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Exam 4: Time Value of Money - Streams and Valuations

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Question 21

Multiple Choice

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You are 30 years old and you want to retire at age 60 with $1.5 million. You are going to make equal annual deposits into your savings account at the end of each year in order to save up this money. Your savings account pays 8% interest. What amount must you deposit each year?

A) $13,241.15
B) $12,160.93
C) $14,227.80
D) $13,274.34
E) $14,506.85

F) B) and E)
G) A) and E)

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Question 22

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How much must be invested today to make four annual withdrawals of $20,000 each for tuition payments if you can earn 8% compounded annually on your investment and the first withdrawal will take place in one year? (Round to the nearest whole dollar)

A) $66,243
B) $51,242
C) $79,854
D) $47,393
E) $57,341

F) A) and D)
G) A) and B)

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Question 23

Multiple Choice

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In three years you will begin receiving an annual payment of $600 that will be made for two years. If the annual interest rate is 12%, what will be the balance in your account at the end of the fourth year?

You are offered an investment that will pay you the cash flows shown in the table. The first cash flow occurs in one year. The cost of the investment is $1,086.59 (today) . What is the return on the investment? $\begin{array} { | c | c | } \hline \text { Year } & \text { Cash Flow } \\\hline 1 & \$ 70 \\\hline 2 & \$ 70 \\\hline 3 & \$ 70 \\\hline 4 & \$ 70 \\\hline 5 & \$ 1,070 \\\hline\end{array}$

Assume that your required rate of return is 12% and you are given the following stream of cash flows: $\begin{array} { | c | c | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & \$ 10,000 \\\hline 1 & \$ 15,000 \\\hline 2 & \$ 15,000 \\\hline 3 & \$ 15,000 \\\hline 4 & \$ 15,000 \\\hline 5 & \$ 20,000 \\\hline\end{array}$ If payments are made at the end of each period, what is the present value of the cash flow stream? (Round to the nearest whole dollar)

The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, is: (Round to the nearest whole dollar)

You just won the Sweepstakes and have decided to take your winning in 15 equal payments of $35,000. You decide to save all of this money for your retirement and deposit it into an account that earns 11% per year. What is the amount of your retirement nest egg? (Round to the nearest whole dollar)

You are late paying a bill for $11,200.66. You have made arrangements to pay off the bill in installments of $260 per month, and you will be charged monthly interest of 1.2% on the balance owing. How long will it take you to pay off the account balance? (round your answer to nearest month)

You are expecting to receive $70 per year at the end of each of the next five years. If you invest the money in account that pays 5%, then how much interest will you earn over the five years? (Round to the nearest whole dollar)

An annuity with an infinite life is called:

You have a 5-year amortized loan with a nominal rate of 11% and annual payments of $541.14. What is the original (time 0) principal of the loan?

Jennifer presents a business plan to her bank's loan officer that predicts net cash flows for the first three years of $10,000, $15,000, and $8,000 respectively. If these cash flows occur at the end of each year and the discount rate is 4%, what is the total present value of these cash flows? (Round to the nearest whole dollar)

Margaret plans to deposit $500 on the first day of each of the next five years, beginning today. If she earns 4% compounded annually, how much will she have at the end of five years?

Marla borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end of year payment is: (Round to the nearest whole dollar)

The future value of a $10,000 annuity deposited at 12 percent compounded annually for each of next 5 years is: (Round to the nearest whole dollar)

Ferrari offers the 360 Spider for $160,724 cash. Ferrari also advertises a purchase plan with 4.5% APR financing and 48 end-of-month payments of $3,862. Which is the better deal?

You have the opportunity to buy a perpetuity which pays $1,000 annually. Your required rate of return on this investment is 15 percent. You should be essentially indifferent to buying or not buying the investment if it were offered at a price of:

Betty borrows $50,000 at 10 percent annually compounded interest to be repaid in four equal annual installments. The actual end of year loan payment is: (Round to the nearest whole dollar)

John wants to have $6,215 in 13 years to buy a Laser 2 sailboat with a spinnaker and trapeze. After he has owned the boat for 15 years he will need $2,500 for hull maintenance. How much must he deposit at the end of each year for the next 13 years to save enough money for the purchase and maintenance? His savings account pays 9%.

Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth maximizing investor, which annuity would you choose?