Exam 9: Time Value of Money

Cash flow time lines are used primarily for decisions involving paying off debt or investing in financial securities.They cannot be used when making decisions about investments in physical assets.

You have a 30-year mortgage with a simple annual interest rate of 8.5 percent.The monthly payment is $1,000.What percentage of your total payments over the first three years goes toward the repayment of principal?

If $100 is placed in an account that earns a simple 4 percent, compounded quarterly, what will it be worth in 5 years?

Your company is planning to borrow $1,000,000 on a 5-year, 15 percent, annual payment, fully amortized term loan.What fraction of the payment made at the end of the second year will represent repayment of principal?

Your employer has agreed to make 80 quarterly payments of $400 each into a trust account to fund your early retirement.The first payment will be made 3 months from now.At the end of 20 years (80 payments), you will be paid 10 equal annual payments, with the first payment to be made at the beginning of Year 21 (or the end of Year 20).The funds will be invested at a simple rate of 8.0 percent, quarterly compounding, during both the accumulation and the distribution periods.How large will each of your 10 receipts be? (Hint: You must find the effective annual rate and use it in one of your calculations.)

In its first year of operations, 2001, the Gourmet Cheese Shoppe had earnings per share (EPS) of $0.26.Four years later, in 2005, EPS was up to $0.38, and 7 years after that, in 2012, EPS was up to $0.535.It appears that the first 4 years represented a supernormal growth situation and since then a more normal growth rate has been sustained.What are the rates of growth for the earlier period and for the later period?

You just graduated, and you plan to work for 10 years and then to leave for the Australian "Outback" bush country.You figure you can save $1,000 a year for the first 5 years and $2,000 a year for the next 5 years.These savings cash flows will start one year from now.In addition, your family has just given you a $5,000 graduation gift.If you put the gift now, and your future savings when they start, into an account which pays 8 percent compounded annually, what will your financial "stake" be when you leave for Australia 10 years from now?

If the NPV for a project is positive it must be that

NPV and IRR will always lead to the same accept/reject decision for mutually exclusive projects.

As the discount rate increases without limit, the present value of the future cash inflows

If you buy a factory for $250,000 and the terms are 20 percent down, the balance to be paid off over 30 years at a 12 percent rate of interest on the unpaid balance, what are the 30 equal annual payments?

You have determined the profitability of a planned project by finding the present value of all the cash flows form that project.Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

Which of the following statements is correct?

Suppose you put $100 into a savings account today, the account pays a simple annual interest rate of 6 percent, but compounded semiannually, and you withdraw $100 after 6 months.What would your ending balance be 20 years after the initial $100 deposit was made?

Although the payback method ignores the time value of money, relying solely on this capital budgeting method will always lead to value maximizing decision.

The greater the number of compounding periods within a year, the greater the future value of a lump sum invested initially, and the greater the present value of a given lump sum to be received at maturity.

The opportunity cost rate is only applicable if you as an investor actually have an alternative investment to compare.If you are making a decision about a single investment, the opportunity rate concept does not apply.

Your mother's employer offers a tax-deferred retirement plan (a 401-b plan, which was authorized by Congress to encourage savings) which would permit her to invest, tax-free until she retires, up to 15 percent of her salary.Once you are out of school (one year from today), she figures she can save $1,000 every 6 months, or $2,000 per year.The insurance company which manages the retirement fund promises to pay a stated (or simple) rate of 12 percent per year, but with quarterly compounding.If your mother invests $1,000 each six months, starting six months after you graduate (or 18 months from today), how much will she have 5 years from now, assuming the last payment is made at the end of Year 5? (Hint: She will make a total of 8 payments.)

You have just purchased a life insurance policy that requires you to make 40 semiannual payments of $350 each, where the first payment is due in 6 months.The insurance company has guaranteed that these payments will be invested to earn you an effective annual rate of 8.16 percent, although interest is to be compounded semiannually.At the end of 20 years (40 payments), the policy will mature.The insurance company will pay out the proceeds of this policy to you in 10 equal annual payments, with the first payment to be made one year after the policy matures.If the effective interest rate remains at 8.16 percent, how much will you receive during each of the 10 years?

An investor is considering the purchase of 20 acres of land.An analysis indicates that if the land is used for cattle grazing, it will produce a cash flow of $1,000 per year indefinitely.If the investor requires a return of 10 percent on investments of this type, what is the most he or she should be willing to pay for the land?