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##### Time Value of Money

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**Question**

You purchase a bond for $25,000 which you plan to hold until it matures in 5 years. It pays 2% simple interest per year. How much interest will you earn on your investment if you hold it as planned.;2. To improve your earnings from the investment in question #1 you invest each year?s interest (which is paid at the end of the year) in a money market fund that pays 1.5% compound interest per year. You do this until the bond matures in the BEGINNING of year 10. What will you earn if you do this?;3. Your firm must replace its delivery truck so you purchase one for $42,500. You finance it for 5 years at 2.95% per year and make equal monthly payments each month for the 5 years (60 months). Assuming you finance the entire amount how much will you have paid for the truck?;4. When shopping to replace the delivery truck in the last question you found a competing dealer who offered this choice: Option A. Get $3000 ?cash back,? then pay the balance in 5 annual payments at 2.5%, Option B. Pay the full price in 5 annual installments at no (0%) interest. Which is the better deal, that is, under which deal will you pay less? How much more or less does the better option cost compared to the answer in question 3 once all payments are made?;5. Your firm purchases a piece of property for $515,000. Historically, nearby property in the neighborhood has appreciated in value about 1.5% per year. Assuming you can rely on this historic appreciation what will the property be worth at the end of 20 years?;6. In doing some retirement planning you determined that you want to save $25,000 each year until you retire. You plan to invest it in a ?guaranteed return mutual fund? which pays compound interest at 3% per year, you plan to keep it invested there until you retire in 30 years. What will the investment be worth then?;7. Your firm must replace its packaging machine after its useful life of 10 years passes and depreciation can no longer be claimed on it. The estimated replacement cost is $5,550,123. How much must the company save/invest each year at 2% to accumulate enough to replace the machine?;8. If the interest rate increased to 5% and the firm from question 7 determined it could only invest $235,000 per year, how long would it take to accumulate $5,550,123 to replace its packaging machine? If they needed to get this done within a 10-year period, could they do it under these circumstances?;9. You are offered two investments for the firm?s ?retained earnings? ($4,238,000). You are looking for good ways to invest the firm?s hard earned money. Which option will give you a better return on and of investment (two ROIs)?;? Option A- which pays out at 4% simple interest for five years;? Option B- which pays out at 2% compound interest for four years;10. Increasing the number of periods could impact all of the following except;a. Present value of an annuity;b. Present value of $1;c. Future value of an annuity;d. Future value of $1

Paper#77201 | Written in 18-Jul-2015

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