TIME VALUE OF MONEY

If you deposit $25,000 today in a Certificate of Deposit and earn 1.2% annual interest, how much will you have in 7 years? The range is between $20,000 and $35,000

Dionne expects to receive a graduation gift of $10,000 from her parents in 4 years. If the discount rate is 3.4%, what is the gift worth today? The range is between $6,000 and $12,000

June received a life insurance payout from her grandmother in the form of an annuity. She will get $25,000 per year for the next 30 years. How much is that worth today if the current long term interest rate is 2.5%? This is an ordinary annuity. The range is between $400,000 and $700,000

If Interest rates rise to 5%, what will be the value today of the annuity in 2? Explain what you learned from the change from Problem 2.

Vinod deposits $30,000 into an IRA account that invests in long term U S Treasury Bonds. Interest rates for the 20 year bond are 2.5%. How long will it take to double Vinod's money? The range is between 20 and 32 years.

How lYou calculate long will it take Vinod to double his money at 7.5%? You calculate

The Woods want to borrow $240,000 to buy a house. The current annual mortgage interest rate is 3.75%. What will their monthly payment be for a 30 year loan that has equal monthly payments. They will owe zero at the end of the mortgage. The range is between $800 and $1,500.

Kim retired after 30 years in 2016 from the Monsanto company. She had paid $400 per month into her 401K retirement plan. When she retired the balance in her account was $873,000. What average annual rate of interest had she earned over the 30 years, assuming monthly compounding? The range is between 7% and 13%.

For the year that ended in January 2000, Wal-Mart had revenues of $165 billion. For the year ended in January 2016, it had revenues of $482 billion. What has been the average compound growth rate over these sixteen years? The range is between 5% and 10%

Mrs. Woods sees an advertisement for a 15 year loan at a rate of 2.5%. What would be the mortgage payment if they borrow $240,000 at this lower interest rate? What are the advantages or disadvantages of this loan compared to the loan in Problem 5 above? The range is between $800 and $1,800.

Bola has accumulated $30,000 in her thrift savings plan at her job at the Federal Aviation Administration as of May 2016. The government puts in 1% of her pay and matches up to another 4% if she puts in 5% out of her pay. Bola earns $90,000 a year and plans to add 5% from her income plus the agency 5% for a total of $9,000 per year. Her cousin Eugene says that if she invests in stocks, she can earn 12% per year because that has been the long term history. How much will she have in 25 years at retirement if she can earn 12% per year compounded annually? Assume annual compounding foe ease of calculation. The range is between $1,000,000 and $2,000,000.

Bola's friend Marshall heard a speech by John C. (Jack) Bogle, founder of The Vanguard Group of Mutual Funds, one of the lowest cost and most successful group of funds. Jack said that with the increasing need to reduce carbon emissions, it is unlikely that long term stock returns can exceed 6% per year. Steps to reduce carbon will likely reduce prospects for economic growth in Mr. Bogle's opinion. How much will Bola have if Jack Bogle is correct and the earnings will be 6% per year compounded annually? What does this tell about the effect of the rate on the amount of money accumulated for retirement? Note: Thrift savings may be invested in a number of choices including the G fund, a portfolio of U S Government Bonds that pays 1.75% as of May 2016.

Christina hopes to open a Deli in 2015. The initial investment will be $85,000. She expects that that the Deli will generate the positive cash flow as indicated below. If she can borrow money at 7% per year, what will be the Net Present Value? Use 7% as the discount rate.

Christina hopes to open a Deli in 2016. The initial investment will be $75,000. She expects that the Deli will generate the positive cash flow as indicated below. If she can borrow money at 7% per year, what will be the Net Present Value? Use 7% as the discount rate.

James and Corrine are considering what to do about purchasing a new car. They plan to acquire a new 2016 Toyota Highlander. The dealer has quotes a price of $40,000 with the options they want. They have choices: Lease, Buy with a zero interest loan from the dealer, and buy with a $2,000 rebate and borrow the money from the credit union. A. Lease: With an initial payment of $3,300, due at signing, they can lease the car for 3 years at $324 per month. At the end they have the option to purchase the car for $30,000. The cost of tags and sale tax is covered by the dealer. B. Zero Interest: If they decide to buy, they have the option of a zero interest loan for 3 years. C. $2,000 Rebate: If the decide to take the rebate, the loan from the credit union has an annual rate of 6% for 5 years. In both cases of purchase, the cost of sales tax and license tags total $3,300. They plan to keep the car for 12 years. Which option has the lowest present value cost? They decided to use 6% as the discount rate.

Convert the 6% annual discount rate to a monthly rate and find the present Value of the lease option. The $3,300 up-front fee includes the $3,300 for tax and tags.

The range is between $30,000 and $45,000.

Create a cash flow time line for the purchase with a 3 year, zero Interest Loan. Don't forget the $3,300 for tax and tags.

Calculate the Present Value of the purchase of the car with the zero interest loan with the monthly equivalent of the 6% discount rate

If James and Corrine, take the rebate of $2,000, they will have a loan of $38,000. Calculate the payment for a loan of $38,000 at 6% interest for 5 years. The rebate of $2,000 is used to reduce the amount of the loan. James and Corrine must still pay the $3,300 for tax and tags in period zero

Create a cash flow time line for the purchase with a $2,000 rebate, a 5 year loan of $38,000 at 6% Interest. Note: the loan value is the $40,000 price minus the $2,000 rebate. Don't forget the $3,300 for tax and tags in period zero.

Calculate the Present Value of the purchase of the car with the $2,000 rebate and a 6% loan.

What should James and Corrine do? Why?

Kim's niece, Janae just took a new job at Washington Adventist Hospital. She plans to contribute $600 per month to her IRA. The plan allows investment into a corporate bond fund that is currently earning 3.5% per year. How much should Janae expect to have when she retires in 30 years? Explain the difference with what Kim accumulated. The range is between $350,000 and $450,000.

Calculate the Monthly Payment for the 3 year, zero interest loan for $40,000. The range is between $700 and $1,500.

For this problem set, we are not going to give you the exact answer but a range within which the correct answer can be found. For example, if the problem was “How much is 20 plus 50?” we would say, “The correct answer is between 65 and 75” and you would need to specify the exact answer of “70.”