Time Value of Money
1. Alexis Mantle recently won a lottery and has the option of receiving one of the following three prizes: (1) $64,000 cash immediately, (2) $20,000 cash immediately and six-period annuity of $8,000 beginning one year from today, or (3) a six-period annuity of $13,000 beginning one year from today. Assuming an interest rate of 6%, which option should Alex choose?
2. The Maris Corporation wants to accumulate a sum of money to repay certain debts due on December 31, 2015. Maris will make annual deposits of $100,000 into a special bank account at the end of each of 10 years beginning December 31, 2006. Assuming the bank account pays 8% interest compounded semiannually, what will be the fund balance after the last payment is made on December 31, 2015?
3. Don Larsen purchased a new automobile for $20,000. Don made a cash down payment of $5,000 and agreed to pay the remaining balance in 30 monthly installments, beginning one month from the date of purchase. Financing is available at a 24% annual interest rate. Calculate the amount of the required monthly payment.
4. Mays Warehouse borrowed $100,000 from a bank and signed a note requiring 20 annual payments of $13,388 beginning one year from the date of the agreement. Determine the interest rate implicit in this agreement.
5. On September 30, 2006, the Roberto Clemente Corporation issued 8% stated rate bonds with a face amount of $300 million. The bonds mature on September 30, 2006 (20 years). The market rate of interest for similar bonds was 10%. Interest is paid semiannually on March 31 and September 30. Determine the price of the bonds on September 30, 2006.
6. On June 30, 2006, the Campanella Company purchased equipment from Alston Corp. Campanella agreed to pay Alston $10,000 on the purchase date and the balance in five annual installments of $8,000 on each June 30 beginning June 30, 2007. Assuming that an interest rate of 10% property reflects the time value of money in this situation, at what amount should Campanella value the equipment?
7. Reese needs to accumulate sufficient funds to pay a $400,000 debt that comes due on December 31, 2011. The company will accumulate the funds by making 5 equal annual deposits to an account paying 6% interest compounded annually. Determine the required annual deposit if the first deposit is made today, December 31, 2006.
8. On January 1, 2006 Sal Maglio leased on office building. Terms of the lease require Maglio to make 20 annual lease payments of $120,000 beginning on January 1, 2006. A 10% interest rate is implicit in the lease agreement. At what amount should Maglio record the lease liability on January 1, 2006, before any lease payment is made?
9. Para Salin and her friends are planning a trip to Europe in a little over 3 years. In order to accumulate enough money for the trip, Para opens a savings account. Assuming an interest rate of 4%, compounded quarterly, how much will she accumulate in 3 years by depositing $500 at the end of each of the next 12 quarters, beginning three months from now.
10. John Smith is 55 years old and has been asked to accept early retirement from his company. The company has offered John three alternative compensation packages. Which alternative should John choose assuming he is able to invest funds at a 7% rate?
a) $180,000 cash to be paid immediately.
b) A 20-year annuity of $16,000 beginning immediately.
c) A 10-year annuity of $50,000 beginning at age 65
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The solution explains various questions relating to time value of money
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