Exam 4: The Time Value of Money Part 2

Which is greater,the present value of a $1,000 five-year ordinary annuity discounted at 10%,or the present value of a $1,000 five-year annuity due discounted at 10%?

You have just turned 25 and may now spend a portion of the trust fund your parents established for you.The terms of the trust fund allow you to withdraw 60 beginning-of-the-year cash flows of $100,000 each.An investment firm has offered to pay you cash for all of the fund today.If the rate they use to discount the cash flows is 16% per year,what is their offer price today for your pension fund?

Which of the following is NOT true regarding the total payment in an equal payment amortization table?

Amounts of money can be added or subtracted only if they are at the same point in time.

Complete the equal-payments three-year amortization table.

Twelve years ago,you paid for the right to twelve $25,000 annual end-of-the-year cash flows.If discounting the cash flows at an annual rate of 8%,what did you pay for these cash flows back then?

Present value calculations do which of the following?

Your family recently won the $10,000,000 lottery and chose to accept the annual payout plan of $500,000 today plus 19 more year-end cash flows of $500,000.If you discount these cash flows at an annual rate of 8.0%,what is their present value?

Even with an interest rate of 0.0%,the future value of a 5-year $800 annual annuity will be greater than the present value of the same annuity.

You are saving money for a down payment on a new house.You intend to place $5,000 at the end of each year for three years into an account earning 6% per year.At the end of the fourth year,you will place $10,000 into this account.How much money will be in the account at the end of the fourth year?

Your company just sold a product with the following payment plan: $50,000 today,$25,000 next year,and $10,000 the following year.If your firm places the payments into an account earning 10% per year,how much money will be in the account after collecting the last payment?

Johnson has an annuity due that pays $600 per year for 15 years.What is the value of the cash flows 15 years from today if they are placed in an account that earns 7.50%? Note: You are asked to find the FV one year after the last cash flow is realized.

It is fortunate that we have formula,calculator,and spreadsheets as tools to solve for variables of the TVM equation,because there is no real way to visualize the timing and amount of cash flows.

You have just won the Reader's Digest lottery of $5,000 per year for twenty years,with the first payment today followed by nineteen more start-of-the-year cash flows.At an interest rate of 5%,what is the present value of your winnings?

Solving for an unknown interest rate given the PV,FV,PMT,and N is an iterative (or trial-and-error)process.

What is the present value today of an ordinary annuity cash flow of $3,000 per year for forty years at an interest rate of 6.0% per year?

When solving for the future value of a stream of unequal cash flows,it is important to add together the values BEFORE applying the future value formula to determine their future value.

What type of loan requires both principal and interest payments as you go by making equal payments each period?

The main variables of the TVM equation are

You have decided to endow the insert your name here Chair in Finance at the State University.How much money must you deposit into the endowment account today if the Chair pays $125,000 per year forever (first payment one year from today)and is invested at a rate that pays out 4.50% per year forever?