Decisions and the Timing of Cash Flows

a. You are considering entering into the following transactions. In determining your course of action, should you use the formulation for the present value or future value of the cash flows in arriving at a decision?

1. You wish to know how much money you must deposit now to have $20,000 for a down payment on a house five years from now.

2. You have received an investment from your aunt that will pay you $30,000 per year for each of the next 10 years. You would like to pay off college debts and want to know how much a banker would give you if you sold the rights to the payments to the bank.

3. You just deposited $5,000 in a three-year certificate of deposit and wish to know how much you will receive when it matures.

4. You have a loan that matures in six years and will require a payment of $17,000 at maturity. How much money would you need to set aside today to have sufficient cash to make the payment when it comes due?

5. You wish to deposit enough money currently to receive cash payments of $35,000 per year for the next 15 years.

6. You wish to determine how much money you would have to deposit each year to accumulate $500,000 by the time you retire at age 62.

7. You wish to know how the monthly car payments are determined when you purchase a new Corvette with a down payment of $1,500.

8. You are unable to pay off a loan of $10,000 that matures next month and want to know how much you will have to pay if you delay payment by one year and the bank charges you the existing consumer loan interest rate plus a penalty of 5 percent.

b. The present value or future value of a cash flow is based on the amount of cash to be received or paid, the number of periods during which interest is earned, and the relevant interest rate. Under normal circumstances:

1. Will the present value increase or decrease when the interest rate is increased?

2. Will the future value increase or decrease when the interest rate is increased?

3. Will the present value increase or decrease when the future payment amount is decreased?

4. Will the future value increase or decrease when the amount deposited today is decreased?

5. Will the present value of a single future payment increase or decrease when the number of periods is decreased?

6. Will the future value increase or decrease when the number of periods is increased?

7. How will the present value be affected by substituting a series of equal payments (annuity) of $1,000 at the end of each of five years in place of a single payment of $5,000 at the end of five years?