Exam 4: The Time Value of Money

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:

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%. -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: A)$332,300 B)$137,900 C)$155,800 D)$156,000

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. -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. 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:

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

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%. -You are considering investing in a zero coupon bond that will pay you its face value of $1000 in ten years. If the bond is currently selling for $485.20, then the IRR for investing in this bond 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%. -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:

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. -At an annual interest rate of 7%, the present value of $5,000 received in five years 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%. -If the appropriate interest rate is 8%, then present value of $500 paid at the end of each of the next 40 years is 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 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. -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%. -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. 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. -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 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. -If the current rate of interest is 8%, then the present value of an investment that pays $1000 per year and lasts 20 years 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 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. -Which of the following statements is FALSE?

Which of the following statements regarding perpetuities is FALSE?

Use the following timeline to answer the question(s)below. 0 1 2 3 $600 $1,200 $1,800 -At an annual interest rate of 7%, the present value of this timeline in year 0 is closest to:

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

Use the figure for the question(s)below. -Which of the following statements regarding timelines 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 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. -At an annual interest rate of 7%, the future value of $5,000 in five years is closest to: