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Time Value of Money and Investment

1. Use the information for the question(s) below.

Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $150,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $50,000 in three years. The current market rate of interest for Joe is 6%.Suppose a second entrepreneur approaches Joe and offers him $284,000 today for the business.

Should Joe accept the new entrepreneur's offer or stick with the original offer of $150,000 and the series of payments over three years? Why?

Use the table for the question(s) below.

Year A B
0 $150 $150
1 40 100
2 80 80
3 100 40

2. If the interest rate is 10%, then which investment(s), if any, would you take and why?

Use the information for the question(s) below:

3. Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. Assuming that costs continue to increase an average of 4% per year, tuition and other costs for one year for this student in 18 years when she enters college will be closest to:
A) $12,500
B) $21,500
C) $320,568
D) $25,323

4. Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:
A) $97,110
B) $107,532
C) $101,291
D) $50,000

5. If the current rate of interest is 8%, then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:
A) $18,519
B) $45,761
C)$9,818
D) $20,000

6. Assume that you are 40 years old today, and that you are planning on retirement at age 65. Your current salary is $55,000 and you expect your salary to increase at a rate of 6% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 41st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 7%. The future value at retirement (age 65) of your savings is:

7. Assume that you are 40 years old today, and that you are planning on retiring at age 65. Your current salary is $55,000 and you expect your salary to increase at a rate of 6% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 41st birthday and will be 8% of this year's salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. At retirement (age 65) you will begin withdrawing equal annual payments to pay for your living expenses during retirement (on your 65th birthday). If you expect to die one day before your 99 th birthday (Your last withdraw will be on your 98th birthday) and if the annual rate of return is 7%, then how much money will you have to spend in each of your golden years of retirement?

8. Suppose that you are considering an investment that will pay you $4000 per year for the next five years. The appropriate rate of interest is 5%. You want to know the present value of the cash flows from this investment. To solve this problem in Microsoft Excel, you would use which of the following excel formulas?
A)=PV(.05,5,4000,0,0)
B) =PV(.05,5,4000,0,1)
C) =PV(5,.05,4000,0)
D) =PV(5,5,4000,0)

9. Suppose that you deposit $10,000 in an account that pays 6% interest and you want to know how much will be in your account at the end of 10 years. To solve this problem in Microsoft Excel, you would use which of the following Excel formulas?
A) =FV(.06,10000,0,10)
B) =PV(.06,10000,0,10)
C) =FV(.06,10,0,10000)
D) =PV(.06,10,0,10000)

10. You are interested in purchasing a new automobile that costs $35,000. The dealership offers you a special financing rate of 6% APR (0.5%) per month for 48 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to:
A) $729
B) $822
C) $842
D) $647

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The solution explains some questions relating to time value of money

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