Deck 27: the Time Value of Money: Future Amounts and Present Values

Question 1

Discounting a future amount of a cash receipt will determine the present value of that receipt.

Answer 1

True

Question 2

The obligation for deferred income taxes is the only long-term liability that is not reported at its present value.

Answer 2

True

Question 3

The present value of a single amount is calculated by multiplying the future amount by the present value of $1 table.

Answer 3

True

Question 4

The market price of a bond is equal to its present value.

Question 5

The lower the discount rate of an investment,the lower the present value of the investment.

Question 6

Future value is the amount that must be invested today at a specific interest rate to receive a particular amount at some future date.

Question 7

As the discount rate required by an investor increases,the present value of an investment decreases.

Question 8

The future value of an investment gradually increases toward the present amount.

Question 9

If I invest $20,000 at 2.5% today,how long will it take to reach a minimum of $50,000 compounded semi-annually?

A)5 years
B)37 years
C)9 and ½ years
D)17 years

Question 10

If you invested $10,000 at 6% on your 20th birthday how much would you have on your 40th birthday? Use Table FA-1.

A)$32,070.00
B)$31,180.00
C)$36,785.59
D)$12,158.12

Question 11

The present value of an annuity is calculated by multiplying the periodic cash flows by the discounted factor from the future value of an annuity table.

Question 12

The present value of a single amount can only be calculated through the application of complex calculations.

Question 13

Compounding interest assumes the interest on an investment is reinvested.

Question 14

The future amount of an annuity is calculated by multiplying the periodic payment amount by the discounted factor from the future value of an annuity table.

Question 15

The present value of an ordinary annuity is the amount that equal payments made at the end of successive equal periods is worth today.

Question 16

Annuities may provide equal amounts to an investor at fixed periods of time over the life of an investment.

Question 17

The rate of interest is usually expressed as an annual rate.

Question 18

An annuity due assumes the cash flow will occur at the beginning of the period.

Question 19

The future amount of an annuity is calculated by multiplying the present value of the annuity by its applicable factor from a table.

Question 20

An interest rate of 12% a year is the same as 6% for 2 months.

Question 21

Your wealthy aunt wishes to give you a trip to Paris when you graduate from college in three years.She estimates the trip will cost $4,000.How much must she invest now at 5% to accumulate enough for you to take this trip? Use Table PV-1.

A)$3,287.72
B)$3,456.00
C)$4,499.44
D)$3,161.24

Question 22

Financial instruments do not include:

A)Contracts that call for receipts or payment of cash.
B)Equity investment in another business.
C)Cash.
D)Tangible assets.

Question 23

Joe Notsosmart invested $10,000 at 8% simple interest for 5 years.How much more would he have received if he had received compound interest annually at the same rate? Use Table FA-1.

A)$4,000
B)$4,693
C)$690
D)$400

Question 24

Compound interest:

A)Is interest only on the principal amount for several years.
B)Is interest on the principal and previously earned interest.
C)Is interest only on previous interest excluding the principal.
D)Is equal to simple interest received for several years.

Question 25

To determine the amount to be deposited in a bank today to grow to $5,000 three years from now at 7%,which table should be used?

A)Present value of 1.
B)Future value of 1.
C)Present value of an annuity.
D)No table is required;just multiply $5,000 by 1.07.

Question 26

The difference between the present value and the future value of a sum of money depends upon:

A)The rate of interest.
B)The length of time.
C)The rate of interest and the length of time.
D)Neither the rate of interest nor the length of time.

Question 27

The future value of an annuity is:

A)Always more than the present value.
B)Always less than the present value.
C)Equal to the present value.
D)Double the present value.

Question 28

Financial instruments are recorded at:

A)Future values.
B)Present values plus interest.
C)Present values less interest.
D)Present values.

Question 29

The present value of a cash amount:

A)Is always less than the future value.
B)Is always more than the future value.
C)Is the same as the future value.
D)Has no relationship to the future value because of inherent uncertainties.

Question 30

The present value of an investment is:

A)The amount an investor would pay today to receive a certain amount in the future.
B)The amount an investor would pay today plus the interest the investor would expect to receive a certain amount in the future.
C)The amount an investor would pay today less the interest the investor requires.
D)90% of the future value of an investment.

Question 31

If I invest $50,000 today for 5 years and it grows to $84,550,what rate of interest have I received? Use Table FA-1.

A)5%
B)6%
C)10%
D)12%

Question 32

How much must I invest today in order to have $25,000 in 5 years assuming 12% interest compounded annually? Use Table PV-1.

A)$14,175.00
B)$15,888.00
C)$18,681.50
D)$17.624.00

Question 33

If I invest $100 at the end of each year for four years at 6% how much will I have at the end of the fourth year? Use Table FA-2.

A)$421.24
B)$437.50
C)$563.71
D)$432.95

Question 34

The time value of money is based on the idea that:

A)The value of money in the future equals the interest received in the present.
B)The value of money in the future will be greater than an amount available today.
C)The value of money at present over some length of time will be reduced by inflation.
D)The future value of money will become the current value as time passes.

Question 35

A note that does not include an interest rate should be recorded at:

A)Its face amount if the difference between face and present value is material.
B)Its present value if the difference between face and present value is material.
C)Its face amount at all times.
D)Its present value at all times.

Question 36

A scholarship fund has $75,000 to invest now to provide scholarships to high school students.They want to have at least $150,000 in 9 years.What rate of interest must they invest this money at to reach their goal? Use Table PV-1.

A)7%
B)8%
C)10%
D)11%

Question 37

Judy Bright has just won the lottery.She can elect to receive her winnings in equal payments of $200,000 a year for the next ten years on December 31 or to receive $2,000,000 immediately.If the current interest rate is 6%,which choice will provide the highest amount? Use Table PV-2.

A)Receiving $2,000,000 immediately.
B)Taking equal payments for 10 years.
C)It does not matter since either choice provides the same amount.
D)Refusing to accept the winnings since it is not enough.

Question 38

Anthony Driver wants to buy a new car in 4 years.He knows that he can earn 10% interest compounded semi-annually.How much must he deposit now in order to have $26,000 at the end of 4 years? Use Table PV-1.

A)$21,390.20
B)$17,602.00
C)$38,413.96
D)$31.603.26

Question 39

If you receive $20,000 as a gift and invest it at 12% compounded semi-annually,how much will you have at the end of three years? Use Table FA-1.

A)$32,020.60
B)$28,380.00
C)$22,497.20
D)$14,027.60

Question 40

To determine the present value of a single amount to be received or paid at a future time you need to know all of the following except:

A)The interest rate or discount rate.
B)The number of periods.
C)The future value.
D)The time between periods.

Question 41

Powers Company wishes to issue $2,000,000 of 8%,10-year bonds that pay interest semi-annually.The current discount rate is 6%.What amount should the bonds sell for?

Question 42

Use the tables to determine the answers to the following:
(1)How much must be invested now for 5 periods at 6% to amount to $15,000?
(2)How much is $3,000 invested now at 8% in 8 periods worth?
(3)How much is $25,000 compounded semi-annually at 12% for 4 years?

Question 43

Belle invests $200 at the end of each year in a savings account that pays 5% annually.How much will Belle have at the end of 5 years? Use Table FA-2.

A)$1,000
B)$1,105.20
C)$1,077.50
D)$1,082.37

Question 44

A future amount is the dollar amount to which a present value will ________ over time.

A)diminish
B)accumulate
C)disappear
D)maintain

Question 45

Sam Rivers has $3,000 to invest.He must decide whether to invest this money for five years at 10% compounded semi-annually or at 12% compounded annually.Which option should he select?

Question 46

Joan is 70 years old and wishes to retire.She needs to have $48,000 a year plus her social security to live in the style she is accustomed to.She would like to have enough money in her retirement account,which earns 5% compounded annually,to support her for the next 20 years.How much must be in the fund if she takes the first payment at year-end?

Question 47

Consider the two questions related to Barbara,who wants to purchase a car.
(a)How long will it take Barbara to accumulate $30,000 to buy a car if she invests $15,000 at 5%?
(b)How long will it take if she invests the same amount at 4% semi-annually?

Question 48

Explain how compound interest applies to the time value of money.

Question 49

Explain what is meant by the "time value of money." Provide examples.