows: Because Frank only has enough savings for one investment,his broker has proposed the third alternative to be,according to his expertise,"the best in town." However,Frank questions his broker and wants to calculate the present value of each investment.Assuming a 15% discount rate,what is Frank's best alternative?

Joe borrowed $10,000 at 10% per year and promised to pay it back in equal annual installments at the end of each of the next 5 years.Joe's payment will be $2,100 [($10,000/5)+ ($10,000 × 10%).

When solving time value of money problems on a financial calculator,you must select the "end mode" when you enter the final years cash flow.

You own an ordinary annuity contract that will pay you $3,000 per year for 12 years.You need money to pay back a loan in 6 years,and you are afraid if you get the annuity payments annually you will spend the money and not be able to pay back your loan.You decide to sell your annuity for a lump sum of cash to be paid to you five years from today.If the interest rate is 8%,what is the equivalent value of your 12-year annuity if paid in one lump sum five years from today?

Assuming two investments have equal lives,a high discount rate tends to favor

Tim has $100 in a bank account paying 2% interest per year.At the end of 5 years,Tim's bank account balance will be $110 if interest is not compounded,but will be greater than $110 if interest is compounded.

Bill wants to buy a new boat in 7 years.He expects the new boat will cost $28,000.Bill has $18,000 in an investment account today.What rate of return must Bill earn on his investments to be able to buy the boat on time?

The future value of a 10-year ordinary annuity is twice as much as the future value of an otherwise identical 5-year annuity.

If the interest rate is positive,then the future value of an annuity due will be greater than the future value of an ordinary annuity.

You won the lottery and can receive either (1)$60,000 today,or (2)$10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today.You plan to use the money to pay for your child's college education in 15 years.You should

Which of the following investments has the highest effective annual return (EAR)? (Assume that all CDs are of equal risk.)

You decide you want your child to be a millionaire.You have a son today and you deposit $10,000 in an investment account that earns 7% per year.The money in the account will be distributed to your son whenever the total reaches $1,500,000.How old will your son be when he gets the money (rounded to the nearest year)?

You just invested $50,000 into an account that earns 7 percent compounded annually.At the end of each year you can withdraw $4,971.How many years can you continue to make the withdrawals?

Jimmy just bought a new Ford SUV for his business.The price of the vehicle was $40,000.Jimmy made a $5,000 down payment and took out an amortized loan for the rest.The car dealership made the loan at 8% interest compounded monthly for five years.He is to pay back the principal and interest in equal monthly installments beginning one month from now.Determine the amount of Jimmy's monthly payment.

A financial advisor tells you that you can make your child a millionaire if you just start saving early.You decide to put an equal amount each year into an investment account that earns 7.5% interest per year,starting on the day your child is born.How much would you need to invest each year (rounded to the nearest dollar)to accumulate a million for your child by the time he is 35 years old? (Your last deposit will be made on his 34^th birthday.)

Bob invested $2,000 in an investment fund on his 21^st birthday.The fund pays 7% interest compounded semiannually.Bob is celebrating his 50^th birthday today.Bob decides he wants to retire on his 60^th birthday and he wants to withdraw $75,000 per year,the first withdrawal on his 60^th birthday and the last withdrawal on his 90^th birthday.Bob expects to receive $100,000 from his employer on his 55^th birthday in recognition of his long service to the company.Assume Bob has not taken any money out of his investment fund since he initially funded it on his 21^st birthday,and that he will deposit the $100,000 from his employer into the investment fund on his 55^th birthday.The investment fund will be used to pay for Bob's retirement. If Bob makes no additional deposits into his investment fund,how much will be available for retirement at age 60? Since the amount in (a)is insufficient to meet his retirement goals,Bob decides to deposit equal annual amounts into the investment fund beginning on his 51^st birthday and ending on his 59^th birthday,so that he can meet his retirement goals.How much will each deposit be?

You bought a racehorse that has had a winning streak for six years,bringing in $250,000 at the end of each year before dying of a heart attack.If you paid $1,155,720 for the horse 4 years ago,what was your annual return over this 4-year period?