Exam 5: Introduction to Valuation: the Time Value of Money

-You collect old coins.Today,you have two coins each of which is valued at $300.One coin is expected to increase in value by 6 percent annually while the other coin is expected to increase in value by 4.5 percent annually.What will be the difference in the value of the two coins 15 years from now?

The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?

Which one of the following will produce the highest present value interest factor?

What is the relationship between present value and future value interest factors?

-A year ago,you deposited $40,000 into a retirement savings account at a fixed rate of 5.5 percent.Today,you could earn a fixed rate of 6.5 percent on a similar type account.However,your rate is fixed and cannot be adjusted.How much less could you have deposited last year if you could have earned a fixed rate of 6.5 percent and still have the same amount as you currently will when you retire 38 years from today?

-You want to have $25,000 saved 6 years from now to buy a house.How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account.

Gerold invested $5,600 in an account that pays 5 percent simple interest.How much money will he have at the end of ten years?

Samantha opened a savings account this morning.Her money will earn 5 percent interest,compounded annually.After five years,her savings account will be worth $5,600.Assume she will not make any withdrawals.Given this,which one of the following statements is true?

-You're trying to save to buy a new $160,000 Ferrari.You have $58,000 today that can be invested at your bank.The bank pays 6 percent annual interest on its accounts.How many years will it be before you have enough to buy the car? Assume the price of the car remains constant.

You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years.Assume you can earn 6 percent on your savings.Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different.

Shelley won a lottery and will receive $1,000 a year for the next ten years.The value of her winnings today discounted at her discount rate is called which one of the following?

Martin invested $1,000 six years ago and expected to have $1,500 today.He has not added or withdrawn any money from this account since his initial investment.All interest was reinvested in the account.As it turns out,Martin only has $1,420 in his account today.Which one of the following must be true?

-What is the future value of $6,200 invested for 23 years at 9.25 percent compounded annually?

-Imprudential,Inc.has an unfunded pension liability of $850 million that must be paid in 25 years.To assess the value of the firm's stock,financial analysts want to discount this liability back to the present.The relevant discount rate is 6.5 percent.What is the present value of this liability?

Forty years ago,your mother invested $5,000.Today,that investment is worth $430,065.11.What is the average annual rate of return she earned on this investment?

-On your ninth birthday,you received $300 which you invested at 4.5 percent interest,compounded annually.Your investment is now worth $756.How old are you today?

You are investing $100 today in a savings account at your local bank.Which one of the following terms refers to the value of this investment one year from now?

-You have just made a $1,500 contribution to your individual retirement account.Assume you earn a 12 percent rate of return and make no additional contributions.How much more will your account be worth when you retire in 25 years than it would be if you waited another 10 years before making this contribution?

-You own a classic automobile that is currently valued at $150,000.If the value increases by 6.5 percent annually,how much will the automobile be worth ten years from now?

Steve just computed the present value of a $10,000 bonus he will receive in the future.The interest rate he used in this process is referred to as which one of the following?