Exam 4: The Time Value of Money

Assume that you are 30 years old today,and that you are planning on retiring at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31^st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.At retirement (age 65)you will begin withdrawing equal annual payments to pay for your living expenses during retirement (on your 65th birthday).If you expect to die one day before your 101st birthday (Your last withdraw will be on your 100th birthday)and if the annual rate of return is 7%,then how much money will you have to spend in each of your golden years of retirement?

You are saving for retirement.To live comfortably,you decide that you will need $2.5 million dollars by the time you are 65.If today is your 30th birthday,and you decide,starting today,and on every birthday up to and including your 65th birthday,that you will deposit the same amount into your savings account.Assuming the interest rate is 5%,the amount that you must set aside each year on your birthday is closest to:

If the current rate of interest is 8% APR,then the present value of an investment that pays $250 per quarter and lasts 20 years is closest to:

Dagny Taggart is a graduating college senior and she is considering the costs of going to medical school.Beginning next fall,Dagny expects medical school tuition to run $45,000 for the first year and she estimates that tuition will increase by 6% each year.If Dagny is able to invest her money in an account paying 8% interest per year,then the present value to Dagny of four years of medical school tuition is closest to:

Use the information for the question(s)below. Joe just inherited the family business,and having no desire to run the family business,he has decided to sell it to an entrepreneur.In exchange for the family business,Joe has been offered an immediate payment of $100,000.Joe will also receive payments of $50,000 in one year,$50,000 in two years,and $75,000 in three years.The current market rate of interest for Joe is 6%. -Draw a timeline detailing Joe's cash flows from the sale of the family business.

Use the information for the question(s)below. Joe just inherited the family business,and having no desire to run the family business,he has decided to sell it to an entrepreneur.In exchange for the family business,Joe has been offered an immediate payment of $100,000.Joe will also receive payments of $50,000 in one year,$50,000 in two years,and $75,000 in three years.The current market rate of interest for Joe is 6%. -In terms of present value,how much will Joe receive for selling the family business?

Suppose that you deposit $10,000 in an account that pays 6% interest and you want to know how much will be in your account at the end of 10 years.To solve this problem in Microsoft Excel,you would use which of the following Excel formulas?

Francisco d'Anconia is considering an investment opportunity that costs $10,000 today and will pay $11,500 in two years.The IRR of this opportunity is closest to:

Use the following timeline to answer the question(s)below. 0 1 2 3 $600 $1200 $1800 -At an annual interest rate of 7%,the future value of this timeline in year 3 is closest to:

You have been offered the following investment opportunity,if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Draw a timeline detailing this investment opportunity.

You are offered an investment opportunity that costs you $28,000,has an NPV of $2278,lasts for three years,has interest rate of 10%,and produces the following cash flows: The missing cash flow from year 2 is closest to:

Which of the following statements is FALSE?

The British government has just issued a new consol bond that sells for £1000 and pays interest of 8%.The annual interest payment on this bond must be:

The future value at retirement (age 65)of your savings is closest to:

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Assuming that the parents have already made the deposit for their daughter's 18th birthday,then the amount available for the daughter's college expenses on her 18th birthday is closest to:

Use the following information to answer the question(s)below. Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now,$450,000 two years from now,and $650,000 three years from now. -If the appropriate interest rate is 10%,then the NPV of this opportunity is closest to:

Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years or to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years in the amount of $3,184,000.If the interest rate on the loan is 6%,then the annual payment the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:

Which of the following statements regarding the timeline is FALSE?

Consider the following timeline: If the current market rate of interest is 10%,then the future value of this timeline is closest to:

Define the following terms: (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity