Exam 13: Time Value of Money

Touche Manufacturing is considering a rearrangement of its manufacturing operations. A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year, $10,000 for the next two years, and $12,000 for the next two years. Assuming a 12% discount rate, calculate the total present value of the cash flows.

DON Corp. is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for 5 years. At the end of five years, the machine can be sold to realize after-tax cash flows of $5,000. Assuming a 12% discount rate, calculate the total present value of the cash savings.

Quaker State Inc. offers a new employee a lump-sum signing bonus at the date of employment. Alternatively, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump-sum at employment date would make him indifferent between the two options?

The value that an amount today will grow to in the future is referred to as the:

Sandra won $5,000,000 in the state lottery which she has elected to receive at the end of each month over the next thirty years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:

Future value is how much an amount today will grow to be in the future.

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

What is the value today of receiving $3,000 at the end of each year for the next three years, assuming an interest rate of 3% compounded annually?

What is the value today of receiving $5,000 at the end of six years, assuming an interest rate of 8% compounded semiannually?

At the end of the next four years, a new machine is expected to generate net cash flows of $8,000, $12,000, $10,000, and $15,000, respectively. What are the cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

Samson Inc. is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for 8 years. Assuming a 10% discount rate, calculate the present value of the cash savings.

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Present value of a single amount f. Compound interest g. Present value of a single amount h. Time value of money i. Simple interest j. Present value of an annuity Phrases: _____ A dollar now is worth more than a dollar later. _____ A series of equal periodic payments. _____ Accumulation of a series of equal payments. _____ Interest earned on the initial investment and on previous interest. _____ Accumulation of an amount with interest.

If you put $300 into a savings account that pays annual compound interest of 10% per year and then withdraw the money two years later, you will earn interest of $63.

Carol wants to invest money in a 6% CD that compounds semiannually. Carol would like the account to have a balance of $50,000 five years from now. How much must Carol deposit to accomplish her goal?

Claudine Corporation will deposit $5,000 into a money market account at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the account earns 9% interest?