Exam 5: Time Value of Money

Suzy wants to buy a house but does not want to get a loan. The average price of her dream house is $500,000 and its price is growing at 5 percent per year. How much should Suzy invest in a project at the end of each year for the next 5 years in order to accumulate enough money to buy her dream house with cash at the end of the fifth year? Assume the project pays 12 percent rate of return.

The future value of $200 received today and deposited at 8 percent for three years is ________.

Aunt Tillie has deposited $33,000 today in an account which will earn 10 percent annually. She plans to leave the funds in this account for seven years earning interest. If the goal of this deposit is to cover a future obligation of $65,000, what recommendation would you make to Aunt Tillie?

The greater the interest rate and the longer the period of time, the higher the present value.

When computing the number of deposits needed to accumulate a future sum, it will take longer if the interest rates are higher, holding the future value and deposit size constant.

How many years would it take for Jughead to save an adequate amount for retirement if he deposits $2,000 per month into an account beginning today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement?

An annuity with an infinite life is called a(n) ________.

Find the present value of the following stream of a firm's cash flows, assuming that the firm's opportunity cost is 25 percent.

Find the present value of the following stream of a firm's cash flows, assuming that the firm's opportunity cost is 9 percent.

The present value of a $25,000 perpetuity at a 14 percent discount rate is ________.

A wealthy art collector has decided to endow her favorite art museum by establishing funds for an endowment which would provide the museum with $1,000,000 per year for acquisitions into perpetuity. The art collector will give the endowment upon her fiftieth birthday 10 years from today. She plans to accumulate the endowment by making annual end-of-year deposits into an account. The rate of interest is expected to be 6 percent in all future periods. How much must the art collector deposit each year to accumulate to the required amount?

The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is ________.

Since individuals are always confronted with opportunities to earn positive rates of return on their funds, the timing of cash flows does not have any significant economic consequences.

Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

In general, with an amortized loan, the payment amount remains constant over the life of the loan, both the principal portion of and the interest portion declines over the life of the loan.

The annual rate of return is referred to as the ________.

The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity for interest rates greater than zero.

The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is ________.

Rita borrows $4,500 from the bank at 9 percent annually compounded interest to be repaid in three equal annual installments. The interest paid in the third year is ________.

In comparing an ordinary annuity and an annuity due, which of the following is true?