Exam 4: The Time Value of Money

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:

If the current rate of interest is 8% APR,then the present value of an investment that pays $250 per quarter and lasts 20 years is closest to:

Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that you 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:

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:

You are looking for a new truck and see the following advertisement."Own a new truck! No money down.Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120.The interest rate for the deal advertised is closest to:

Which of the following statements regarding perpetuities 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:

You are saving for retirement.To live comfortably,you decide that you will need $2.5 million dollars by the time you are 65.If today is your 30th birthday,and you decide,starting today,and on every birthday up to and including your 65th birthday,that you will deposit the same amount into your savings account.Assuming the interest rate is 5%,the amount that you must set aside each and every year on your birthday is closest to:

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:

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

The British government has just issued a new consol bond that sells for £1000 and pays interest of 8%.The annual interest payment on this bond must be:

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:

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

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 would be in the account if you left the money there until your 65th birthday is closest to:

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

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 college education. Currently, college 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 college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest.Draw a timeline that details the amount of money she will need to have in the future four each of her four years of her undergraduate education.

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 college education. Currently, college 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 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.Draw a timeline that details the amount that would be available for the daughter's college expenses on her 18th birthday.

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 immediately upon purchasing the consol bond,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%. -In terms of present value,how much will Joe receive for selling the family business?

If the current rate of interest is 8% APR,then the future value of an investment that pays $500 every two years and lasts 20 years is closest to: