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Time Value of Money
One hundred dollars today is not necessarily $100 in the future when one invests in an interest-bearing account that grows in value over time. This is because of a very important financial concept called the time value of money. To determine what your investment is worth at a particular time in the future, you can use the future value formula. 1. Your grandmother put $2000 in an account that pays 5% interest rate on the day when you were born. You are now 18 years old. a) How much money do you have in your account now? b) How much money do you have in your account if you have left the money there for 25 years? c) What if you left the money until your 65th birthday? d) What happens if she has put the money into an account that earns 6% interest rate. How much money do you have in your account after 18, 25 and 65 years? Use the information above to explain how even a slight change in the interest rate can make a significant difference in accumulating savings over the long run. (use vocabulary: compound interest, time period)
Suppose the Texas lottery advertises that it pays its winner $10 million. However, this prize money is paid at the rate of $500,000 each year (with the first payment being immediate) for a total of 20 payments. What is the present value of this prize..
Pierre Imports is evaluating the proposed acquisition of new equipment at a cost of $90,000. In addition the equipment would require modifications at a cost of $10,000 plus shipping costs of $2,000. What is the cash outflow at Time 0?
If you invest $ 1,000 today in a security paying 8 percent compounded quarterly, how much will the investment be worth seven years from today?
You recently won the lottery for $100,000,000 and found out that they will pay you $5,000,000 per year for 20 years. Assume that the payments will be made to a tax shelter that you had previously set up and that no income taxes will be payable. If th..
Suppose that bond traders expect an increase in the federal funds rate, but the FOMC surprises them by keeping it constant. - What happens to longer-term rates?
KL Airlines paid an annual dividend of $1.42 a share last month. The company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3 years, respectively. After that, the dividend will be constant at $2 per share per year. What is the ma..
Suppose that Son of Son of Unkempt Inc. common stock will pay an annual dividend next year of $14.05, has net income of $562 million, is keeping back $178 in retained earnings, has common book value of $9,289 million, what would the common stock be w..
Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2,220,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worth..
Assume the following ratios are constant: Total asset turnover 3.40 Profit margin 6.3 % Equity multiplier 1.50 Payout ratio 30 % What is the sustainable growth rate? (Do not round intermediate calculations and enter your answer as a percent rounded t..
There’s a lady that enjoys making crafts. Another lady has admired her work and has asked her to make 100 identical items for her upcoming wedding. Item Time to Create 1 20 minutes 3 10 minutes 6 6.5 minutes The lady would like to earn $15.00 per ho..
The implementation of capital budgeting projects that have a rate of return higher than the firm's "weighted average cost of capital" will decrease the value of the firm.
You have located the following information on Webb’s Heating & Air Conditioning: debt ratio is 54 percent, capital intensity is 1.10 times, profit margin is 12.5 percent, and the dividend payout is 25 percent. Calculate the sustainable growth rate fo..
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