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 present value (at age 30)of your retirement savings is closest to:

If the appropriate interest rate is 8%,then present value of $500 paid at the beginning of each of the next 40 years is closest to:

Henry Rearden is saving for retirement and has determined that to live comfortably he must save $3 million by his 65 birthday.Henry just turned 30 today,and he has decided that starting today and continuing on every birthday up to and including his 65th birthday,he will deposit the same amount into an individual retirement account (IRA).If Henry can earn 8% on his IRA,then the amount he must set aside each year to make sure that he will have $3 million in his account on his 65th birthday is closest to:

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?

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. -Assuming 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,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:

Kampgrounds Inc.is considering purchasing a parcel of wilderness land near a popular historic site.Although this land will cost Kampgrounds $400,000 today,by renting out wilderness campsites on this land,Kampgrounds expects to make $35,000 at the end of every year indefinitely.If the appropriate discount rate is 8%,then the NPV of this new wilderness campsite is closest to:

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. -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:

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:

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:

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:

Consider the following timeline: If the current market rate of interest is 10%,then the future value of this timeline is closest to:

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

You have an $8,000 balance on your credit card,which charges 12% interest annually (1% per month).If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

At an annual interest rate of 7%,the future value of this timeline in year 2 is closest to:

Which of the following statements is FALSE?

Which of the following formulas is INCORRECT?

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 $2500 today,you will receive $1000 at the end of each of the next three years.Draw a timeline detailing this investment opportunity.

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:

If the current rate of interest is 8%,then the future value 20 years from now of an investment that pays $1000 per year and lasts 20 years is closest to:

Which of the following statements is FALSE?