Exam 6: Discounted Cash Flow Valuation

You want to be a millionaire when you retire in 40 years.You can earn A 12.5 percent annual return.How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month?

You want to buy a new sports coupe for $41,750,and the finance office at the dealership has quoted you an 8.6 percent APR loan compounded monthly for 48 months to buy the car.What is the effective interest rate on this loan?

What is the interest rate charged per period multiplied by the number of periods per year called?

You have your choice of two investment accounts.Investment A is a 5-year annuity that features end-of-month $2,500 payments and has an interest rate of 11.5 percent compounded monthly.Investment B is a 10.5 percent continuously compounded lump sum investment,also good for five years.How much would you need to invest in B today for it to be worth as much as investment A five years from now?

Explain the difference between the effective annual rate (EAR)and the annual percentage rate (APR).Of the two,which one has the greater importance and why?

You would like to establish a trust fund that will provide $120,000 a year forever for your heirs.The trust fund is going to be invested very conservatively so the expected rate of return is only 5.75 percent.How much money must you deposit today to fund this gift for your heirs?

You have some property for sale and have received two offers.The first offer is for $89,500 today in cash.The second offer is the payment of $35,000 today and an additional $70,000 two years from today.If the applicable discount rate is 11.5 percent,which offer should you accept and why?

You are comparing two investment options that each pay 5 percent interest,compounded annually.Both options will provide you with $12,000 of income.Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each.Option B pays three annual payments of $4,000 each.Which one of the following statements is correct given these two investment options?

Theresa adds $1,500 to her savings account on the first day of each year.Marcus adds $1,500 to his savings account on the last day of each year.They both earn 6.5 percent annual interest.What is the difference in their savings account balances at the end of 35 years?

Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal?

You have $5,600 that you want to use to open a savings account.There are five banks located in your area.The rates paid by banks A through E,respectively,are given below.Which bank should you select if your goal is to maximize your interest income?

Your employer contributes $50 a week to your retirement plan.Assume that you work for your employer for another 20 years and that the applicable discount rate is 9 percent.Given these assumptions,what is this employee benefit worth to you today?

Given an interest rate of 8 percent per year,what is the value at date t = 9 of a perpetual stream of $500 annual payments that begins at date t = 17?

Nadine is retiring at age 62 and expects to live to age 85.On the day she retires,she has $402,000 in her retirement savings account.She is somewhat conservative with her money and expects to earn 6 percent during her retirement years.How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death?

Which one of the following terms is used to identify a British perpetuity?

Your great aunt left you an inheritance in the form of a trust.The trust agreement states that you are to receive $2,400 on the first day of each year,starting immediately and continuing for 20 years.What is the value of this inheritance today if the applicable discount rate is 6.75 percent?

You are borrowing money today at 8.48 percent,compounded annually.You will repay the principal plus all the interest in one lump sum of $12,800 two years from today.How much are you borrowing?

You are borrowing $17,800 to buy a car.The terms of the loan call for monthly payments for 5 years at 8.6 percent interest.What is the amount of each payment?

You just settled an insurance claim.The settlement calls for increasing payments over a 10-year period.The first payment will be paid one year from now in the amount of $10,000.The following payments will increase by 4.5 percent annually.What is the value of this settlement to you today if you can earn 8 percent on your investments?

You have just purchased a new warehouse.To finance the purchase,you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price.The monthly payment on this loan will be $12,200.What is the effective annual rate on this loan?