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Exam 9: The Time Value of Money

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Question 31

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Fishermen's Corp. is considering purchasing a boat. If the boat was purchased, it is expected to receive $20,000 at the end of the first year, $40,000 at the end of the second year, and $60,000 at the end of the third year within its business. What is the boat worth to Fishermen's Corp today, assume an 8% discount rate.

A) $120,000
B) $100,440
C) $47,640
D) $98,756

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Question 32

Multiple Choice

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If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, how much would you have as an ending balance in your account?

A) Present value of $1
B) Future value of $1
C) Present value of an annuity of $1
D) Future value of an annuity of $1

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Question 33

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You will deposit $200,000 today. It will grow for five years at 12% interest, but compounded semi-annually. What will your investment grow to?

The interest factor (IF) for the future value of an ordinary annuity is 4.641 at 10% for four years. If we wish to accumulate $8,000 by the end of four years, how much should the annual payments be?

Football player Walter Johnson signs a contract calling for payments of $250,000 per year, which begins 10 years from now and then continue for five more years after that. To find the value of this contract today, which table or tables should you use?

Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the next 5 years starting one year from now and expects to earn a 6% annual rate of return. How much money will his daughter have when she starts college?

Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the annual return on his investment?

The higher the interest rate used in determining the future value of a $1 annuity,

Higher interest rates reduce the present value amount.

When adjusting for semi-annual compounding of an annuity, the adjustments include multiplying the periods and annuity payment amount by 2.

If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to a "future value of $1" table.

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

In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of principal increases over the life of the mortgage.

An annuity may best be defined as

The future value of an ordinary annuity assumes that the payments are received at the end of the year and that the last payment does not compound.

The farther into the future any given amount is received, the larger its present value. Time amplifies the growth of money. Consequently, to achieve a certain future value, more time means that you can start with less.

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

As the time period until receipt increases, the present value

When the inflation rate is zero, the present value of $1 is identical to the future value of $1.

If Allison has saved $1,000,000 upon retirement, how much money can she live on each year if she can earn 4% per year and will end with $0 when she expects to die 30 years after retirement?