Exam 5: Time Value of Money

Herbert has opened a retirement fund account which pays 7 percent interest and requires $5,000 annual deposits. Herbert will retire in 15 years and expects 10 years of retirement life. What is the maximum annual retirement benefit Herbert can get during his retirement years?

Otto is planning for his son's college education to begin ten years from today. He estimates the yearly tuition, books, and living expenses to be $10,000 per year for a four-year degree. How much must Otto deposit today, at an interest rate of 12 percent, for his son to be able to withdraw $10,000 per year for four years of college?

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

Detta borrows $20,000 from the bank. For a five-year loan, the bank requires annual end-of-year payments of $4,878.05. The annual interest rate on the loan is

Ms. Day needs $20,000 to buy her dream car. In her search for the best (low cost) loan, she has gathered the following information from three local banks. Which bank would you recommend Ms. Day borrow from?

Ten years ago, Tom purchased a painting for $300. The painting is now worth $1,020. Tom could have deposited $300 in a savings account paying 12 percent interest compounded annually. Which of these two options would have provided Tom with a higher return?

Mr. Knowitall has been awarded a bonus for his outstanding work. His employer offers him a choice of a lump-sum of $5,000 today, or an annuity of $1,250 a year for the next five years. Which option should Mr. Knowitall choose if his opportunity cost is 9 percent?

Janice borrows $25,000 from the bank at 15 percent to be repaid in 10 equal annual installments. Calculate the end-of-year payment.

The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, 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?

Entertainer's Aid plans five annual colossal concerts, each in a different nation's capital. The concerts will raise funds for an endowment which would provide the World Wide Hunger Fund with $3,000,000 per year into perpetuity. The endowment will be given at the end of the fifth year. The rate of interest is expected to be 9 percent in all future periods. How much must Entertainer's Aid deposit each year to accumulate to the required amount?

Find the equal annual end-of-year payment on $50,000, 15 year, and 10 percent loan.

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.

A firm wishes to establish a fund which, in 10 years, will accumulate to $10,000,000. The fund will be used to repay an outstanding bond issue. The firm plans to make deposits, which will earn 12 percent, to this fund at the end of each of the 10 years prior to maturity of the bond. How large must these deposits be to accumulate to $10,000,000?

What is the rate of return on an investment of $124,090 if the company expects to receive $10,000 per year for the next 30 years?

The future value of $200 received today and deposited at 8 percent compounded semi-annually for three years is

Calculate the future value of $4,600 received today if it is deposited at 9 percent for three years.

Ashley owns stock in a company which has consistently paid a growing dividend over the last five years. The first year Ashley owned the stock, she received $1.71 per share and in the fifth year, she received $2.89 per share. What is the growth rate of the dividends over the last five years?

The future value of a $10,000 annuity due deposited at 12 percent compounded annually for each of the next 5 years is

Colin would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000 and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents on the cruise?