Exam 9: The Time Value of Money

The shorter the length of time between a present value and its corresponding future value,

Increasing the number of periods will increase all of the following except

Dr. J. wants to buy a Dell computer which will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 8% annual return. How much should he set aside?

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 15 equal annual payments. What is the principal outstanding after the first loan payment?

If Gerry makes a deposit of $1,500 at the end of each quarter for 5 years, how much will he have at the end of the 5 years assuming a 12% annual return and quarterly compounding?

Discounted at 10%, $1000 received at the end of each year for three years is worth less than $2,700 received today. PV_A = A PV_IFA (App. D: 3 periods, 10%) = $1,000  .2.487 = $2,487

The present value of a positive future inflow can become negative as discount rates become higher and higher.

Pension fund retirement accounts use the present value of an annuity to calculate the ending value upon retirement.

As the interest rate increases, the present value of an amount to be received at the end of a fixed period

The farther into the future any given amount is received, the larger its present value.

Sara would like to evaluate the performance of her portfolio over the past 10 years. What compound annual rate of return has she achieved is she invested $12,000 10 years ago and now has $25,000?

Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in order to buy her home in 10 years?

An annuity is a series of consecutive payments of equal amount.

Calculation of the yield of an investment provides the total return over multiple years.

Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the annual return on his investment?

You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

In determining the future value of a single amount, one measures

Ali Shah sets aside 2,000 each year for 5 years. He then withdraws the funds on an equal annual basis for the next 4 years. If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use the following two tables in this order:

The formula PV = FV(1 + n)ⁱ will determine the present value of $1.

Sharon Smith will receive $1 million in 50 years. The discount rate is 14%. As an alternative, she can receive $1,000 today. Which should she choose?