Exam 4: The Time Value of Money

A business is deciding whether to give an end-of-year bonus of $5000 each year for the next four years to an employee,in order to increase the number of sales that employee makes.What is the minimum extra profit the employee must generate this year for the bonus to be worthwhile over the next four years,if the discount rate is 7%?

When the net present value (NPV)of an investment is positive,the benefits exceed the costs and the investment should be made.

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 6%,then the future value (FV)of this stream of cash flows is closest to:

Investment X and Investment Y are both growing perpetuities with initial cash flow of $100.Both investments have the same interest rate (r).The present value of Investment X is $5,000,while the present value of Investment Y is $4,000.Which of the following is TRUE?

Which of the following is TRUE about perpetuities?

If the current rate of interest is 8%,then the future value (FV)of an investment that pays $1000 per year and lasts 20 years is closest to:

Anya finally decides that she will give her cousin,Zen,the loan he requested.He is expected to pay Anya $12,500 each year for the next 5 years,starting at the end of this year.The loan interest rate at the bank is 5% but because he is family,she will only charge him half of this interest rate.What is the current value of this loan,today? B)$500,000 C)$62,500 D)$54,118.46 E)$55,240.89

You are saving money for the down payment on a house.If you can save $7,500 per year for the next five years at an interest rate of 8%,how much will you have saved at the end of five years?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%,then the future value (FV)of this stream of cash flows is closest to:

AB Company has decided to donate to the children's hospital every year.The company 's first payment will be $1 million and it will grow at a constant rate of 3% forever.What is the present value of this growing perpetuity if the current market rate is 5%?

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.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Assuming that the parents have already made the deposit for their daughter's 18th birthday,then the amount available for the daughter's college expenses on her 18th birthday is closest to:

Jason buys a consol (perpetual bond)that pays out a fixed cash flow of $750,000 every year,forever,starting at the end of this year.If the current market rate is 12.5%,what is the present value of the cash flows?

A perpetuity with a first payment of $500 grows at a constant rate of 5%.If the interest rate is 7%,what is the Present Value of this perpetuity?

What is the total future value of these cash flows in year 4,given that the interest rate is 10%?

Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years.He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year.What is the net present value (NPV)of this investment if the interest rate is 4%?

JJ & Co has decided to donate money to a cancer research fund every year for the next 25 years.They will make annual payments of $3.5 million.What is the present value of their donation if the current market rate is 7.5%?

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:

Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest.That bequest will provide $1000 in the first year,and will grow by 7% per year,forever.If the interest rate is 11%,how much must Martin provide to fund this bequest?

Trial and error is the only way to compute the internal rate of return (IRR)when interest is calculated over five or more periods.

Suppose the current interest rate is 8.5%,what is the future value of a $15 million investment in 10 years?