Exam 9: Time Value of Money

Drexel Corporation has been enjoying a phenomenal rate of growth since its inception one year ago.Currently, its assets total $100,000.If growth continues at the current rate of 12 percent compounded quarterly, what will total assets be in 2¹/₂ years?

You plan to invest $2,500 in a money market account which will pay an annual stated (simple) interest rate of 8.75 percent, but which compounds interest on a weekly basis.If you leave this money on deposit for one year (52 weeks), what will be your ending balance when you close the account?

Financial calculator and tabular methods use different mathematical formulas to solve time value of money problems, and that is why they always lead to different results.

You have some money on deposit in a bank account which pays a simple (or quoted) rate of 8.0944 percent, but with interest compounded daily (using a 365-day year).Your friend owns a security which calls for the payment of $10,000 after 27 months.The security is just as safe as your bank deposit, and your friend offers to sell it to you for $8,000.If you buy the security, by how much will the effective annual rate of return on your investment change?

Using the discounted payback method, a project should be accepted when the discounted payback is greater than the project's expected life.

Your father, who is 60, plans to retire in 2 years, and he expects to live independently for 3 years.Suppose your father wants to have a real income of $40,000 in today's dollars in each year after he retires.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?

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased, thereby providing an opportunity to purchase and install assets before they are needed.

The NPV method implicitly assumes that the rate at which cash flows can be reinvested is the required rate of return, whereas the IRR method implies that the firm has the opportunity to reinvest at the project's IRR.

Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year.If you require a 14 percent rate of return, what is the present value of these cash flows?

The present value of $3,000 to be received in 5 years at a 10% discount rate is $2000.

An increase in the discount rate used in computing the NPV of a project will lower the value of the NPV for that project.

When Richard evaluated a capital budgeting project⎯a new machine needed to manufacture inventory⎯using his firm's required rate of return, he discovered that the project's net present value (NPV) is negative.Based on this information, which of the following must be correct?