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Exam 9: The Time Value of Money

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Question 1

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Joe Nautilus has $120,000 and wants to retire. What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years?

A) 12%
B) between 12% and 13%
C) 14%
D) greater than 15%

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Question 2

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After 10 years, 1,000 shares of stock originally purchased for $10/share was sold for $50/share. What was the annual yield on the investment? Choose the closest answer assuming annual compounding.

A) 500.00%
B) 5.00%
C) 12.70%
D) 17.46%

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Question 3

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The present value of a positive future value may become negative as discount rates become higher and higher.

Mr. Sheridan is selling his house for $280,000. He bought it for $55,000 15 years ago. What is the annual return on his investment, assuming monthly compounding?

As the interest rate increases, the present value of an amount to be received at the end of a fixed period

The formula FV = PV(1 + n)ⁱ will determine the present value of $1.

Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years ago. What is the annual return on his investment?

The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table.

The interest factor for the present value of a single amount is the inverse of the future value interest factor.

Football player Walter Johnson signs a contract calling for payments of $2,500,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

Janice Hardin sets aside $5,000 each year for 10 years. She then withdraws the funds on an equal annual basis for the next 10 years. The two tables she should use in the correct order are:

A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have $250,000 to your credit in the plan. The plan anticipates earning 9% interest compounded monthly. How much will your monthly benefits be, paid at the end of each month?

Carol Thomas will pay out $6,000 at the end of the year 2, $8,000 at the end of year 3, and receive $10,000 at the end of year 4. With an interest rate of 13%, how much money does she need to have on hand today to meet her obligations?

As the interest rate increases, the PV_IF for the present value of $1 increases.

As the time period until receipt increases, the present value of an amount at a fixed interest rate

Gary Kiraly wants to buy a new Italian sports car in three years. The vehicle is expected to cost $80,000 at that time. If Gary should be so lucky as to find an investment yielding 12% over that three-year period, how much would he have to invest now in order to accumulate $80,000 at the end of the three years?

Morgan D expects to receive $200 per month for 10 years and $250 per month for the next 10 years. What is the present value of this 20-year cash flow? Use a 10% discount rate, assuming monthly compounding.

As the interest rate decreases, the present value of an amount to be received at the end of a fixed period

The longer the length of time between a present value and its corresponding future value,

The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions covering periods of over one year.