Exam 6: Time Value of Money

Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a 10-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment.

An amortized or installment loan represents an annuity whose cash flows consist of the loan payments.

An increase in the frequency of compounding will increase the future value of an investment if all other factors are held constant.

With an annuity due, payments:

Your grandparents have just given you a $50,000 savings bond that matures in 20 years. If the discount rate is 10%, what did they pay for the bond?

You are considering an investment that will pay you $100 in Year 1, $500 in Year 2, $0 in Year 3 and $600 in Year 4. If you require a 12% return, what is the most you should pay for this investment today? (Round to nearest $)

What is the Present Value (PV) of the following series of cash flows using an 8% discount rate? Year \ 1 500 2 300 3 0 4 400 5 400

The opportunity cost of using a resource in some way, is the amount the resource could earn if used in an alternative way.

A consumer loan that charges 1.50% interest per month has an annual percentage rate of:

You currently have $600,000.00 in the bank and intend to withdrawal $60,000.00 from the account annually beginning next year. Assuming the account earns 10% annually, how long can you keep withdrawing $60,000.00 from the account?

The present value of the cash flows that come from an investment is the minimum price an investor should be willing to pay for the investment.

Your lifetime financial goal is to have $1,250,000 invested in a mutual fund when you retire in 40 years. You plan to invest $1,000 in a mutual fund now, and then invest an additional $200 per quarter for 40 years. What average return must the fund provide to meet your investment goal?

You want to purchase a beach house for $220,000 funding as much of the cost as possible with a home mortgage loan. Banks are currently offering standard thirty year mortgages at 8% (monthly compounding). Unfortunately, you can only afford payments of $1,500 per month. How much cash will you need for a down payment in order to buy the home? (Round to the nearest dollar)

Joe Brady just won a $450,000 lottery in Pennsylvania. Instead of receiving a lump sum, he found that he would receive $22,500 annually (end of year) for 20 years. Joe is 75 years old and wants his money now. He has been offered $140,827 to sell his ticket. What rate of return is the buyer expecting to make if Joe accepts the offer?

The time value of money means that a dollar today is worth more than a dollar at any time in the future.

You want to purchase a car for $40,000 when you graduate in two years. At that time you will take out a 5-year bank loan at 12% compounded monthly. Based on your estimated earnings, you think you'll be able to afford loan payments of $750 per month. You plan to save up the difference between the cost of the car and the amount you'll borrow by making quarterly deposits over the next two years in a bank account that pays 8% compounded quarterly. How large must those deposits be? (Round to the nearest dollar)

If an investor is indifferent between $1.00 today and $1.33 in three years:

Determine how much you would be willing to pay for a security that pays $60 annually indefinitely (a perpetuity), assuming you require an 8 percent return on this investment.

The lease on a new office requires an immediate payment of $24,000 plus $24,000 per year at the end of each of the next 10 years. At a discount rate of 14 percent, what is the present value of this stream of lease payments?

A four-year annuity of $1,000 annual payments at the end of each year, with a 10% interest rate is worth how much today?