Exam 9: The Time Value of Money

Dr. J. wants to buy a Dell computer that 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 an 8% annual return. How much should he set aside at the end of each year?

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?

Shah sets aside $2,000 each year for five years. After five years, he then withdraws the funds on an equal annual basis for the next four years. If Shah wishes to determine the amount of the annuity to be withdrawn in years 6 through 9, he should use the following two tables in this order:

John Doeber borrowed $150,000 to buy a house. His loan cost was 16% annually because of his bad credit score. He promised to repay the loan in 5 years on a quarterly basis. How much are the quarterly payments?

You will deposit $200,000 today. It will grow for five years at 12% interest, but compounded semiannually. What will your investment grow to?

As the interest rate increases, the interest factor (IF) for the present value of $1 increases.

Pedro Gonzalez will invest $5,000 at the end of each year. If the interest rate is 8%, what will the value be after three years?

A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement, you will have $73,425. The plan anticipates earning 8% interest. Given the following information, how much will you be able to take out on an annual basis while you are retired?

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

John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 10 equal annual payments. What are John's annual payment amounts?

If an individual's cost of capital were 6%, the person would prefer to receive $110 at the end of one year rather than $100 right now.

In determining the future value of an ordinary annuity, the final payment is not compounded at all.

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

Under what conditions must a distinction be made between money to be received today and money to be received in the future?

As the interest rate increases, the present value

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

As the discount rate becomes higher and higher, the present value of inflows approaches

If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account?

Jeff believes he will need a $60,000 annual income during retirement. If he can achieve a 6% return during retirement and believes he will live 20 years after retirement, how much does he need to save by the time he retires? Assume he'll start drawing his money out one year after his retirement.

The interest factor for the future value of an annuity is simply the sum of the interest factors for the future value using the same number of periods.