Exam 4: Discounted Cash Flow Valuation

Aunt Clarisse has promised to leave you an annuity that will pay $60 next year and grow at an annual rate of 4%. The payments are expected to go on indefinitely and the interest rate is 9%. What is the value of the growing perpetuity?

If a business takes out a $10,000,7 year,12% loan,the annual payment is:

The Eternal Gift Insurance Company is offering you a policy that will pay you and your heirs $10,000 a year forever. The cost of the policy is $285,000. What is the rate of return on this policy?

The interest rate expressed as if it were compounded once per year is called the _____ rate.

Which of the following amounts is closest to the end value of investing $10,000 for 18 months at a stated annual interest rate of 12% compounded quarterly?

The present value of future cash flows minus initial cost is called:

Mr. Miser,who is 35 years old,has just inherited $11,000 and decides to use the windfall towards his retirement. He places the money in a bank which promises a return of 6% per year until his planned retirement in 30 years. If his funds earn 6% interest compounded annually,how much will he have at retirement? Repeat the analysis for both semi-annual and continuous compounding.

What is the future value of investing $9,000 for 7 years at a continuously compounded rate of 11%?

You want to have $10,000 saved ten years from now. How much less do you have to deposit today to reach this goal if you can earn 6% rather than 5% on your savings?

You are going to loan your friend $1,000 for one year at a 5% rate of interest. How much additional interest can you earn if you compound the rate continuously rather than annually?

Your mother helped you start saving $25 a month beginning on your 10^th birthday. She always made you make your deposit on the first day of each month just to "start the month out right." Today,you turn 21 and have $4,482.66 in your account. What is your rate of return on your savings?

You borrow $149,000 to buy a house. The mortgage rate is 7.5% and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement,how much total interest will you pay?

Compound interest:

You are considering a project with the following cash flows: What is the present value of these cash flows,given an 11% discount rate?

Using the example of a savings account,explain the difference between the effective annual rate and the annual percentage rate.

You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%. Given these assumptions,what is this employee benefit worth to you today?

Forty years ago,your father invested $2,500. Today that investment is worth $107,921. What is the average rate of return your father earned on his investment?

You are considering a job offer. The job offers an annual salary of $52,000,$55,000,and $60,000 a year for the next three years,respectively. The offer also includes a starting bonus of $2,000 payable immediately. What is this offer worth to you today at a discount rate of 6%?

You are comparing two annuities with equal present values. The applicable discount rate is 7.5%. One annuity pays $5,000 on the first day of each year for twenty years. How much does the second annuity pay each year for twenty years if it pays at the end of each year?