Exam 3: The Time Value of Money

As a result of an injury settlement with your insurance you have the choice between If you could invest your money at 8% compounded annually,which option should you pick?

A young couple buys their dream house.After paying their down payment and closing costs,the couple has borrowed $400,000 from the bank.The terms of the mortgage are 30 years of monthly payments at an APR of 6% with monthly compounding.What is the monthly payment for the couple?

Suppose a professional sports team convinces a former player to come out of retirement and play for three seasons.They offer the player $2 million in year 1,$3 million in year 2,and $4 million in year 3.Assuming end of year payments of the salary,how would we find the value of his contract today if the player has a discount rate of 12%?

A young couple buys their dream house.After paying their down payment and closing costs,the couple has borrowed $400,000 from the bank.The terms of the mortgage are 30 years of monthly payments at an APR of 6% with monthly compounding.Suppose the couple wants to pay off their mortgage early,and will make extra payments to accomplish this goal.Specifically,the couple will pay an EXTRA $2,000 every 12 months (this extra amount is in ADDITION to the regular scheduled mortgage payment).The first extra $2,000 will be paid after month 12.What will be the balance of the loan after the first year of the mortgage?

Your parents set up a trust for you that you will not have access to until your 30th birthday,which is exactly 9 years from today.By prior arrangement,the trust will be worth exactly $200,000 on your 30th birthday.You need cash today and are willing to sell the rights to that trust today for a set amount.If the discount rate for such a cash flow is 12%,what is the maximum amount that someone should be willing to pay you today for the rights to the trust on your 30th birthday?

Your aunt is evaluating her retirement pension.She can retire at age 65 and collect $1,000 per month for the rest of her life.Assume that payments begin one month after her 65^th birthday.If your aunt lives to be exactly 80 years old and can earn 7% interest (compounded monthly),what is the equivalent lump sum she would need at retirement to equal the value of the pension?

You wish to save $2,500,000 for your retirement by saving a certain sum every month for the next 40 years.If you can earn 9% compounded monthly,and you make your deposits at the BEGINNING of each month,how much would you have to deposit each month to achieve your objective?

If you invest $5,000 in a mutual fund with a total annual return (interest rate)of 8% and you re-invest the proceeds each year,what will be the value of your investment after five years?

If you deposit $9,000 at the BEGINNING of each year in an account earning 8% interest,what will be the value of the account in 25 years?

Hamilton Industries needs a bulldozer.The purchasing manager has her eye on a new model that will be available in three years at a price of $75,000.If Hamilton's discount rate is 11%,how much money does she need now to pay for the bulldozer when it's available?

Discounting is:

In the equation below,the exponent "3" represents $133.10 = $100 ´ (1 + .1)³

You are asked to choose between a 4-year investment that pays 10% compound interest and a similar investment that pays 11.5% SIMPLE interest.Which investment will you choose?

Roxy is buying a house and the mortgage terms are 30 years,monthly payments.If the interest rate is 7% (APR),the loan is $300,000 loan,what is the balance of the loan after the seventh payment?

You will receive a stream of annual $70 payments to begin at the end of year 0 until the final payment at the BEGINNING of year 5.What amount will you have at the end of year 5 if you can invest all amounts at an 11% interest rate?

Having acquired great fortune based on your mastery of finance,you decide to set up a charity.You'd like to give the finance department of your alma mater $100,000 next year,and you want to make an annual contribution in perpetuity,with each year's contribution growing by 4%.The university can generate an 8% return on invested capital.What is the value of a lump-sum donation needed today to accomplish this?

An annuity is considered:

The amount that someone is willing to pay today,for a single cash flow in the future is

Consider the following set of cashflows to be received over the next 3 years: If the discount rate is 10%,how would we write the formula to find the Future Value of this set of cash flows at year 3?

Which of the following should have the greatest value if the discount rate applying to the cash flows is a positive value?