TVM Practice Questions If you deposit $2,000 into a bank account that pays 6% in
ID: 2617450 • Letter: T
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TVM Practice Questions If you deposit $2,000 into a bank account that pays 6% interest annually, how much will be in your account after 5 years? What's the future value of a 596, 5-year ordinary annuity that pays $800 each year? If this was an annuity due, what would its future value be? Consider the following time line and answer the questions below I. 2. 3. Stream A $0 $150 $450 $450 $450 $250 Stream B S0 $250 $450 450 $150 Find the present value of the following cash flow streams at a 5% discount rate. Find the present value of the following cash flow streams at a 0% discount rate. a. b. 4- A rookie quarterback is negotiating his first NFL contract. His opportunity cost is 7%. He has been offered three possible 4-year contracts. Payments are guaranteed, and they would be made at the end of the year. Terms of each contract are as follows (in millions): Contract 1 53 Contract 2 $2 Contract 3 $7 $3 S3 $1 53 $4.5 $1 5.5 S1 As his advisor, which contract would you recommend he accept? Your father is 50 years old and will retire in 10 years. He expects to live for 25 years after he retires, until he is 85. He wants a fixed retirement income that has the same purchasing power at the time he retires as $50,000 has today. (The real value of his income of his retirement will decline annually after he retires.) His retirement income will begin the day he retires, 10 years from today, at which time he will receive 24 additional annual payments Annual inflation is expected to be 4%. He currently has $90,000 saved, and he expects to earn 8% annually on his savings. How much must he save during each ofthe next 10 years (end of year deposits) to meet his retirement goal 5. a. b. c. Determine the annuity payment. Calculate the present value of the annuity stream. Calculate the payments needed over the next 10 years to fund that annuity present value-recognizing that he already has $90,000 saved.Explanation / Answer
QUESTION 1 deposit (pv) 2000 int (i) 6.00% n= number of years 5 find FV FV= PV(1+i)^n FV= 2000(1.06)^5 Answer > FV= $2,676.45 QUESTION 2 int (i) 5.00% n= number of years 5 PMT = 800 find FV FV(C11;C12;-C13;0) FV(rate,nper,-pmt,pv,type) $4,420.51 if annuity due- fv= FV(C11;C12;-C13;0;1) FV(rate,nper,-pmt,pv,type) $4,641.53 QUESTION 3 A. 1/(1.05)^N) YEAR STREAM A STREAM B PV FACTOR @5% STREAM A PV STREAM B PV 0 $0.00 $0.00 1 $0.00 $0.00 1 $150.00 $250.00 0.9523809524 $142.86 $238.10 2 $450.00 $450.00 0.9070294785 $408.16 $408.16 3 $450.00 $450.00 0.8638375985 $388.73 $388.73 4 $450.00 $450.00 0.8227024748 $370.22 $370.22 5 $250.00 $150.00 0.7835261665 $195.88 $117.53 PV AT 5% $1,505.84 $1,522.73 B. (1/(1)^N) YEAR STREAM A STREAM B PV FACTOR @0% STREAM A PV STREAM B PV 0 $0.00 $0.00 1 $0.00 $0.00 1 $150.00 $250.00 1 $150.00 $250.00 2 $450.00 $450.00 1 $450.00 $450.00 3 $450.00 $450.00 1 $450.00 $450.00 4 $450.00 $450.00 1 $450.00 $450.00 5 $250.00 $150.00 1 $250.00 $150.00 PV AT 0% $1,750.00 $1,750.00 QUESTION 4 (1/(1.07)^N) (1/(1.07)^N) (1/(1.07)^N) YEAR CONTRACT 1 PV FACTOR @7% PV = PV FACTOR * CONTRACT 1 CONTRACT 2 PV FACTOR @7% PV = PV FACTOR * CONTRACT 2 CONTRACT 3 PV FACTOR @7% PV = PV FACTOR * CONTRACT 3 1 3 0.9345794393 2.8037383178 2 0.9345794393 1.8691588785 7 0.9345794393 6.5420560748 2 3 0.8734387283 2.6203161848 3 0.8734387283 2.6203161848 1 0.8734387283 0.8734387283 3 3 0.8162978769 2.4488936307 4.5 0.8162978769 3.673340446 1 0.8162978769 0.8162978769 4 3 0.762895212 2.2886856361 5.5 0.762895212 4.1959236663 1 0.762895212 0.762895212 TOTAL 10.1616337694 12.3587391756 8.994687892 ANSWER – CONTRACT 2 SHALL BE ACCEPTED AS IT HAS THE HIGHEST PV
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