Exam 9: Time Value of Money

Assume that you inherited some money.A friend of yours is working as an unpaid intern at a local brokerage firm,and her boss is selling some securities which call for four payments,$50 at the end of each of the next 3 years,plus a payment of $1,050 at the end of Year 4.Your friend says she can get you some of these securities at a cost of $900 each.Your money is now invested in a bank that pays an 8 percent simple (quoted)interest rate,but with quarterly compounding.You regard the securities as being just as safe,and as liquid,as your bank deposit,so your required effective annual rate of return on the securities is the same as that on your bank deposit.You must calculate the value of the securities to decide whether they are a good investment.What is their present value to you?

Effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased,thereby providing an opportunity to purchase and install assets before they are needed.

The effective annual rate of 5% compounded monthly is approximately 5.12%.

The process of discounting or finding the present value of a cash flow to be received in the future is really the reverse of compounding.

Discounted payback's primary advantage over traditional payback is that

You have determined the profitability of a planned project by finding the present value of all the cash flows form that project.Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

The Desai Company just borrowed $1,000,000 for 3 years at a quoted rate of 8 percent,quarterly compounding.The loan is to be amortized in end-of-quarter payments over its 3-year life.How much interest (in dollars)will your company have to pay during the second quarter?

Suppose an investor can earn a steady 5% annually with investment A,while investment B will yield a constant 12% annually.Within 11 years' time,the compounded value of investment B will be more than twice the compounded value of investment A (ignore risk).

The present value of $3,000 to be received in 5 years at a 10% discount rate is $2000.

Your mother's employer offers a tax-deferred retirement plan (a 401-b plan,which was authorized by Congress to encourage savings)which would permit her to invest,tax-free until she retires,up to 15 percent of her salary.Once you are out of school (one year from today),she figures she can save $1,000 every 6 months,or $2,000 per year.The insurance company which manages the retirement fund promises to pay a stated (or simple)rate of 12 percent per year,but with quarterly compounding.If your mother invests $1,000 each six months,starting six months after you graduate (or 18 months from today),how much will she have 5 years from now,assuming the last payment is made at the end of Year 5? (Hint: She will make a total of 8 payments. )

You are given the following cash flow information.The appropriate discount rate is 12 percent for Years 1−5 and 10 percent for Years 6−10.Payments are received at the end of the year. What should you be willing to pay right now to receive the income stream above?

In an amortization problem where a debt is completely amortized,if we are given the values for PV,I,and N,then we can solve the problem despite having been given only three of the five time value variables involved.

Assume that your required rate of return is 12 percent and you are given the following stream of cash flows: If payments are made at the end of each period,what is the present value of the cash flow stream?

You want to buy a Nissan 300ZX on your 27th birthday.You have priced these cars and found that they currently sell for $30,000.You believe that the price will increase by 5 percent per year until you are ready to buy.You can presently invest to earn 14 percent.If you just turned 20 years old,how much must you invest at the end of each of the next 7 years to be able to purchase the Nissan in 7 years?

When Richard evaluated a capital budgeting project⎯a new machine needed to manufacture inventory⎯using his firm's required rate of return,he discovered that the project's net present value (NPV)is negative.Based on this information,which of the following must be correct?

Your company is planning to borrow $1,000,000 on a 5-year,15 percent,annual payment,fully amortized term loan.What fraction of the payment made at the end of the second year will represent repayment of principal?

Which of the following statements is correct?

What is the future value of a 5-year ordinary annuity with annual payments of $200,evaluated at a 15 percent interest rate?

If it were evaluated with an interest rate of 0 percent,a 10-year regular annuity would have a present value of $3,755.50.If the future (compounded)value of this annuity,evaluated at Year 10,is $5,440.22,what effective annual interest rate must the analyst be using to find the future value?

Express Airlines is considering the purchase of an aircraft to supplement its current fleet.In estimating the impact of adding this aircraft to the fleet,management has developed the following expected cash flows: If the discount rate is 10 percent,what is the present value of these estimated flows?