Exam 3: The Time Value of Money Part 1

Upon taking his first job out of college,your Dad earned an annual salary of $38,000 and set a goal to earn $100,000 per year.If his salary increased at an average annual rate of 12%,how long did it take to reach his goal?

In 1970,before the era of major league baseball free agency,the minimum player salary was $12,000.In 1975,the minimum salary was $16,000.What was the average annual growth in the minimum salary in major league baseball over those five years?

Dividend growth rate is important to many investors.You are considering investing in a firm after looking at the firm's dividends over a seven-year period.At the end of the year 2002,the firm paid a dividend of $1.15.At year-end 2009,it paid a dividend of $1.84.What was the average annual growth rate of dividends for this firm?

Your trust fund will pay you $100,000 in six years when you turn 25.A shady financial institution has encouraged you to sign away the rights to your trust fund in exchange for cash today.Would you prefer that the financial institution use a discount rate of 8% or 10% to determine the value of your lump sum payment? Why?

Consider the TVM equation: An increase in the present value will decrease the future value,other things remaining equal.

You gave your little sister two rabbits for Easter three years ago and now she has 84 of the cute little bunnies.What is the average annual rate of increase in the number of rabbits your sister owns? Note: Your parents are not very pleased with you right now.

What is the Rule of 72? Why do you think the Rule of 72 came into widespread use? Give an example of where you think the rule could be useful.

Four years ago,Robert's annual salary was $52,500.Today,he earns $73,800.What has been the average annual rate of growth of Robert's salary?

Consider a two-year investment: Given a constant and positive interest rate,the interest earned in the second year will be greater than the interest earned in the first year (assuming annual compounding).

Current annual dividends for Simpsons Frozen Foods Inc. ,are $1.35 per share.Four years ago,dividends per share were exactly $1.00.What has been the rate of growth for Simpsons' dividends per share?

Consider the TVM equation: A decrease in the interest rate will decrease the future value,other things remaining equal.

Your manufacturing firm has just secured a sale to the federal government with payment of $450,000 due in nine months.You have asked your bank for cash today with the stipulation that you will give the proceeds from the government contract to the bank in nine months.The bank has agreed to your request if you allow them to discount the cash flows at an annual rate of 8%.How much will the bank pay you today under this agreement?

Madison is taking over as Chief Marketing Officer at MidWest Graphics.She has pledged to increase sales from their current level of $12,000,000 at a rate of 10% per year until the firm hits sales of $20,000,000 per year.How long will it take Madison to hit the target goal at this rate of increase?

You need $32,000 at the end of 6 years.If you can earn 0.625% per month,how much would you need to invest today to meet your objective?

In five years your oldest child will be in 8th grade,at which point you and your family plan to vacation in Europe.You estimate that you will need $20,000 for the trip.How much do you need to set aside today if you can place your money in an investment vehicle earning an average of 4.50% per year?

The Rule of 72 is a rule of thumb for estimating the interest rate necessary to double your money,given a period of time.

When solving for a present value,the interest rate is commonly referred to as the compound rate,but when solving for the future value,the interest rate is called the discount rate.

If you invest $3,650 today,how much money will you have in 4 years?

Which of the following investments has a larger future value: Investment A,a $1,000 investment earning 5% per year for 6 years,or Investment B,a $500 investment earning 10% per year for 6 years,with a bonus of an extra $500 added at the end of the sixth year?

Kelvin has $2,500 but needs $5,000 to purchase a new golf cart.If he can invest his money at a rate of 12% per year,approximately how many years will it take the money in Kelvin's account to grow to $5,000? Use the Rule of 72 to determine your answer. Note: The golf cart's price may have changed by the time Kelvin's account reaches a value of $5,000.