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Exam 13: Time Value of Money

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Question 1

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What is the value today of receiving five annual payments of $500,000, beginning one year from now, assuming an 11% discount rate?

A) $2,500,000.
B) $2,225,000.
C) $1,847,950.
D) $2,115,270.

E) C) and D)
F) None of the above

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Question 2

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Briefly explain why the value of $100 received today is greater than the value of $100 received one year from now.

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The $100 received today can be invested ...

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Question 3

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The discount rate is the rate at which someone is willing to give up current dollars for future dollars.

How much will $8,000 grow to in five years, assuming an interest rate of 8% compounded quarterly?

How much will $25,000 grow to in seven years, assuming an interest rate of 12% compounded annually?

If you put $600 into a savings account that pays simple interest of 10% per year and then withdraw the money two years later, you will earn interest of $126.

How much must be invested now at 9% interest to accumulate to $10,000 in five years?

Explain the difference between present value and future value.

Samuel is trying to determine what it's worth today to receive $10,000 in four years at a 7% interest rate. He should use a table for the:

Dobson Contractors is considering buying equipment at a cost of $75,000. The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000. The discount rate is 12%. Assume the equipment would be paid for on the first day of year one, but that all other cash flows occur at the end of the year. Ignore income tax considerations. Determine if Dobson should purchase the machine.

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided. Terms: a. Annuity b. Future value of a single amount c. Discount rate d. Future value of an annuity e. Interest f. Compound interest g. Present value of a single amount h. Time value of money i. Simple interest j. Present value of an annuity Phrases: _____ Amount today equivalent to a specified future amount. _____ The rate at which future dollars are equal to current dollars. _____ Interest earned on the initial investment only. _____ The factor that causes money today to be worth more than the same amount in the future. _____ Current worth of a series of equal payments received in the future.

Which three factors are necessary in calculating the present value of a single amount?

Briefly describe the difference between simple interest and compound interest.

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the end of the month, with interest of 12% on the unpaid balance. She should use a table for the:

What is the value today of receiving $2,500 at the end of three years, assuming an interest rate of 9% compounded annually?

How much will $5,000 invested at the end of each year grow to in six years, assuming an interest rate of 7% compounded annually?

If you put $500 into a savings account that pays simple interest of 8% per year and then withdraw the money two years later, you will earn interest of $80.

The present value of $1,000 received three years from today with a discount rate of 10% is less than the present value of a $500 annuity with the same discount rate over the same period.

The future value of $1,000 invested today for three years that earns 10% compounded annually is greater than the future value of a $500 annuity with the same interest rate over the same period.

George Jones is planning on a cruise for his 70^th birthday party. He wants to know how much he should set aside at the end of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the: