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Exam 4: The Time Value of Money

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Question 1

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Use the information for the question(s) below. Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. -The future value at retirement (age 65)of your savings is:

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First deposit = .08 ...

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Question 2

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Which of the following statements is false?

A) The process of moving a value or cash flow backward in time is known as discounting.
B) FV =
C) The process of moving a value or cash flow forward in time is known as compounding.
D) The value of a cash flow that is moved forward in time is known as its future value.

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Question 3

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If the appropriate interest rate is 8%,then present value of $500 paid at the beginning of each of the next 40 years is closest to:

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 10%,then the present value of this stream of cash flows is closest to:

The British government has a consol bond outstanding that pays ₤100 in interest each year.Assuming that the current interest rate in Great Britain is 5% and that you will receive your first interest payment one year from now,then the value of the consol bond is closest to:

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 6%,then the future value of this stream of cash flows is closest to:

Dagny Taggart is a graduating college senior and she is considering the costs of going to medical school.Beginning next fall,Dagny expects medical school tuition to run $45,000 for the first year and she estimates that tuition will increase by 6% each year.If Dagny is able to invest her money in an account paying 8% interest per year,then the present value to Dagny of four years of medical school tuition is closest to:

Which of the following is not a valid time value of money function in Excel?

At an annual interest rate of 7%,the present value of $5,000 received in five years is closest to:

At an annual interest rate of 7%,the future value of this timeline in year 2 is closest to:

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%,then the future value of this stream of cash flows is closest to:

Suppose that you deposit $10,000 in an account that pays 6% interest and you want to know how much will be in your account at the end of 10 years.To solve this problem in Microsoft Excel,you would use which of the following Excel formulas?

Use the following information to answer the question(s) below. Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. -If the appropriate interest rate is 10%,then the NPV of this opportunity is closest to:

Use the information for the question(s) below. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. -Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:

You are saving for retirement.To live comfortably,you decide that you will need $2.5 million dollars by the time you are 65.If today is your 30th birthday,and you decide,starting today,and on every birthday up to and including your 65th birthday,that you will deposit the same amount into your savings account.Assuming the interest rate is 5%,the amount that you must set aside each and every year on your birthday is closest to:

If the current rate of interest is 8%,then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:

Kampgrounds Inc.is considering purchasing a parcel of wilderness land near a popular historic site.Although this land will cost Kampgrounds $400,000 today,by renting out wilderness campsites on this land,Kampgrounds expects to make $35,000 at the end of every year indefinitely.If the appropriate discount rate is 8%,then the NPV of this new wilderness campsite is closest to:

Which of the following statements is false?

You are considering investing in a zero coupon bond that will pay you its face value of $1000 in ten years.If the bond is currently selling for $485.20,then the IRR for investing in this bond is closest to:

Which of the following statements regarding growing annuities is false?