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Exam 5: Time Value of Money

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Question 71

Multiple Choice

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The future value of $200 received today and deposited at 8 percent for three years is ________.

A) $248
B) $252
C) $158
D) $200

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

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Question 72

Multiple Choice

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The present value of a $25,000 perpetuity at a 14 percent discount rate is ________.

A) $178,571
B) $285,000
C) $350,000
D) $219,298

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

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Question 73

Multiple Choice

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Find the present value of the following stream of a firm's cash flows,assuming that the firm's opportunity cost is 9 percent.

Find the equal annual end-of-year payment on $50,000,15 year,and 10 percent loan.

Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years.If Bill can earn 12 percent on his contributions,how much will he have at the end of the twentieth year?

The nominal and effective rates are equivalent for annual compounding.

A local bank is offering a zero-coupon certificate of deposit for $25,000.At maturity,three years from now,the investor will receive $32,000.What is the rate of return on this investment?

The annual percentage yield (APY)is the effective rate of interest that must be disclosed to customers by banks on their savings products as a result of "truth in savings laws."

A beach house in Southern California now costs $350,000.Inflation is expected to cause this price to increase at 5 percent per year over the next 20 years before Eric and Karinna retire from successful careers in commercial art.How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the beach house upon retirement?

The future value of $100 received today and deposited at 6 percent for four years is ________.

How long would it take for you to save an adequate amount for retirement if you deposit $40,000 per year into an account beginning today that pays 12 percent per year if you wish to have a total of $1,000,000 at retirement?

Find the present value of the following stream of a firm's cash flows,assuming that the firm's opportunity cost is 14 percent.

You have provided your friend with a service worth $8,500.Your friend offers you the following cash flow instead of paying $8,500 today.Should you accept his offer if your opportunity cost is 8 percent?

What annual rate of return would Jia need to earn if she deposits $20,000 per year into an account beginning one year from today in order to have a total of $1,000,000 in 30 years?

An annuity due is an amount that occur at the beginning of each period.

Last Christmas,Danny received an annual bonus of $1,500.These annual bonuses are expected to grow by 5 percent for the next 5 years.How much will Danny have at the end of the fifth year if he invests his Christmas bonuses (including the most recent bonus)in a project paying 8 percent per year?

Ms.Day needs $20,000 to buy her dream car.In her search for the best (low cost)loan,she has gathered the following information from three local banks.Which bank would you recommend Ms.Day borrow from?

Rita borrows $4,500 from the bank at 9 percent annually compounded interest to be repaid in three equal annual installments.The interest paid in the third year is ________.

Assume you have a choice between two deposit accounts.Account X has an annual percentage rate of 12.25 percent but with interest compounded monthly.Account Y has an annual percentage rate of 12.20 percent with interest compounded continuously.Which account provides the highest effective annual return?

Dottie has decided to set up an account that will pay her granddaughter (Lexi)$5,000 a year indefinitely.How much should Dottie deposit in an account paying 8 percent annual interest?