You are thinking of buying a house for $150,000
Time Value Module
1. Today, you invest $1,000 in a mutual fund. If you earn 10% annually, how much will you have in the fund in 10 years?
2. You invest $1,000 in a mutual fund annually (end-of-year). If you earn 10% annually, how much will you have in the fund in 10 years?
3. Today, you invest $10,000 in a mutual fund. Starting in 12 months and every year for 10 years, you add $3,000 per year. If you earn 10% annually, how much will you have in the fund in 10 years?
4. You are considering buying a house for $150,000. You have a down payment of $30,000. Assume a 15 year, 6% mortgage, with monthly payments. How much will your mortgage payment equal?
5. If the house is worth $150,000, how much will it be worth in five years assuming a 4% annual appreciation rate?
6. What is your annualized return if you invest $10,000 now and receive $26,000 at the end of ten years?
7. You would like to buy a NEW Porsche 911 in five years. The Porsche with the features you want costs $90,000 today. You expect new models to increase at the rate of 6 percent annually. Realistically, you think you could afford one in five years (you want to pay cash). Ignore taxes. Assume b, c, and d below are unrelated.
a. What will a new Porsche cost in five years?
b. If you believe you can obtain a 5 percent annual return and you plan on investing equal lump sum payments once a year starting in 12 months, how much will you have to invest annually to reach your goal?
c. If you believe you can save $10,000 annually (starting in 12 months), what annual return will you have to earn in order to reach your goal?
d. If you believe you can save $20,000 annually and earn 7%, when will you be able to buy a Porsche? Assume the cost of the Porsche equals $120,440.30 at all times.
8. If the inflation rate is 8 percent per year for 5 years, determine how much purchasing power the dollar lost. Your answer should be given as a percentage. (difficult question)
9. Today, you figure you need $80,000 a year to live if you were going to retire today. If you are 40 and want to retire when you are 60, how much will you need at age 60 (first year only) if the inflation rate is 3 percent per year?
10. You have $25,000 invested in Sun Microsystems. You expect Sun to appreciate at 10% a year. You want to buy a new Ford SUV, current price $30,000. You expect the price of vehicles to increase at the rate of 3 percent. Will you have enough money to buy a new Ford SUV in five years?
11. You have a three year old son. You would like to pay for his first year of college 15 years from now. If tuition is $40,000 now and you expect it to go up at the rate of four percent, how much will the tuition be in 15 years? If you want to make the same annual (end of year) investment for the next 15 years to accomplish your goal, how much do you need to save annually if you assume an annual return of seven percent? How much will your son's tuition be in his second year?
12. You know that you will receive $500,000 when your grandmother dies. If inflation is expected to equal 4% annually and she dies in 15 years, what is the value of your inheritance in today’s dollars?
13. Your financial consultant told you should have $4,000,000 worth of investments by the time you retire in 35 years. If you have nothing saved right now and expect a 7 percent return, how much do you need to save annually (end-of-year, equal payments) to reach your goal?
14. Your financial consultant told you should have $4,000,000 worth of investments by the time you retire in 35 years. If you have nothing saved right now and expect a 7 percent return, how much do you need to save annually (end-of-year) to reach your goal? Assume each year you will be able to increase your savings by 5 percent.
15. Your brother told you that he will sell his Porsche to you at any time for $50,000. Right now, you have $10,000 and you expect you can obtain a 7 percent annual return. When will you be able to buy the Porsche?
16. You would like to buy a used cigarette boat in four years. The boat with the condition you want costs $80,000 today. You expect boats in similar condition to appreciate at the rate of 4 percent annually. You plan on paying cash. How much do you expect to pay for the boat in four years?
17. If you die today, you would like your life insurance to pay for your daughter’s first year of college. Your daughter is two year’s old, so the tuition payment will be due in 16 years. You estimate the first year college costs will be $100,000. If you expect an average annual return of 7 percent, how much life insurance would you need today to pay for your daughter’s first year of college?
18. Your parents tell you they are willing to give you $10,000 in four years. However, you would like the equivalent in today’s dollars. Assuming an inflation rate of 3 percent, how much should your parents give you today?
19. Develop and answer your own time value problem.
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