Exam 4: The Time Value of Money

Use the following information to answer the question(s) below. Your great aunt Matilda put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday the account balance was $5,033.83. -The amount of money that your great aunt Matilda originally put in the account is closest to:

Use the following information to answer the question(s) below. Consider the following four alternatives: 1. $132 received in two years. 2. $160 received in five years. 3. $200 received in eight years. 4. $220 received in ten years. -The ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year would be:

Consider a growing perpetuity that will pay $100 in one year.Each year after that,you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment.This pattern of payments will continue forever.If the interest rate is 11%,then the value of this perpetuity is closest to:

Use the figure for the question(s) below. -Which of the following statements regarding the timeline is false?

You are offered an investment opportunity that costs you $28,000,has an NPV of $2278,lasts for three years,has interest rate of 10%,and produces the following cash flows: The missing cash flow from year 2 is closest to:

Since your first birthday,your grandparents have been depositing $1000 into a savings account on everyone of your birthdays.The account pays 4% interest annually.Immediately after your grandparents make the deposit on your 18th birthday,the amount of money in your savings account will be 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%. -Assume that you are 30 years old today,and that you are planning on retiring 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 31^st 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.At retirement (age 65)you will begin withdrawing equal annual payments to pay for your living expenses during retirement (on your 65th birthday).If you expect to die one day before your 101st birthday (Your last withdraw will be on your 100th birthday)and if the annual rate of return is 7%,then how much money will you have to spend in each of your golden years of retirement?

After your grandmother retired,she purchased an annuity contract for $250,000 that will pay her $25,000 at the end of every year until she dies.The appropriate interest rate for this annuity is 8%.The number of years that your grandmother must live in order to get more value out of the annuity than what she paid for it is closest to:

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 statements is false?

Use the following information to answer the question(s) below. Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. -If the appropriate interest rate is 10%,then Nielson Motors should:

Use the figure for the question(s) below. -Which of the following statements regarding timelines is false?

Use the following information to answer the question(s) below. Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. -If the appropriate interest rate is 15%,then Nielson Motors should:

At an annual interest rate of 7%,the future value of $5,000 in five years is closest to:

Use the following information to answer the question(s) below. Consider the following four alternatives: 1. $132 received in two years. 2. $160 received in five years. 3. $200 received in eight years. 4. $220 received in ten years. -The ranking of the four alternatives from most valuable to least valuable if the interest rate is 6% per year would be:

Use the information for the question(s) below. Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. -In terms of present value,how much will Joe receive for selling the family business?

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

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Assuming that the parents have already made the deposit for their daughter's 18th birthday,then the amount available for the daughter's college expenses on her 18th birthday is closest to:

At an annual interest rate of 7%,the future value of this timeline in year 3 is closest to:

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