Exam 5: Time Value of Money

Future value is the value of a future amount at the present time,found by applying compound interest over a specified period of time.

A university has $16,000,000 invested in its endowment.The university wants to withdraw $800,000 from this endowment starting next year and continuing at annual intervals forever,with each subsequent payment growing at 4% per year.What rate of return does the endowment have to earn to sustain the desired withdrawals?

The main idea behind the time value of money is that a dollar today is worth more than a dollar in the future because ________.

Calculate the present value of $800 received at the beginning of year 1,$400 received at the beginning of year 2,and $700 received at the beginning of year 3,assuming an opportunity cost of 9 percent.

To expand its operation, the International Tools Inc. (ITI) has applied for a $3,500,000 loan from the International Bank. According to ITI's financial manager, the company can only afford a maximum yearly loan payment of $1,000,000. The bank has offered ITI, 1) a 3-year loan with a 10 percent interest rate, 2) a 4-year loan with a 11 percent interest rate, or 3) a 5-year loan with a 12 percent interest rate. (a) Compute the loan payment under each option. (b) Which option should the company choose?

You have been given the opportunity to earn $20,000 five years from now if you invest $9,524 today.What will be the rate of return to your investment?

Marc has purchased a new car for $15,000.He paid $2,500 as down payment and he paid the balance by a loan from his hometown bank.The loan is to be paid on a monthly basis for two years charging 12 percent interest.How much are the monthly payments?

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

A ski chalet at Peak n' Peak now costs $250,000.Inflation is expected to cause this price to increase at 5 percent per year over the next 10 years before Chris and Julie retire from successful investment banking careers.How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon retirement?

You will receive $100 in 1 year,$200 in 2 years,and $300 in 3 years.If you can earn 13% on your investments,the present value of these future receipts is ________.

Gina has planned to start her college education four years from now.To pay for her college education,she has decided to save $1,000 a quarter for the next four years in an investment account paying 12 percent interest.How much will she have at the end of the fourth year?

Jeanne has just graduated from high school and has received an award for $5,000.She would like to deposit the money in an interest earning account until she graduates from college bank B pays 8 percent interest compounded semiannually.Which is the better offer,and how much will Jeanne have upon graduation from college?

Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year,assuming the firm can earn 17 percent on its investments.

A beach house in Southern California now costs $350,000.Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Eric and Karinna retire from successful careers in commercial art.How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement?

Jia has just won a $20 million lottery,which will pay her $1 million at the end of each year for 20 years.An investor has offered her $10 million for this annuity.She estimates that she can earn 10 percent interest,compounded annually,on any amounts she invests.She asks your advice on whether to accept or reject the offer.What will you tell her? (Ignore Taxes)

John borrowed $12,000 to buy a new car and expects to pay $564.87 per month for the next 2 years to pay off the loan.What is the loan's rate of interest?

Tom is evaluating the growth rate in dividends of a company over the past 6 years.What is the annual compound growth rate if the dividends are as follows:

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

What annual rate of return would Grandma Zoe need to earn if she deposits $1,000 per month into an account beginning one month from today in order to have a total of $1,000,000 in 30 years?

Zheng Sen wishes to accumulate $1 million by the end of 20 years by making equal annual end-of-year deposits over the next 20 years.If Zheng Sen can earn 10 percent on his investments,how much must he deposit at the end of each year?