Exam 3: The Time Value of Money Part 1

In January of 1997,the U.S.Consumer Price Index (CPI)stood at 159.1.By January of 2011,the level had risen to 220.2.What was the average annual rate of inflation over this time period as measured by the CPI?

The Rule of 72 can be used to quickly estimate interest rates necessary to double your money in a given time period without the use of a spreadsheet or calculator.However,the rule does NOT work for estimating growth rates.

If you invest $5,000 today at an annual interest rate of 6.35%,how much money will you have for your daughter's college education in 18 years?

The Present Value Interest Factor (PVIF)is the reciprocal of the Future Value Interest Factor (FVIF).

You have $5,000 in an index mutual fund.At an average annual rate of return of 10% per year,this investment should exceed a value of $500,000 by the time you retire in 40 years.

Your father spent all of his adult life working in a small T-shirt making firm.His first year of sales was $118,000 and his last year of sales was $450,000.If the firm grew at an average rate of 3.15% per year,how many years did your father sell T-shirts at his firm?

For much of the 20th century,new car prices rose at an annual rate of 5.73%.Given a beginning new car price of $600,how long did it take for the average new car price to rise to $16,950? Please round to the nearest year.

Your firm has sold a fleet of 100 cars to a local firm at a discounted price of $20,000 each (a total of $2,000,000)due in six months.You are willing to discount the purchase price at an annual rate of 4% if the firm pays cash today.What is the least amount of money you will accept if the firm pays your company today?

Your grandfather likes to tell the story about how he started with 50 head of cattle on his ranch and grew the ranch to 1,000 head of cattle.He said "My plan was simple: grow the number of head of cattle at a rate of 10% per year." Your grandfather reached his goal before he retired.How long did it take him?

Consider the TVM equation: A decrease in the time period will increase the future value,other things remaining equal.

Other things remaining equal,the price today and the growth rate are inversely related.

Write the equation for present value.How are prices and interest rates related? Refer to your equation when answering the first part of this question.Give an example of a real-world situation in which knowing the relationship between prices and interest rates would be valuable.

You won the state lottery and took the payout as a $1,283,475 lump sum today.Your spouse has decided that you need to invest this money for the next 10 years and can expect it to earn an average annual rate of return of 7.18%.If this comes to pass,how much money will be in the account at the end of the period?

You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years.If this bond is discounted at a rate of 3.875% per year,what is today's price (present value)for this bond?

The one-time payment of money at a future date is often called a ________.

Your production manager informs you that currently the firm is producing 1,438 heating units per month but has plans to increase production at a rate of 5% per month until the firm is producing 3,000 units per month.How many months will this take?

A home improvement firm has quoted a price of $9,800 to fix up Eric's backyard.Five years ago,Eric put $7,500 into a home improvement account that has earned an average of 5.25% per year.Does Eric have enough money in his account to pay for the backyard fix-up?

The question "What is the current value of an amount of cash that will be received at a specific time in the future?" is best answered by which form of the TVM equation?

At your birth,your grandparents put $5,000 into a college fund for you.Now you want to use the fund to pay your first year of college costs of $23,000.To have enough money in your college fund for your stated purpose,what annual rate of return would have to have been earned on the account over an 18-year period?

The school district needs to pass a bond levy for funding to remodel existing schools and to build new schools.Expenditures for the new and remodeled buildings will begin 18 months after passage of the bond.If the school district receives all funding immediately after the passage of the bond and can invest the funds at a rate of 3.75% per year,how large must the bond be for the district to have $45,000,000 at the start of construction?