Question 1

Cash flows from an annuity occur every year in the future.

Accepted Answer

False

Question 2

What is the PV of an investment that will pay you $1,500 every year,forever,starting in one year's time,if the interest rate is 8%?

Accepted Answer

A) PV Perpetuity = 1500 / 0.08 = $18,750

Question 3

When evaluating investment opportunities,we can compare and combine cash flows that occur at different points in time.

Accepted Answer

To accurately compare or combine cash flows occurring at different points in time, they must first be adjusted for the time value of money, typically through discounting or compounding to a common point in time.

Question 4

Which of the following investments has a higher present value,assuming the same (strictly positive)interest rate applies to both investments?

Accepted Answer

B) You get more money sooner.

Question 5

A perpetuity will pay $1000 per year,starting five years after the perpetuity is purchased.What is the present value (PV)of this perpetuity on the date that it is purchased,given that the interest rate is 4%?

Accepted Answer

C) The first step is to calculate the PV perpetuity = 1000 / 0.04 = $ 25,000; the next step is to calculate its PV using TVM keys: input FV = 25,000, number of years 5 not 4, and interest rate = 4%; PV = $20,548.18.

Question 6

Consider the following timeline detailing a stream of cash flows: 
If the current market rate of interest is 8%,then the present value (PV)of this stream of cash flows is closest to:

Accepted Answer

B) PV = 5000 / (1.08)¹ + 6000 / (1.08)² + 7000 / (1.08)³ + 8000 / (1.08)⁴ = $21,210.73

Question 7

The present value (PV)of a stream of cash flows is just the sum of the present values of each individual cash flow.

Accepted Answer

This statement is true. The present value of a stream of cash flows can be calculated by finding the present value of each individual cash flow and then adding them together. This is often done when evaluating investments or other financial decisions.

Question 8

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2400.After installation the solar water heater will produce a small amount of hot water every day,forever,and will require no maintenance.How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 9% per year.)

Accepted Answer

A) Calculate the cash flow as the perpetuity whose PV = $2,400;
hence, annual heating cost = 2400 × 0.09 = $216.

Question 9

Suppose the current interest rate is 8.5%,what is the future value of a $15 million investment in 10 years?

Accepted Answer

B) FV = 15(1.085)¹⁰ = $33.915 million

Question 10

Jessica deposits her $2,500 bonus cheque into the bank at the end of 2015.At the end of 2016 ,she deposits another bonus cheque,which is double the amount of last year's cheque.Given that the interest rate is 5%,what is the total future value of these two bonuses at the end of 2017?

Accepted Answer

E) FV= 2500(1.05²) + 5000(1.05) =$8,006.25

Question 11

You are given two choices of investments,Investment A and Investment B.Both investments have the same future cash flows.Investment A has a discount rate of 4%,and Investment B has a discount rate of 5%.Which of the following is true?

Accepted Answer

The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B since the discount rate is lower for Investment A, resulting in a higher present value. Therefore, Investment A is the better choice.

Question 12

What is the total future value of these cash flows in year 4,given that the interest rate is 10%?

Accepted Answer

D) Total FV= 12,000(1.1⁴) + 14,000(1.1³) + 16,000(1.1²) + 18,000(1.1) + 20,000 = $95,363.20

Question 13

Consider the following timeline detailing a stream of cash flows: 
If the current market rate of interest is 8%,then the future value (FV)of this stream of cash flows is closest to:

Accepted Answer

A) FV = 1000(1.08)⁴ + 2000(1.08)³ + 3000(1.08)² + 4000(1.08)¹ = $11,699

Question 14

Given that the interest rate is 10% per annum,what is the present value of an investment that has 5 equal payments of $50,000 each year for 5 years,starting today?

Accepted Answer

C) Calculate the PV with PMT= $50,000, interest= 10% and N = 4, which gives PV = $50,000 (for today's pmt) + $158,493.27 = $208,493.27

Question 15

Consider the following timeline detailing a stream of cash flows: 
If the current market rate of interest is 6%,then the future value (FV)of this stream of cash flows is closest to:

Accepted Answer

A) FV = 100(1.06)⁵ + 200(1.06)⁴ + 300(1.06)³ + 400(1.06)² + 500(1.06)¹ = $1723

Question 16

To calculate the future value of an annuity,we divide the annuity formula by the appropriate discount factor.

Accepted Answer

To calculate the future value of an annuity, we multiply the annuity payment by the future value annuity factor, not divide by the discount factor.

Question 17

Use the information for the question(s) below.
Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%.
-In terms of present value (PV),how much will Joe receive for selling the family business?

Accepted Answer

The answer of Use the information for the question(s) below.
Joe...

Question 18

An investor receives $250,000 at the end of each of the next 5 years.What is the present value of her investment,given that the interest rate is 5%?

Accepted Answer

A) PV = 250,000/(1.05) +250,000/(1.05)² + 250,000/(1.05)³+ 250,000/(1.05)⁴+ 250,000/(1.05)⁵⁼
ᴼᴿ Calculate the PV with PMT= $250,000, interest= 5% and N = 5, which gives PV = $1,082,369.17

Question 19

Consider the following timeline detailing a stream of cash flows: 
If the current market rate of interest is 10%,then the present value (PV)of this stream of cash flows is closest to:

Accepted Answer

C) PV = 100 / (1.10)¹ + 100 / (1.10)² + 200 / (1.10)³ + 200 / (1.10)⁴ = $460

Question 20

Use the information for the question(s) below.
Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%.
-If a few intermediate cash flows in valuing a stream of cash flows are zero,can we delete those points on the timeline and squeeze the timeline to show only nonzero cash flows?

Accepted Answer

The answer of Use the information for the question(s) below.
Joe...

Quiz 4: The Time Value of Money

Cash flows from an annuity occur every year in the future.

What is the PV of an investment that will pay you $1,500 every year,forever,starting in one year's time,if the interest rate is 8%?

When evaluating investment opportunities,we can compare and combine cash flows that occur at different points in time.

Which of the following investments has a higher present value,assuming the same (strictly positive) interest rate applies to both investments?

A perpetuity will pay $1000 per year,starting five years after the perpetuity is purchased.What is the present value (PV) of this perpetuity on the date that it is purchased,given that the interest rate is 4%?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%,then the present value (PV) of this stream of cash flows is closest to: