Exam 6: The Time Value of Money-Annuities and Other Topics

You are thinking of buying a miniature golf course.It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight.If the appropriate discount rate is 10%,what is the present value of these cash flows?

Consider an investment that has cash flows of $500 the first year and $400 for the next four years.If your opportunity cost is 10%,you should be willing to pay $1,607.22 for this investment.

________ annuities involve depositing money at the end of the period and allowing it to grow.

A perpetuity will grow at the rate of 5% per year.One year from the date of purchase,it will pay $50,0000.If the appropriate discount rate is 10%,what is the value of the perpetuity?

As a part of your savings plan at work,you have been depositing $250 per quarter in a savings account earning 8% interest compounded quarterly for the last 10 years.You will retire in 15 years and want to increase your contribution each year from $1,000 to $2,000 per year,by increasing your contribution every four months from $250 to $500.Additionally,you have just inherited $10,000,which you plan to invest now to earn interest at 12% compounded annually for the next 15 years.How much money will you have in savings when you retire 15 years from now?

You are planning to deposit $10,000 today into a bank account.Five years from today you expect to withdraw $7,500.If the account pays 5% interest per year,how much will remain in the account eight years from today? Round to the nearest dollar.

Recently you borrowed money for a new car.The loan amount is $15,000 to be paid back in equal annual payments which begin today,and will continue to be payable at the beginning of each year for a total of five years.Interest on the loan is 8%.What is the amount of the loan payment?

You are considering the purchase of XYZ Company's common stock which will pay a $1.00 per share dividend one year from the date of purchase.The dividend is expected to grow at the rate of 4% per year.If the appropriate discount rate for this investment is 14%,what is the price of one share of this stock?

A retirement plan guarantees to pay you or your estate a fixed amount for 20 years.At the time of retirement,you will have $31,360 to your credit in the plan.The plan anticipates earning 8% interest annually over the period you receive benefits.How much will your annual benefits be,assuming the first payment occurs one year from your retirement date?

To evaluate and compare investment proposals,we must adjust all cash flows to a common date.

Use the following information in solving the following question(s). You are going to pay $100 into an account at the beginning of each of the next 40 years.At the beginning of the 41st year,you buy a 30-year annuity whose first payment comes at the end of the 41st year (the account pays 12%). -How much money will be in the account at the end of year 40 (round to the nearest $1,000)?

SellUCars,Inc.offers you a car loan at an annual interest rate of 8% compounded monthly.What is the annual percentage yield of the loan?

Consider the following cash flows: Date Cash Received Amount of Cash 1/1/15 $100 1/1/16 $100 1/1/17 $500 1/1/18 $100 What is the value on 1/1/14 of the above cash flows? Use an 8% discount rate,and round your answer to the nearest $1.00.

We can use the present value of an annuity formula to calculate constant annual loan payments.

What is a series of equal payments for an infinite period of time called?

You intend to purchase a new car upon graduation in two years.It will have a cost of $29,371,including all extra features and sales tax.You just received a $3,000 pre-graduation gift from your rich uncle that you intend to deposit in a money market account that pays 6% interest,compounded monthly.If you use the amount in the money market account for a down payment,and take out an auto loan for the remainder,how much will you need to borrow? (Round to the nearest dollar. )

You have borrowed $70,000 to buy a speed boat.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate,compounded monthly.Create an amortization schedule for the first two months of the loan.

What is the present value of the following perpetuities? a.$600 discounted at 7% b.$450 discounted at 12% c.$1,000 discounted at 6% d.$880 discounted at 9%

The formula for calculating the present value of a growing perpetuity is PV = Payment _{period 1}/(i-g)

Suppose that you wish to save for your child's college education by opening up an educational IRA.You plan to deposit $100 per month into the IRA for the next 18 years.Assume that you will be able to earn 10%,compounded monthly,on your investment.How much will you have accumulated at the end of 18 years?