Exam 4: The Time Value of Money

You are offered an investment opportunity that costs you $28,000,has an NPV of $2,278,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:

Which of the following statement is correct?

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 with the first withdrawal 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?

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 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%. -You have been offered the following investment opportunity: if you pay $2,500 today,you will receive $1,000 at the end of each of the next three years.Draw a timeline detailing this investment opportunity.

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 university education. Currently university 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 university costs continue to increase an average of 4% per year and that all her university 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:

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 university education. Currently university 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. -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 university education.They decide to make deposits into an educational savings account on each of their child's birthdays,starting with the first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2,000 on their child's first birthday and plan to increase the size of their deposits by 5% each year.Draw a timeline that details the amounts that will be deposited into the account up to and including their child's 18th birthday.

Since your first birthday,your grandparents have been depositing $1,000 into a savings account on every one 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:

Which of the following statements regarding growing annuities is false?

Which of the following statements regarding growing perpetuities is false?

Consider the following timeline: If the current market rate of interest is 9%,then the present value of this timeline as of year 0 is closest to:

Suppose that you are considering an investment that will pay you $4,000 per year for the next five years.The appropriate rate of interest is 5%.You want to know the present value of the cash flows from this investment.To solve this problem in Microsoft Excel,you would use which of the following Excel formulas?

Define the following terms: (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity

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

Which of the following statements is false?

In cash flow calculations,cash flow sign convention requires us to

Suppose you invest $1,000 into a mutual fund that is expected to earn a rate of return of 10%.The amount of money will you have in 10 years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

Which of the following statements is false?

If the current rate of interest is 8%,then the future value 20 years from now of an investment that pays $1,000 per year and lasts 20 years is closest to:

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