Exam 4: The Time Value of Money

Suppose that you deposit $10,000 in an account that pays 6% interest and you want to know how much will be in your account at the end of 10 years.To solve this problem in Microsoft Excel,you would use which of the following Excel formulas?

A Canadian company issues an 8-year term bond with face value of $1,000 and 6% coupon rate.If the market prevailing effective rate of interest is 5.75%,what is the price an investor will have to pay? Note: The bond pays a $60 coupon (or interest)payment at the end of each of the 8 years and pays the face value at the end of the 8 years.

Which of the following is NOT a valid time value of money function in Excel?

Which of the following formulas is incorrect?

Which of the following statements regarding perpetuities is false?

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:

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?

You work for a pharmaceutical company that has developed a new drug.The patent on the drug will last for 17 years.You expect that the drug will produce cash flows of $10 million in its first year and that this amount will grow at a rate of 4% per year for the next 17 years.Once the patent expires,other pharmaceutical companies will be able to produce generic equivalents of your drug and competition will drive any future profits to zero.If the interest rate is 12% per year,then the present value of producing this drug is closest to:

Consider the following timeline: If the current market rate of interest is 10%,then the future value at time 3 on this timeline 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%. -Suppose a second entrepreneur approaches Joe and offers him $250,000 today for the business.Should Joe accept the new entrepreneur's offer or stick with the original offer of $100,000 and the series of payments over three years? Why?

Consider the following timeline: If the current market rate of interest is 12%,then the present value of the cash flows 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%. -The present value (at age 30)of your retirement savings is closest to:

Use the figure for the question(s) below. -Which of the following statements regarding the timeline 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 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. -Assume that university costs continue to increase an average of 4% per year and that all their child's university savings are invested in an account paying 7% interest.Draw a timeline that details the amount of money their child will need to have in the future for each of the four years of their child's undergraduate education (assuming that their child begins university at age 18).

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

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

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

After many years teaching finance at Capilano University,Allen wants to establish a scholarship to offer 4 $1,000 awards each year to students whose performance is excellent in finance courses.If the university can negotiate a 12.75% effective interest rate,at least how much does Allen need to endorse over to the scholarship (closest estimate)?

Net Present Value can be calculated for any time period provided that

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