et as default + T A) Read aloudy Application Exercises 1. Which is better, a present value of $100 or a future value of $100? Please explain. 2. Define and explain two factors that affect the present value of an asset. 3. In five years, what is the future value of $4,000 if the interest rate is 10% and money is compounded monthly? What is the future value if money is compounded semiannually? 4. Clark has an investment proposal that invites him to invest $1,000 a year for ten years in a hotel and promises to pay him a return of 11% per year. If Clark agrees, how much will his investment be worth at the end of ten years? 5. What is the maximum amount of money you should pay for an investment today that is projected to yield $8,000 in four years if the market rate of interest is 12% and the money is compounded semiannually? What would be the present value if the money is com- pounded monthly? CONCEPT OF TIME VALUE OF MONEY 217 6. Milton is trying to convince you to invest in his restaurant deal and make ten annual pay. ments of $500, with the first payment due today. If the market rate of interest is 6%, how much will this investment be worth at the end of ten years? 7. An investment banker is offering a fixed-income investment that guarantees an 8% interest rate. It requires you to make monthly payments, with the first payment due today. If your goal is to have $10,000 in ten years, how much would you need to invest monthly to reach your goal? If you made annual payments with the first payment due today, what would your annual payment need to be for this investment to be worth $10,000 at the end of the ten- year period? 8. Your restaurant needs some kitchen remodeling, and the proposal for a new dishwasher is $55,000. Your banker will make you a loan at 8% interest compounded monthly over the next five years. What would be your monthly debt service payment to the bank? If your banker required a 10% down payment, how would this affect your monthly payment to the bank? 9. How much would you pay for an investment that promises you $1,500 each year for ten years if the going interest rate in the market is at 6.5%? 10. ETHICS * Joseph just finished talking to five different bankers regarding a loan for his limited-service hotel. He needs $100,000 for a renovation project. However, with his current credit rating, he can only secure a loan of $75,000. Knowing that he has future contracts coming in with a few long-time corporate customers, he hopes he will be able to achieve higher sales next year. With that in mind, he is thinking about increasing his sales numbers to make his cash flow look better. Of course, in time value of money calculations, higher cash flows yield a higher present value, which would allow him to borrow more money. Is Joseph right in doing this
