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Exam 4: The Time Value of Money Part 2

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Question 41

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Which of the following is NOT true with regard to an amortization table?

A) The interest payment for a period is equal to the periodic interest rate multiplied by the beginning-of-the-period principal balance.
B) The remaining principal balance at the end of a payment period is equal to the beginning-of-the-period principal less the total payment.
C) The total payment is calculated by using the present value of an annuity formula.
D) All of the above are true.

E) A) and B)
F) All of the above

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Question 42

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The formula for the Present Value Interest Factor of an Annuity (PVIFA) is .

A) True
B) False

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Question 43

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What is the present value of a lottery paid as an annuity due for twenty years if the cash flows are $250,000 per year and the appropriate discount rate is 7.50%?

You currently have $67,000 in an interest-earning account. From this account, you wish to make 20 year-end payments of $5,000 each. What annual rate of return must you make on this account to meet your objective?

You have saved $47,000 for college and wish to use $15,000 per year. If you use the money as an ordinary annuity and earn 6.15% on your investment, how many years will your annuity last? Use a calculator to determine your answer.

The formula for the Future Value Interest Factor of an Annuity (FVIFA) is .

Elliot Industries invests a portion of its profits each year into a benefit emergency health care account for its employees. For the last five years it has invested year-end amounts of $50,000, $43,000, $26,000, $61,000, and $84,000. If the last deposit ($84,000) was made today and the account earns an average of 7.3% per year, how much money is currently in the account, assuming there have been no withdrawals?

When solving for future value, we use the term compounding of cash flows rather than the term discounting of cash flows.

You dream of endowing a chair in finance at the local university that will provide a salary of $150,000 per year forever, with the first cash flow to be one year from today. If the university promises to invest the money at a rate of 5% per year, how much money must you give the university today to make your dream a reality?

A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________.

The future value three years from today of a $100 three-year annuity due compounded at a rate of 10% is equal to ________.

A trend among universities is to guarantee tuition to incoming freshmen for a four-year period. Further, the annual amount due is collected in equal payments collected every three months. Although the payments are equal as well as equally spaced, this is NOT an example of an annuity because the payments are made every three months rather than on a monthly or annual basis.

It ALWAYS makes more sense financially to take the lump sum payout from winning a lottery than taking the annual cash flows.

You have a choice between a lottery lump sum payout of $10,000,000 today or a series of twenty-five annual annuity payments (first payment one year from today) . At a discount rate of 6.50%, how large must the annual annuity payments be to make you indifferent between the two choices?

Solving for an unknown interest rate for annuity cash flows is an iterative (or trial-and-error) process.

Given positive equal annual cash flows and a positive interest rate, the future value of an annuity will be greater than the sum of the cash flows.

Which of the following is NOT an example of annuity cash flows?

Given a positive interest rate and a positive cash flow, an ordinary annuity always has a greater future value than an annuity due of the same size and number of cash flows.

Home mortgage loans are commonly paid off by making equal monthly payments consisting of both interest and principal. This is an example of an amortized loan.

Johnson has an annuity due that pays $600 per year for 15 years. What is the present value of the cash flows if they are discounted at an annual rate of 7.50%?