PRESENT VALUE 9 1 point P4-12 a 209 Type your answer... CHAPTER 4 Time Value of Money 10 1 point P4-12 Present value concept Answer each the following questions. a. What single investment made today, warning 12% annual interest, will be worth $6,000 at the end of 6 years? b. What is the present value of $6,000 to be received at the end of 6 years if the discount rate is 12%? c. What is the most you would pay today for a promise to repay you $6,000 at the end of 6 years if your opportunity cost is 12%? d. Compare, contrast, and discuss your findings in parts a through c. P4-13 Type your answer... PERSONAL FINANCE PROBLEM P4-13 Time value Jim Nance has been offered a future payment of $500 three years from today. If his opportunity cost is 7% compounded annually, what value should he place on this opportunity today? What is the most he should pay to purchase this payment today! 11 1 point P4-15 a 1 Type your answer... P4-14 Time value An lowa state savings bond can be converted to $100 at maturity 6 years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 8% annual interest (compounded annually), at what price must the state sell its bonds? Assume no cash payments on savings bonds prior to redemption. 12 1 point P4-15 a 2 Type your answer... PERSONAL FINANCE PROBLEM P4-15 Time value and discount rates You just won a lottery that promises to pay you $1,000,000 exactly 10 years from today. Because the $1,000,000 payment is guaran- teed by the state in which you live, opportunities exist to sell the claim today for an immediate single cash payment. a. What is the least you will sell your claim for if you can earn the following rates of return on similar-risk investments during the 10-year period? (1) 6% (2) 9% (3) 12% b. Rework part a under the assumption that the $1,000,000 payment will be received in 15 rather than 10 years. c. On the basis of your findings in parts a and b, discuss the effect of both the size of the rate of return and the time until receipt of payment on the present value of a future sum. 13 1 point P4-15 a3 Type your answer... PERSONAL FINANCE PROBLEM P4-16 Time value comparisons of single amounts In exchange for a $20,000 payment today, a well-known company will allow you to choose one of the alternatives shown in the following table. Your opportunity cost is 11%. 14 1 point Alternative Single amount A $28,500 at end of 3 years $54,000 at end of 9 years Calculate the amount today if the interest is 5% and it will be received in 15 years. Type your