Time Value of Money

Question Set# 2

1. A vintner is considering the purchase of 20 acres of land for wine making. It will produce $1,000 per year indefinitely.

If the vintner requires a return of 10% on his investments, what is the

most he would be willing to pay for the land?

2. You have savings amounting to $1,200 (CF0) and you expect to save an additional $800 next year. You need your savings to pay for your tuition fees of $800 in 2 years and $1,000 in 3 years. What is the value of this cash flowtoday if your savings will earn 6%?

3. Your professor has taken $350,000 and put it into an account earning 8% annually. She plans to withdraw $3,500 a month and travel all over the world until the money runs out. How many years will it be before you see her again?

4. Your parents decide to give you $12,000 towards the down payment of your dream car. The car that you have chosen costs $40,000 (TTL). Your friendly banker approves your loan at 6 years, 8%. What is your monthly payment?

5. What will your amortization schedule be for the first six months on this car?

(From Problem #4).

Month	Payment	Interest	Principal	Principal Balance
1
2
3
4
5
6

6. If there are 40 more years before youll retire and you start saving $120 per month, how much will you have when you retire if money is worth 6% in your savings account?

7. If money is worth 8% compounded semi-annually, would it be to your advantage to pay off a current debt of $8,000 by paying the $8,000 now or $12,000 in 4 years?

8. If a car dealer quotes you 14% APR and you are going to make your monthly payments, what is the actual rate (effective rate) that you are paying?

9. What is better, $2,000 received today or $4,000 in 5 years if the discount rate is 14%?

10. You have an investment opportunity that promises to provide the following cash flow for the next 24 years at 8% interest. What is the present value of this cash flow?

Years

Cash Flow

1

200

2

400

3

600

4

300

5

500

6

500

7

500

8

500

9

500

Years

Cash Flow

10

500

11

500

12

500

13

500

14

500

15

500

16

500

17

500

18

500

Years

Cash Flow

19

500

20

500

21

500

22

400

23

300

24

600

=