Exam 26: Time Value of Money

A company is setting aside $21,354 today, and wishes to have $30,000 at the end of three years for a down payment on a piece of property. What interest rate must the company earn?

Sandra has a savings account that has accumulated to $50,000. She started with $28,225, and earned interest at 10% compounded annually. It took her five years to accumulate the $50,000. Calculation: $28,225/$50,000 = 0.5645. This is the present value of 1 factor, 10%, 6 periods.

The number of periods in a present value calculation can only be expressed in years.

From the perspective of a depositor, a savings account is a liability with interest.

Future value can be found if the interest rate (i), the number of periods (n), and the present value (p) are known.

Big League Sports borrowed $883,212, and must make annual year-end payments of $120,000 each. If Big League's interest rate is 6%, how many years will it take Big League Sports to pay off the loan?

Madera Iron Sculpting is planning on replacing one of its robotic welders in five years by making a one-time deposit of $20,000 today and four yearly contributions of $5,000 beginning at the end of year 1. The deposits will earn 10% interest. How much money will Sierra have accumulated at the end of five years to replace the welder?

_____________ is a borrower's payment to the owner of an asset for its use.

An individual is planning to set-up an education fund for her children. She plans to invest $10,000 annually at the end of each year. She expects to withdraw money from the fund at the end of 10 years and expects to earn an annual return of 8%. What will be the total value of the fund at the end of 10 years?

Sam has a loan that requires a single payment of $4,000 at the end of 3 years. The loan's interest rate is 6%, compounded semiannually. How much did Sam borrow?

The present value of 1 formula is often useful when a borrowed asset must be repaid in full at a later date and the borrower wants to know its worth at the future date.

A company is creating a fund today by depositing $65,763. The fund will grow to $90,000 after 8 years. What annual interest rate is the company earning on the fund?

The number of periods in a future value calculation can only be expressed in years.

The future value of an ________________ annuity is the accumulated value of each annuity payment with interest as of the date of the final payment.

How long will it take an investment of $25,000 at 6% compounded annually to accumulate to a total of $35,462.50?

An annuity is a series of equal payments.

A company is setting up a sinking fund to pay off $8,654,000 in bonds that are due in 7 years. The fund will earn 7% interest, and the company intends to put away a series of equal year-end amounts for 7 years. What is the amount of the annual deposits that the company must make?

Interest is the payment to the owner of an asset for its use by a borrower.

Which interest rate column would you use from a present value table or a future value table for 8% compounded quarterly?

Jon Shear expects an investment of $25,000 to return $6,595 annually. His investment is earning 10% per year. How many annual payments will he receive?