Exam 4: Discounted Cash Flow Valuation

Today,you turn 21. Your birthday wish is that you will be a millionaire by your 40^th birthday. In an attempt to reach this goal,you decide to save $25 a day,every day until you turn 40. You open an investment account and deposit your first $25 today. What rate of return must you earn to achieve your goal?

You would like to establish a trust fund that will provide $50,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 2.75%. How much money must you deposit today to fund this gift for your heirs?

One year ago,you invested $3,000. Today it is worth $3,142.50. What rate of interest did you earn?

Janet plans on saving $3,000 a year and expects to earn 8.5%. How much will Janet have at the end of twenty-five years if she earns what she expects?

What is the different between an ordinary annuity and an annuity due? Which occurs more in practice? Give a common example of both.

What is the present value of a payment of $21,000 three years from now if the effective annual interest rate is 4%?

You borrow $5,600 to buy a car. The terms of the loan call for monthly payments for four years at a 5.9% rate of interest. What is the amount of each payment?

A court settlement awarded an accident victim four payments of $50,000 to be paid at the end of each of the next four years. Using a discount rate of 4%,calculate the present value of the annuity.

Find the present value of $5,325 to be received in one period if the rate is 6.5%.

You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first day of each year. What is the value of this annuity today at a 7% discount rate?

What is the future value of $2,400 a year for three years at an 8% rate of interest?

An annuity stream where the payments occur forever is called a(n):

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both Martha and Stewart will receive payments for five years. At an 8% discount rate,what is the difference in the present value of these two sets of payments?

There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.

Your firm wants to save $250,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each year starting today. The firm can earn a 4.7% rate of return. How much does the firm have to save each year to achieve its goal?

You have been investing $120 a month for the last 15 years. Today,your investment account is worth $47,341.19. What is your average rate of return on your investments?

Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day of each year. They both earn a 9% rate of return. What is the difference in their savings account balances at the end of thirty years?

Which of the following amounts is closest to the end value of investing $5,000 for 14 months at a stated annual interest rate of 6% compounded monthly?

Today,you are retiring. You have a total of $413,926 in your retirement savings and have the funds invested such that you expect to earn an average of 3%,compounded monthly,on this money throughout your retirement years. You want to withdraw $2,500 at the beginning of every month,starting today. How long will it be until you run out of money?