Question 1

A tenant wants to lease a building for $50,000 per year. She signs a five-year rental agreement that states that she will pay $25,000 every six months for the next five years. Which of the following is the timeline for her rental payments, assuming she makes the first payment immediately?

Accepted Answer

The answer of A tenant wants to lease a building...

Question 2

Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information?

Accepted Answer

C) $30,000/1.082 = $27,726

Question 3

An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made?

Accepted Answer

D) 11eaabab_c0c3_8e3a_b90e_93d30bb9efc4_TB5536_00

Question 4

Which of the following statements is INCORRECT based on the time value of money?

Accepted Answer

The correct interest rate factor for risk-free cash flows is (1 + rf), not (1 - rf). The other three statements are correct based on the time value of money.

Question 5

The one-year discount factor is the discount at which we can purchase money in the future, one year from now.

Accepted Answer

The one-year discount factor is the present value of $1 to be received in one year, and represents the discount at which we can purchase money in the future one year from now.

Question 6

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

Accepted Answer

In most investment projects, costs are incurred up front, but benefits are received in the future. Therefore, it is important to consider the time value of money, as a dollar received in the future may not have the same value as a dollar received today due to factors such as inflation and interest rates.

Question 7

Samantha enters a rent-to-own agreement for living room furniture. She will pay $60 per month for one year. Which of the following shows the timeline for her payments if the first payment is one month from now?

Accepted Answer

The answer of Samantha enters a rent-to-own agreement for living...

Question 8

What is one of the prerequisite conditions for the Valuation Principle to work?

Accepted Answer

The answer of What is one of the prerequisite conditions...

Question 9

If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________.

Accepted Answer

C) $500.00 × (1.08) = $540.00

Question 10

Dollar amounts received at different points in time cannot be compared in absolute terms.

Accepted Answer

Dollar amounts received at different points in time are not comparable in absolute terms because of inflation and changes in the value of money over time. Therefore, adjusting for inflation and other relevant factors is necessary to compare dollar amounts received at different points in time.

Question 11

If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________.

Accepted Answer

A) 11eaabab_c0c3_4019_b90e_5b36f49cd31e_TB5536_00

Question 12

A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lender's perspective?

Accepted Answer

The answer of A lender lends $10,100, which is to...

Question 13

Whose cash flow is best described by the timeline shown below?

Accepted Answer

The timeline shows an initial outflow of $3,500, followed by four annual inflows of $1,000 each. This matches Karen's cash flow, who loans $3,500 and receives four annual installments of $1,000 from her friend. None of the other options match the timeline shown.

Question 14

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one year's time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investor's decision may be flawed?

Accepted Answer

The answer of An investor has the opportunity to buy...

Question 15

In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.

Accepted Answer

The answer of In order to distinguish between inflows and...

Question 16

If $432 invested today yields $450 in a year's time, what is the discount factor?

Accepted Answer

B) $432/$450 = 0.96

Question 17

Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one year's time?

Accepted Answer

C) $4500 × 1.047 = $4712

Question 18

How can we convert the value of money from one point in time to another?

Accepted Answer

The answer of How can we convert the value of...

Question 19

Which of the following situations is best described by the timeline shown below?

Accepted Answer

The answer of Which of the following situations is best...

Question 20

Why should you approach every problem by drawing a timeline?

Accepted Answer

Drawing a timeline helps to identify events in a transaction or investment which might otherwise be easily overlooked. It allows for a visual representation of how cash flows are distributed over time, which is especially useful for complex transactions or investments. This helps to avoid any potential errors or oversights that could result in flawed financial decisions. While timelines can be used to schedule events, this is not their primary function in finance.

Quiz 3: Time Value of Money: an Introduction