Question 1

An investment offers $10,000 at the end of each year for ten years. (a)If you can earn 5 percent annually, what is this investment worth today? (b)If you do not spend the annual payment but invest it at 5 percent, how much will you have after the ten years have lapsed?

Accepted Answer

The answer of An investment offers $10,000 at the end...

Question 2

EEM, INC has a $1,000,000 debt outstanding that is due after 15 years. The contract requires that after five years, the firm must set aside annually an amount so the debt is retired in full at maturity. If EEM can earn 8 percent on invested funds, how much must the company set aside each year?

Accepted Answer

The answer of EEM, INC has a $1,000,000 debt outstanding...

Question 3

AIR National's capacity is 120 passengers per flight. It currently carries 74 passengers per flight. Growth in passengers is expected to be 6 percent annually. New plans will have to be ordered when the company is carrying 90 percent of capacity. How long will it be before the firm must order new planes?

Accepted Answer

The answer of AIR National's capacity is 120 passengers per...

Question 4

A state's lottery winner is promised $200,000 a year for twenty years (starting at the end of the first year). How much must the state invest now to guarantee the prize if the state can earn annually 7 percent on its funds? How much must the state invest if the annual payments are to be made at the beginning of the year?

Accepted Answer

The answer of A state's lottery winner is promised $200,000...

Question 5

Your brother, who is prone to bearing substantial risk, suggests that you buy a security for $10,000 that promises to pay you $100,000 at the end of 15 years. What is the implied annual return or yield on this investment?

Accepted Answer

The answer of Your brother, who is prone to bearing...

Question 6

Worker A annually invests $1,000 in an IRA for nine years (ages 27 through 35)and never makes another contribution. Worker B annually invests $1,000 in an IRA for thirty years (ages 36 through 65). Which worker will have more in his or her account when he or she retires if they both earn 8 percent on their investments, assuming both investors work for a duration of thirty years?

Accepted Answer

The answer of Worker A annually invests $1,000 in an...

Question 7

The future value of an annuity will be larger if
1. the annuity is an ordinary annuity
2. the annuity is an annuity due
3. the payments are made at the beginning of the year
4. the payments are made at the end of the year

Accepted Answer

An annuity due, where payments are made at the beginning of each period (3), will have a larger future value than an ordinary annuity, where payments are made at the end of each period, because each payment is invested for an additional period.

Question 8

A firm currently earns $1.00 per share. A financial analyst believes that earnings will grow annually at the rate of 10 percent for five years and then decline to 5 percent. What are the expected earnings after ten years?

Accepted Answer

The answer of A firm currently earns $1.00 per share....

Question 9

A piece of rental property will generate $10,000 a year for five years, $12,000 for the next five years, and then be sold at the end of the tenth year for $100,000. If you can earn 10 percent on your funds, what is the maximum you should pay for the property? Note that there are unequal payments to consider.

Accepted Answer

The answer of A piece of rental property will generate...

Question 10

You are hurt in a car accident and your lawyer wins a $100,000 settlement to be distributed as follows: 
 $20,000 immediate payment 
$5,000 a year for ten years 
$30,000 after ten years. 
 If the lawyer's fee is $10,000, what is the net value of this settlement if the interest rate is 6 percent?

Accepted Answer

The answer of You are hurt in a car accident...

Question 11

Time value concepts may be used to determine
1. the annual growth rate in dividends
2. the amount in an IRA account after ten years
3. the tax owed on a capital gain

Accepted Answer

Time value concepts are used to calculate the future value of investments (like the amount in an IRA account after ten years) and the growth rate of dividends, but not directly for calculating taxes owed on a capital gain.

Question 12

A firm has a $1,000,000 debt (e.g., a bond)outstanding that matures after 10 years. The sinking fund requires the firm to set aside annually an amount so the debt may be retired at maturity. If the firm can earn 10% annually on these funds, how much must it invest annually to meet the sinking fund?

Accepted Answer

The answer of A firm has a $1,000,000 debt (e.g.,...

Question 13

A homeowner has a ten-year home-improvement loan for $36,875. What are the annual payments required by the loan if the annual rate of interest is 4 percent?

Accepted Answer

The answer of A homeowner has a ten-year home-improvement loan...

Question 14

If you open an IRA and invest $3,000 a year (at the end of the year), how much will be in the account after twenty-five years if the funds earn 5 percent annually? How much would be in the account if payments were made at the beginning of the year?

Accepted Answer

The answer of If you open an IRA and invest...

Question 15

Which is the smallest if the interest rate is 8 percent?

Accepted Answer

The present value of $100 to be received after five years at an 8% interest rate is the smallest because it is discounted the most compared to the other options.

Question 16

Time value concepts may not be used to determine

Accepted Answer

Time value concepts are used to calculate the present and future values of annuities and lump sums, reflecting how money's value changes over time. They are not directly used to determine the margin required on a stock purchase, which is related to brokerage requirements and regulations.

Question 17

You wish to have $100,000 after ten years for a major purchase such as a boat. How much must you invest at the end of each year if you earn 8 percent annually on your funds?

Accepted Answer

The answer of You wish to have $100,000 after ten...

Question 18

Your uncle plans to leave you an inheritance of $200,000. If his life expectancy is twenty years, what is your inheritance currently worth if the anticipated return on investments is 9 percent?

Accepted Answer

The answer of Your uncle plans to leave you an...

Question 19

An investor expects the price of a stock to double after eight years. What is the expected annual rate of growth?

Accepted Answer

The answer of An investor expects the price of a...

Question 20

The present value of an annuity is
1. larger the greater the rate of interest
2. smaller the greater the rate of interest
3. larger as the number of years increases
4. smaller as the number of years increases

Accepted Answer

The answer of The present value of an annuity is
1....

Quiz 3: The Time Value of Money