Exam 5: Time Value of Money

How long would it take for Nico to save an adequate amount for retirement if he deposits $40,000 per year into an account beginning one year from today that pays 12 percent per year if he wishes to have a total of $1,000,000 at retirement?

The nominal and effective rates are equivalent for annual compounding.

To pay for her college education,Gina is saving $2,000 at the beginning of each year for the next eight years in a bank account paying 12 percent interest.How much will Gina have in that account at the end of 8th year?

A(n)________ is an annuity with an infinite life making continual annual payments.

A generous benefactor to a local ballet plans to make a one-time endowment that would provide the ballet with $150,000 per year into perpetuity.The rate of interest is expected to be 5 percent for all future time periods.How large must the endowment be?

What effective annual rate of return (EAR)would Rayne 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?

Dottie has decided to set up an account that will pay her granddaughter $5,000 a year indefinitely.How much should Dottie deposit in an account paying 8 percent annual interest?

The annual percentage rate (APR)is the nominal rate of interest,found by multiplying the periodic rate by the number of periods in one year.

You have been given a choice between two retirement policies as described below. Policy A: You will receive equal annual payments of $10,000 beginning 35 years from now for 10 years. Policy B: You will receive one lump-sum of $100,000 in 40 years from now. Which policy would you choose? Assume rate of interest is 6 percent.

Calculate the present value of the following stream of cash flows,assuming that the firm's opportunity cost is 15 percent.

Uncle Butch borrows $19,500 from the bank at 8 percent annually compounded interest to be repaid in 10 equal annual installments.The interest paid in the third year is ________.

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 future value of $200 received today and deposited for three years in an account which pays semiannual interest of 8 percent is ________.

The present value of an ordinary annuity of $2,350 each year for eight years,assuming an opportunity cost of 11 percent,is ________.

An annuity due is a stream of equal cash flows with each cash flow arriving at the beginning of each period.

Mr.Jackson 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.Jackson choose if his opportunity cost is 9 percent?

The New York Soccer Association would like to accumulate $10,000 by the end of 4 years from now to finance a big soccer weekend for its members.The Association currently has $2,500 and wishes to raise the balance by arranging annual fund-raising events.How much money should they raise at each annual fund-raising event assuming 8 percent rate of interest?

You are considering the purchase of new equipment for your company and you have narrowed down the possibilities to two models which perform equally well.However,the method of paying for the two models is different.Model A requires $5,000 per year payment for the next five years.Model B requires the following payment schedule.Which model should you buy if your opportunity cost is 8 percent?

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

Everything else being equal,the higher the interest rate,the higher the future value.