Exam 4: The Time Value of Money

Which of the following statements regarding growing perpetuities is false?

With month payment of $580 into a savings account,in 5 years,Allen finally accumulates $80,000 for his dream trip to travel around the world.What could be the effective rate of interest that Allen's savings account enjoys in the 5-year term?

Consider the following timeline: If the current market rate of interest is 8%,then the present value of this timeline is closest to:

Which of the following statements is false?

Use the table for the question(s) below. -If the interest rate is 10%,then which investment(s),if any,would you take and why?

Consider the following timeline: If the current market rate of interest is 8%,then the value as of year 1 is closest to:

Which of the following statement is correct?

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:

Which of the following statements is false?

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:

When money or cash flow moves forward in time,the money or cash flows could be compounded

Use the information for the question(s) below. Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. -The present value (at age 30)of your retirement savings is closest to:

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -If the current rate of interest is 8%,then the future value 20 years from now of an investment that pays $1000 per year and lasts 20 years is closest to:

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -If the current rate of interest is 8%,then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:

Use the information for the question(s) below. Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. -Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that you son remains in this private school through high school and that your current interest rate is 6%,then the present value of your son's private school education is closest to:

When money moves forward on the timeline,the money should be

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -Mr.Zhu is selling his business for retirement.It is expected that the cash flows from his business in each of next 5 years will be $500,000.At the end of the 5 years,the residual value of the business is expected to be $8 million.Mr.Zhu has his expected rate of return of 12.0% .What could be the closest estimate to his "fair market value" (of similar business)at which he would be willing to sell his business?

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year.As the ore closest to the surface is removed it will become more difficult to extract the ore.Therefore,the value of the ore that you mine will decline at a rate of 8% per year forever.If the appropriate interest rate is 6%,then the value of this mining operation is closest to:

When money moves backward on the timeline,the money should be

Use the table for the question(s) below. -Draw a timeline detailing the cash flows from investment "A."