Exam 4: Discounted Cash Flow Valuation

You need some money today and the only friend you have that has any is your 'miserly' friend. He agrees to loan you the money you need,if you make payments of $20 a month for the next six months. In keeping with his reputation,he requires that the first payment be paid today. He also charges you 1.5% interest per month. How much money are you borrowing?

Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9%,what is the current value of the lease?

Marko,Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000,$9,000,and $15,000 over the next three years,respectively. After that time,Marko feels ABC will be worthless. Marko has determined that a 14% rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 8.75%,which offer should you accept and why?

You are considering two savings options. Both options offer a 4% rate of return. The first option is to save $1,200,$1,500,and $2,000 a year over the next three years,respectively. The other option is to save one lump sum amount today. If you want to have the same balance in your savings at the end of the three years,regardless of the savings method you select,how much do you need to save today if you select the lump sum option?

Discounting cash flows involves:

Paying off long-term debt by making installment payments is called:

Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9%,how much can Todd afford to borrow to buy a car?

You just won the lottery! As your prize you will receive $1,200 a month for 100 months. If you can earn 8% on your money,what is this prize worth to you today?

Your credit card company quotes you a rate of 14.9%. Interest is billed monthly. What is the actual rate of interest you are paying?

You are scheduled to receive annual payments of $10,000 for each of the next 25 years. Your discount rate is 8.5%. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

The Good Life Insurance Co. wants to sell you an annuity which will pay you $500 per quarter for 25 years. You want to earn a minimum rate of return of 5.5%. What is the most you are willing to pay as a lump sum today to buy this annuity?

You have deposited $1,500 in an account that promises to pay 8% compounded quarterly for the next five years. How much will you have in the account at the end?

Suzette is going to receive $10,000 today as the result of an insurance settlement. In addition,she will receive $15,000 one year from today and $25,000 two years from today. She plans on saving all of this money and investing it for her retirement. If Suzette can earn an average of 11% on her investments,how much will she have in her account if she retires 25 years from today?

Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have earned over a five-year period if the interest had compounded annually?

What is the future value of the following cash flows at the end of year 3 if the interest rate is 9%? The cash flows occur at the end of each year.

Which one of the following statements concerning the annual percentage rate is correct?

Your grandmother invested one lump sum 17 years ago at 4.25% interest. Today,she gave you the proceeds of that investment which totaled $5,539.92. How much did your grandmother originally invest?

Today you earn a salary of $28,500. What will be your annual salary fifteen years from now if you earn annual raises of 3.5%?

Mr. Miser loans money at an annual rate of 21%. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans?