Exam 4: The Time Value of Money

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 future value at retirement (age 65)of your savings is:

Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the end of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that your son remains in this private school through high school and that your current interest rate is 7%,then the present value of your son's private school education is closest to:

You are interested in purchasing a new automobile that costs $35,000.The dealership offers you a special financing rate of 6% APR (0.5%)per month for 48 months.Assuming that you do not make a down payment on the auto and you take the dealer's financing deal,then your monthly car payments would be 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. -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:

You are considering investing in a zero coupon bond that will pay you its face value of $1,000 in ten years.If the bond is currently selling for $485.20,then the IRR for investing in this bond is closest to:

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 detailing a stream of cash flows: If the current market rate of interest is 6%,then the future value of this stream of cash flows is closest to:

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 10%,then the present value of this stream of cash flows is closest to:

Consider the following timeline: If the current market rate of interest is 7%,then the future value of this timeline as of year 3 is closest to:

Which of the following statements is false?

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

Use the table for the question(s) below. -If the interest rate is 6%,then the NPV of investment "A" is closest to:

Which of the following statements regarding annuities is false?

How do you calculate (mathematically)the present value of the following? (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity

Using an Excel spreadsheet to calculate net present value (NPV)has an advantage over using a financial calculator because

You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15 year fixed rate mortgage (180 months)at 9% APR (0.75% month).If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:

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

The British government has a consol bond outstanding that pays ₤100 in interest each year.Assuming that the current interest rate in Great Britain is 5% and that you will receive your first interest payment one year from now,then the value of the consol bond 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%. -Draw a timeline detailing Joe's cash flows from the sale of the family business.

It has long been told that the Dutch purchased Manhattan island in 1,626 for the value of 60 guilders ($24).Assuming that the Dutch invested this money into an account earning 5%,approximately how much would their investment be worth 380 years later in 2006?