Exam 4: The Time Value of Money Part 2

Present values and interest rates are inversely related.This means that if you deposit $1,000 into an interest-earning account today,it will take longer to reach a future value of $5,000 at an interest rate of 6% than at a rate of 4%.

Edward wishes to save enough money to purchase a retirement lake cabin.He is willing to spend $500,000 for the cabin and he can save $25,000 per year and invest the money into an account earning 8.00% per year.If Edward's investments come in the form of equal annual end-of-the-year cash flows and the first cash flow is in exactly one year,how long will it take him to save enough money to buy the lake cabin?

Weston Inc.just agreed to pay $8,000 today,$10,000 in one year,and $15,000 in two years to a landowner to explore for,but not extract,valuable minerals.If the landowner invests the money at a rate of 5.5% compounded annually,what is the investment worth two years from today?

You currently have $67,000 in an interest-earning account.From this account,you wish to make 20 year-end payments of $5,000 each.What annual rate of return must you make on this account to meet your objective?

If you borrow $100,000 at an annual rate of 8.00% for a 10-year period and repay the interest of $8,000 at the end of each year prior to maturity and the final payment of $108,000 at the end of 10 years,then you have just repaid what type of loan?

Which of the following is NOT a form of perpetuity?

Your firm wishes to purchase a financial contract that provides equal end-of-the-year cash flows of $18,000 per year for the next seven years.What is the present value of these cash flows if you choose to discount them at a rate of 8% per year?

Solving for an unknown interest rate for annuity cash flows is an iterative (or trial-and-error)process.

Your need to repay a loan with a future value of $304,071.00 in 18.5 years.If you can make annual year-end deposits of $11,000 into an account,what annual rate of return would you require to earn enough money to pay the loan in full at the due date?

By choosing to attend college today,you have agreed to pay $17,000 per year in tuition and fees for the next five years.(What… you really thought that you would graduate in four years?)In addition to the tuition and fees,you have also given up the ability to work full time and earn $23,000 per year for the next five years.If your required rate of return is 5% (the U.S.long-run average rate of inflation plus an average real rate of return),what is the total cost in today's dollars of your college degree,assuming that all of the aforementioned cash flows are ordinary annuities?

Given the following cash flows,what is the future value at year six when compounded at an interest rate of 8.0%?

What is the future value in year twelve of an ordinary annuity cash flow of $6,000 per year at an interest rate of 4.00% per year?

Derek and his father have an agreement.If Derek can save $15,000,his father will pay the balance toward a used car (up to a total of $20,000).If Derek can save $3,800 per year,how long will it take him to reach $15,000 if he invests the money into an account earning an annual rate of 4.25%? Use a financial calculator.

You have $50,000 invested in an account paying 3.50%.If you just finished paying your total college expenses for the coming year and your college costs $19,000 per year,how many years will your money last? (Treat your costs like an annuity with the first payment one year from today. )Use a financial calculator.

Your firm intends to finance the purchase of a new construction crane.The cost is $1,500,000.What is the size of the annual ordinary annuity payment if the loan is amortized over a ten-year period at a rate of 8.50%?

Your firm intends to finance the purchase of a new construction crane.The cost is $1,500,000.How large is the payment at the end of year ten if the crane is financed at a rate of 8.50% as a discount loan?

You are paid to teach classes for the university and wonder how much money the university makes from your graduate-level classes.Based on historical data,you determine that your summer classes for the next seven years will generate an average annual revenue of $93,850.If you discount these cash flows at an annual rate of 8.30%,what is the present value of the expected cash flows?

A trend among universities is to guarantee tuition to incoming freshmen for a four-year period.Further,the annual amount due is collected in equal payments collected every three months.Although the payments are equal as well as equally spaced,this is NOT an example of an annuity because the payments are made every three months rather than on a monthly or annual basis.

The furniture store offers you no-money-down on a new set of living room furniture.Further,you may pay for the furniture in three equal annual end-of-the-year payments of $1,000 each with the first payment to be made one year from today.If the discount rate is 6%,what is the present value of the furniture payments?

Given positive equal annual cash flows and a positive interest rate,the future value of an annuity will be greater than the sum of the cash flows.