Deck 13: Time Value of Money

Question 1

If you put $500 into a savings account that pays simple interest of 8% per year and then withdraw the money two years later,you will earn interest of $80.

Answer 1

True

Question 2

LeAnn wishes to know how much she should set aside now at 7% interest in order to accumulate a sum of $5,000 in four years.She should use a table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Answer 2

B

Question 3

Reba wishes to know how much would be in her savings account in five years if she deposits a given sum in an account that earns 6% interest.She should use a table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Answer 3

A

Question 4

The time value of money is a concept,which means that the value of $1 increases over time.

Question 5

Present value indicates how much a present amount of money will grow to in the future.

Question 6

The value today of receiving an amount in the future is referred to as the:

A)Future value of a single amount.
B)Present value of a single amount.
C)Future value of an annuity.
D)Present value of an annuity.

Question 7

An annuity is a series of equal cash payments over equal time intervals.

Question 8

The present value of $1,000 received three years from today with a discount rate of 10% is less than the present value of a $500 annuity with the same discount rate over the same period.

Question 9

Compound interest is interest you earn on the initial investment and on previous interest.

Question 10

Future value is how much an amount today will grow to be in the future.

Question 11

The discount rate is the rate at which someone is willing to give up current dollars for future dollars.

Question 12

The value that an amount today will grow to in the future is referred to as the:

A)Future value of a single amount.
B)Present value of a single amount.
C)Future value of an annuity.
D)Present value of an annuity.

Question 13

The future value of $1,000 invested today for three years that earns 10% compounded annually is greater than the future value of a $500 annuity with the same interest rate over the same period.

Question 14

If you put $200 into a savings account that pays annual compound interest of 8% per year and then withdraw the money two years later,you will earn interest of $32.

Question 15

The more frequent the rate of compounding,the more interest that is earned on previous interest,resulting in a higher future value.

Question 16

If you put $300 into a savings account that pays annual compound interest of 10% per year and then withdraw the money two years later,you will earn interest of $63.

Question 17

If you put $600 into a savings account that pays simple interest of 10% per year and then withdraw the money two years later,you will earn interest of $126.

Question 18

The concept that interest causes the value of money received today to be greater than the value of that same amount of money received in the future is referred to as the:

A)Monetary unit assumption.
B)Historical cost principle.
C)Time value of money.
D)Matching principle.

Question 19

The value of $1 today is worth more than $1 one year from now.

Question 20

Simple interest is interest earned on the initial investment only.

Question 21

Carol wants to invest money in a 6% CD that compounds semiannually.Carol would like the account to have a balance of $50,000 five years from now.How much must Carol deposit to accomplish her goal?

A)$35,069.
B)$43,131.
C)$37,205.
D)$35,000.

Question 22

Below are excerpts from interest tables for 8% interest.
Column 3 is an interest table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Question 23

How much will $5,000 invested at the end of each year grow to in six years,assuming an interest rate of 7% compounded annually?

A)$35,766.
B)$26,813.
C)$23,833.
D)$7,504.

Question 24

Bill wants to give Maria a $500,000 gift in seven years.If money is worth 6% compounded semiannually,what is Maria's gift worth today?

A)$66,110.
B)$81,310.
C)$406,550.
D)$330,560.

Question 25

Shane wants to invest money in a 6% CD that compounds semiannually.Shane would like the account to have a balance of $100,000 four years from now.How much must Shane deposit to accomplish his goal?

A)$88,848.
B)$78,941.
C)$25,336.
D)$22,510.

Question 26

Today,Thomas deposited $100,000 in a three-year,12% CD that compounds quarterly.What is the maturity value of the CD?

A)$109,270.
B)$119,410.
C)$142,576.
D)$309,090.

Question 27

Davenport Inc.offers a new employee a lump-sum signing bonus at the date of employment.Alternatively,the employee can take $30,000 at the date of employment and another $50,000 two years later.Assuming the employee's time value of money is 8% annually,what lump-sum at employment date would make her indifferent between the two options?

A)$60,000.
B)$62,867.
C)$72,867.
D)$80,000.

Question 28

How much will $8,000 grow to in five years,assuming an interest rate of 8% compounded quarterly?

A)$10,989.
B)$11,755.
C)$11,888.
D)$12,013.

Question 29

How much will $1,000 invested at the end of each year grow to in 20 years,assuming an interest rate of 10% compounded annually?

A)$6,728.
B)$8,514.
C)$83,159.
D)$57,275.

Question 30

What is the value today of receiving $2,500 at the end of three years,assuming an interest rate of 9% compounded annually?

A)$1,984.
B)$1,930.
C)$2,104.
D)$3,238.

Question 31

A series of equal periodic payments is referred to as:

A)The time value of money.
B)An annuity.
C)The future value.
D)Interest.

Question 32

At the end of the next four years,a new machine is expected to generate net cash flows of $8,000,$12,000,$10,000,and $15,000,respectively.What are the cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

A)$41,557.
B)$47,700.
C)$32,403.
D)$38,108.

Question 33

What is the value today of receiving $5,000 at the end of six years,assuming an interest rate of 8% compounded semiannually?

A)$3,151.
B)$3,203.
C)$3,428.
D)$3,123.

Question 34

How much will $25,000 grow to in seven years,assuming an interest rate of 12% compounded annually?

A)$55,267.
B)$46,000.
C)$61,899.
D)$52,344.

Question 35

The value that a series of equal payments will grow to in the future is referred to as the:

A)Future value of a single amount.
B)Present value of a single amount.
C)Future value of an annuity.
D)Present value of an annuity.

Question 36

The value today of receiving a series of equal payments in the future is referred to as the:

A)Future value of a single amount.
B)Present value of a single amount.
C)Future value of an annuity.
D)Present value of an annuity.

Question 37

Samuel is trying to determine what it's worth today to receive $10,000 in four years at a 7% interest rate.He should use a table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Question 38

Below are excerpts from interest tables for 8% interest.
Column 2 is an interest table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Question 39

Monica wants to sell her share of an investment to Barney for $50,000 in three years.If money is worth 6% compounded semiannually,what would Monica accept today?

A)$8,375.
B)$41,874.
C)$11,941.
D)$41,000.

Question 40

How much must be invested now at 9% interest to accumulate to $10,000 in five years?

A)$9,176.
B)$6,499.
C)$5,500.
D)$5,960.

Question 41

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

Question 42

Below are excerpts from interest tables for 8% interest.
Column 1 is an interest table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Question 43

Below are excerpts from interest tables for 8% interest.
Column 4 is an interest table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Question 44

Quaker State Inc.offers a new employee a lump-sum signing bonus at the date of employment.Alternatively,the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service.Assuming the employee's time value of money is 10% annually,what lump-sum at employment date would make him indifferent between the two options?

A)$23,026.
B)$57,737.
C)$62,711.
D)None of the above is correct.

Question 45

Touche Manufacturing is considering a rearrangement of its manufacturing operations.A consultant estimates that the rearrangement should result in after-tax cash savings of $6,000 the first year,$10,000 for the next two years,and $12,000 for the next two years.Assuming a 12% discount rate,calculate the total present value of the cash flows.

Question 46

George Jones is planning on a cruise for his 70th birthday party.He wants to know how much he should set aside at the end of each month at 6% interest to accumulate the sum of $4,800 in five years.He should use a table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Question 47

What is the value today of receiving five annual payments of $500,000,beginning one year from now,assuming an 11% discount rate?

A)$2,500,000.
B)$2,225,000.
C)$1,847,950.
D)$2,115,270.

Question 48

What is the value today of receiving $3,000 at the end of each year for the next three years,assuming an interest rate of 3% compounded annually?

A)$8,486.
B)$8,251.
C)$9,000.
D)$9,273.

Question 49

Miller borrows $300,000 to be paid off in three years.The loan payments are semiannual with the first payment due in six months,and interest is at 6%.What is the amount of each payment?

A)$55,379.
B)$106,059.
C)$30,138.
D)$60,276.

Question 50

At the end of each quarter,Patti deposits $500 into an account that pays 12% interest compounded quarterly.How much will Patti have in the account in three years?

A)$7,096.
B)$7,013.
C)$7,129.
D)$8,880.

Question 51

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments,which will be made at the end of the month,with interest of 12% on the unpaid balance.She should use a table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Question 52

Compute the future value of the following invested amounts at the specified periods and interest rates.

Question 53

Compute the present value of the following single amounts to be received at the end of the specified period at the given interest rate.

Question 54

Michaela would like to have $10,000 for a European vacation in four years.Currently,she has saved $8,000.If she puts $8,000 in an account that earns 6% interest,compounded annually,will she be able to take the vacation in four years?

Question 55

Sandra won $5,000,000 in the state lottery,which she has elected to receive at the end of each month over the next thirty years.She will receive 7% interest on unpaid amounts.To determine the amount of her monthly check,she should use a table for the:

A)Future value of $1.
B)Present value of $1.
C)Future value of an annuity of $1.
D)Present value of an annuity of $1.

Question 56

What is the value today of receiving $5,000 at the end of each year for the next 10 years,assuming an interest rate of 12% compounded annually?

A)$87,744.
B)$28,251.
C)$50,000.
D)$15,529.

Question 57

Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years,starting at the end of the first year.The value of this signing bonus is:

A)The present value of the annuity.
B)The future value of the annuity.
C)$20 million.
D)$0 because no cash is owed immediately.

Question 58

If you had an investment opportunity that promises to pay you $20,000 in three years and you could earn a 10% annual return investing your money elsewhere,what is the most you should be willing to invest today in this opportunity?

Question 59

Claudine Corporation will deposit $5,000 into a money market account at the end of each year for the next five years.How much will accumulate by the end of the fifth and final payment if the account earns 9% interest?

A)$32,617.
B)$29,924.
C)$27,250.
D)$26,800.

Question 60

Anthony would like to have $18,000 to buy a new car in three years.Currently,he has saved $15,000.If he puts $15,000 in an account that earns 6% interest,compounded annually,will he be able to buy the car in three years?

Question 61

Two banks each have stated CD rates of 12%.Bank A compounds quarterly and Bank B compounds semiannually.Explain which bank offers the better CD.

Question 62

DON Corp.is contemplating the purchase of a machine that will produce net after-tax cash savings of $20,000 per year for 5 years.At the end of five years,the machine can be sold to realize after-tax cash flows of $5,000.Assuming a 12% discount rate,calculate the total present value of the cash savings.

Question 63

Which three factors are necessary in calculating the present value of a single amount?

Question 64

Samson Inc.is contemplating the purchase of a machine that will provide it with net after-tax cash savings of $100,000 per year for 8 years.Assuming a 10% discount rate,calculate the present value of the cash savings.

Question 65

Dobson Contractors is considering buying equipment at a cost of $75,000.The equipment is expected to generate cash flows of $15,000 per year for eight years and can be sold at the end of eight years for $5,000.The discount rate is 12%.Assume the equipment would be paid for on the first day of year one,but that all other cash flows occur at the end of the year.Ignore income tax considerations.Determine if Dobson should purchase the machine.

Question 66

Hillsdale is considering two options for comparable computer software.Option A will cost $25,000 plus annual license renewals of $1,000 for three years,which includes technical support.Option B will cost $20,000 with technical support being an add-on charge.The estimated cost of technical support is $4,000 the first year,$3,000 the second year,and $2,000 the third year.Assume the software is purchased and paid for at the beginning of year one,but that technical support is paid for at the end of each year.The discount rate is 8%.Ignore income taxes.Determine which option should be chosen based on present value considerations.

Question 67

What is the relationship between the present value of a single amount and the present value of an annuity?

Question 68

Briefly describe the difference between simple interest and compound interest.

Question 69

Baird Bros.Construction is considering the purchase of a machine at a cost of $125,000.The machine is expected to generate cash flows of $20,000 per year for ten years and can be sold at the end of ten years for $10,000.The discount rate is 10%.Assume the machine would be paid for on the first day of year one,but that all other cash flows occur at the end of the year.Ignore income tax considerations.Determine if Baird should purchase the machine.

Question 70

Incognito Company is contemplating the purchase of a machine that provides it with net after-tax cash savings of $80,000 per year for 5 years.Assuming an 8% discount rate,calculate the present value of the cash savings.

Question 71

Price Mart is considering outsourcing its billing operations.A consultant estimates that outsourcing should result in after-tax cash savings of $9,000 the first year,$15,000 for the next two years,and $18,000 for the next two years.Assuming a 12% discount rate,calculate the total present value of the cash flows.

Question 72

Explain the difference between present value and future value.

Question 73

Briefly explain why the value of $100 received today is greater than the value of $100 received one year from now.