Question 1

The BobIU Computer Graphics Co. has just produced a new multimedia graphics chip which will cost $6,000,000 this year to put into production. They anticipate net cash flows of $3 million next year, $2million, $1 million, $.5 million, $.25 million and then $0 over each of the following years. The two owners require a 15% return on their investment. The value of this investment to the firm is:

Accepted Answer

The value of the investment is calculated using the Net Present Value (NPV) method. The NPV of the cash flows, discounted at 15%, is negative, specifically -$811,329.97.

Question 2

You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

Accepted Answer

The answer of You are comparing two investment options. The...

Question 3

There are three factors that affect the future value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.

Accepted Answer

The answer of There are three factors that affect the...

Question 4

What is the present value of 10 payments of $500 each received every 24 months at a discount rate of 12%?

Accepted Answer

The answer of What is the present value of 10...

Question 5

A "little seven" accounting firm offers to pay you a year-end bonus of $5,000 for 3 years if you will accept employment with them and stay for the entire 3-year period. Which of the following amounts is closest to the present value of the bonus if the interest rate is 10%?

Accepted Answer

The answer of A "little seven" accounting firm offers to...

Question 6

Aunt Clarisse has promised to leave you $60 a year starting next year and have it increase at 4% a year thereafter. The payments are expected to go on indefinitely. How much has Aunt Clarisse left you if your opportunity costs is 9%.

Accepted Answer

The answer of Aunt Clarisse has promised to leave you...

Question 7

Mr. Miser, who is 35 years old, has just inherited $11,000 and decides to use the windfall towards his retirement. He places the money in a bank, which promises a return of 6% per year until his planned retirement at age 65. If his funds earn 6% interest compounded annually, how much will he have at retirement? Repeat the analysis for both semi-annual and continuous compounding.

Accepted Answer

The answer of Mr. Miser, who is 35 years old,...

Question 8

Alan Burnie has just started work and has been wanting to buy a sleek powerboat for sometime. Rather than purchase and finance now, he plans to save every three months and increase the deposits by 3% per annum as he expects raises at least that large. How much must the first deposit be if the boat costs $25,000 today and he expects to earn 10% on the money over the next five years.

Accepted Answer

The answer of Alan Burnie has just started work and...

Question 9

A sports team in an effort to solve the salary cap problem has offered a player a contract of $1 million dollars a year for the next season with the payments growing at 7% per year for the next 25 years. The player believes the discount rate for such payments is 13%. What is the value today of taking this contract?

Accepted Answer

The answer of A sports team in an effort to...

Question 10

A court settlement awarded an accident victim four payments of $50,000 to be paid at the end of each of the next four years. Which of the following amounts is closest to the current value of these payments? The appropriate discount rate is an effective annual rate of 4%.

Accepted Answer

To find the current value of the four payments, we need to discount them at the effective annual rate of 4%. We can use the formula:

PV = FV / (1 + r)n

Where PV is the present value, FV is the future value, r is the effective annual rate, and n is the number of periods.

For the first payment, we have:

PV1 = 50,000 / (1 + 0.04)1 = 48,077.97

For the second payment, we have:

PV2 = 50,000 / (1 + 0.04)2 = 46,216.54

For the third payment, we have:

PV3 = 50,000 / (1 + 0.04)3 = 44,429.11

For the fourth payment, we have:

PV4 = 50,000 / (1 + 0.04)4 = 42,714.22

The current value of the four payments is the sum of the present values:

PV = PV1 + PV2 + PV3 + PV4 = 181,495.84

Therefore, the closest answer choice is C, $181,495.

Question 11

There are three factors that affect the present value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the present value of the annuity.

Accepted Answer

The answer of There are three factors that affect the...

Question 12

Joe, a freshman in college, needs $55,000 in 4 years to buy the car of his dreams. If his investments earn 6% interest per year, how much must he invest today to have that amount at graduation? If he invested once a year for four years beginning today until the end of the 4 years how much must he invest?

Accepted Answer

The answer of Joe, a freshman in college, needs $55,000...

Question 13

An annuity:

Accepted Answer

An annuity is a series of equal payments through time.

Question 14

The potential owner/managers of the yet to be formed new In-Line Blade Company are evaluating the prospects for the business. The new equipment is expected to be $5.5 million and have after tax cashflows of $400,000 for the first two years, $750,000 in the next two years, and $1,200,000 thereafter indefinitely. The owners estimate that they require a 15% rate of return. What is the value of the In-Line Blade Company; should they go forward with the investment?

Accepted Answer

The answer of The potential owner/managers of the yet to...

Question 15

As the winner of the Housecleaners sweepstakes, you are entitled to one of the following prizes:
A. $999,999 immediately.
B. $100,000 per year forever.
C. $180,000 per year for the next 10 years starting immediately.
D. $400,000 payable every 2 years over 20 years.
E. $39,000 next year growing by 6% forever.
In terms of present values, which prize should be chosen if r = 9%?

Accepted Answer

The answer of As the winner of the Housecleaners sweepstakes,...

Question 16

An investment today of $3300 is worth $10,000 in 8 years. At what rate has your investment been growing (annually) over the 8 years?

Accepted Answer

The answer of An investment today of $3300 is worth...

Question 17

An annuity factor:

Accepted Answer

An annuity factor is a tool used to calculate the present value of a fixed stream of payments, so that they can be compared to other investments that might offer a different payment stream.

Question 18

Charles Carr borrowed $3,500 to consolidate his debts. Since Charles had an excellent credit rating, he was able to borrow at a 12% effective annual rate. Charles is required to make monthly payments. Charles will make equal payments for the next 36 months. Which one of the following values is closest to his monthly payments?

Accepted Answer

The answer of Charles Carr borrowed $3,500 to consolidate his...

Question 19

As an excellent student in environmental ecology you have been awarded the "Clean Effluent Prize" by state agency. You (or your estate) are to receive $300 forever from the state or the agency will allow you to choose $400 over the next 25 years. Payments are to be received semi-annually and if the market rate of interest is 6% what is the value of the two options respectively.

Accepted Answer

The answer of As an excellent student in environmental ecology...

Question 20

An S&L provides a loan with 15 yearly repayments of $8,000 with the first payment beginning immediately. Which of the following amounts comes closest to the present value of the loan if the interest rate is 7%?

Accepted Answer

We can solve this problem by using the present value formula for an annuity:

PV = PMT * [1 - (1+r)^(-n)] / r

Where PV is the present value, PMT is the payment, r is the interest rate, and n is the number of periods.

Plugging in the given values, we get:

PV = $8,000 * [1 - (1+0.07)^(-15)] / 0.07
PV = $77,964.08

Therefore, the closest amount is B) $77,964.

Quiz 5: The Time Value of Money