Exam 9: Time Value of Money

Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics: If the firm's required rate of return (r) is 10 percent, which project should be purchased?

You expect to receive $1,000 at the end of each of the next 3 years.You will deposit these payments into an account which pays 10 percent compounded semiannually.What is the future value of these payments, that is, the value at the end of the third year?

Your subscription to Jogger's World Monthly is about to run out and you have the choice of renewing it by sending in the $10 a year regular rate or of getting a lifetime subscription to the magazine by paying $100.Your opportunity cost is 7 percent.How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year.(Round up if necessary to obtain a whole number of years.)

Two firms evaluated the same capital budgeting project to determine whether to purchase it.The CFO of Anchor Weights Corporation (AWC) reported that she determined that the project's internal rate of return equals 9 percent, and she recommended that the project be purchased.The CFO of Sectional Spas Incorporated (SSI) simply reported that the project was unacceptable to his firm when he evaluated it using one of the capital budgeting techniques that consider the time value of money.Given this information, which of the following statements is correct?

You have just taken out a 30-year mortgage on your new home for $120,000.This mortgage is to be repaid in 360 equal monthly installments.If the stated (simple) annual interest rate is 14.75 percent, what is the amount of each of the monthly installments?

Which of the following statements is correct?

Your father, who is 60, plans to retire in 2 years, and he expects to live independently for 3 years.He wants a retirement income which has, in the first year, the same purchasing power as $40,000 has today.However, his retirement income will be of a fixed amount, so his real income will decline over time.His retirement income will start the day he retires, 2 years from today, and he will receive a total of 3 retirement payments.Inflation is expected to be constant at 5 percent.Your father has $100,000 in savings now, and he can earn 8 percent on savings now and in the future.How much must he save each year, starting today, to meet his retirement goals?

What is the present value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

As the winning contestant in a television game show, you are considering the prizes to be awarded.You must indicate to the sponsor which of the following two choices you prefer, assuming you want to maximize your wealth.Assume it is now January 1, and there is no danger whatever that the sponsor won't pay off. Which one would you choose?

At an effective annual interest rate of 20 percent, how many years will it take a given amount to triple in value? (Round to the closest year.)

In an amortization problem where a debt is completely amortized, if we are given the values for PV, I, and N, then we can solve the problem despite having been given only three of the five time value variables involved.

You are currently at time period 0, and you will receive the first payment on an annual payment annuity of $100 in perpetuity at the end of this year.Six full years from now you will receive the first payment on an additional $150 in perpetuity, and at the end of time period 10 you will receive the first payment on an additional $200 in perpetuity.If you require a 10 percent rate of return, what is the combined present value of these three perpetuities?

You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college.Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account.How much money will you receive?

Which of the following statements is most correct?

The post-audit is a simple process in which actual results are compared to forecasted results and any discrepancy indicates a change factors that are completely under management's control.

Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will

Net present value is preferred to internal rate of return for capital budgeting decisions because

On January 1, 2006, a graduate student developed a 5-year financial plan which would provide enough money at the end of her graduate work (January 1, 2011) to open a business of her own.Her plan was to deposit $8,000 per year for 5 years, starting immediately, into an account paying 10 percent compounded annually.Her activities proceeded according to plan except that at the end of her third year (1/1/09) she withdrew $5,000 to take a Caribbean cruise, at the end of the fourth year (1/1/10) she withdrew $5,000 to buy a used Prelude, and at the end of the fifth year (1/1/11) she had to withdraw $5,000 to pay to have her dissertation typed.Her account, at the end of the fifth year, was less than the amount she had originally planned on by how much?

A college intern working at Anderson Paints evaluated potential investments⎯that is, capital budgeting projects⎯using the firm's average required rate of return (WACC), and he produced the following report for the capital budgeting manager: The capital budgeting manager usually considers the risks associated with capital budgeting projects before making her final decision.If a project has a risk that is different from average, she adjusts the average required rate of return by adding or subtracting 2 percentage points.If the four projected listed above are independent, which one(s) should the capital budgeting manager recommend be purchased?

If we calculate a periodic interest rate, say a monthly rate, in order to get the simple annual rate, we can multiply the periodic rate by the number of periods within a year.