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

How much would an investor be willing to pay today for an investment that returns $1,000 every year at year-end for five years if he wants to earn a 10% annual return on the investment?

Consider the following cash flows: Date Cash Received Amount of Cash 1/1/17 $100 1/1/18 $100 1/1/19 $500 1/1/20 $100 What is the value on 1/1/16 of the above cash flows? Use an 8% discount rate, and round your answer to the nearest $1.00.

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.)

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%

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.

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

You wish to purchase a condo at a cost of $175,000. You are able to make a down payment of $35,000 and will borrow $140,000 for 30 years at an interest rate of 7.25%. How much is your monthly payment? To solve this problems with an EXCEL spreadsheet, you would enter

Jay Coleman just graduated. He plans to work for five years and then leave for the Australian "Outback" country. He figures that he can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, his family gave him a $2,500 graduation gift. If he puts the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will his financial "stake" be when he leaves for Australia five years from now? Round off to the nearest $1.

Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Gina's plan is to invest her money by depositing into an IRA at the end of every year. What is the amount that she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will earn an annual rate of 11.5%. Round off to the nearest $1.

An annuity involves depositing or investing a single sum of money and allowing it to grow for a certain number of years.

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?

A perpetuity is an investment that continues forever but pays a different dollar amount each year.

You have just purchased an investment that generates the cash flows that are shown below. If you are able to invest your money at 5.75%, compounded annually, by how much is this investment better or worse than your next best investment worth today? 0 $(9,000) 1 $1,250 2 $1,585 3 $1,750 4 $2,225 5 $3,450

The expected after-tax cash flow from an investment property that you are considering is Year 1 $25,000 Year 2 $27,500 Year 3 $30,250 At the end of year 3 you expect to sell the property for $400,000. If the appropriate discount rate is 12%, what is the most you should pay for this property?

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.

How much money must you pay into an account at the beginning of each of 11 years in order to have $5,000 at the end of the 11th year? Assume that the account pays 8% per year, and round to the nearest $1.

The present value of an annuity increases as the discount rate increases.

A commercial bank will loan you $17,500 for two years to buy a car. The loan must be repaid in 24 equal monthly payments. The annual interest rate on the loan is 6% of the unpaid balance. What is the amount of the monthly payments?

The present value of a perpetuity decreases when the ________ decreases.

Your parents are planning to retire in Phoenix, AZ in 20 years. Currently, the typical house that pleases your parents costs $200,000, but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years. In order to buy a house upon retirement, what must they save each year in equal annual end-of-year deposits if they can earn 10% annually?