Question 1

A firm's net income last year was $1.5 million. Its net income grew 5 percent during the last "5" years. If that growth rate continues, how long will it take for the firm's net income to double?
A)7.6 years
B) 10.47 years
C) 14.21 years
D) 14.55 years

Accepted Answer

The answer of A firm's net income last year was...

Question 2

You have $50,000 in your account. Assuming no additional deposits are made and your account earns 8 percent per year, how long will it take for the account to have a balance of $500,000?
A) 28.83 years
B) 29.92 years
C) 50.00 years
D) 90.00 years

Accepted Answer

We can use the formula for compound interest: A = P(1 + r/n)^(nt), where A is the ending amount, P is the beginning amount, r is the interest rate, n is the number of times the interest is compounded per year, and t is the number of years. 
Plugging in the values, we get: 
500,000 = 50,000(1 + 0.08/1)^(1*t)
Dividing both sides by 50,000: 
10 = (1.08)^t
Taking the logarithm of both sides: 
log(10) = log(1.08^t)
log(10) = t*log(1.08)
t = log(10)/log(1.08)
t ≈ 29.92 years
Therefore, the best choice is B, 29.92 years.

Question 3

Which of the following will not increase a present value?
A) increase the interest rate
B) decrease the number of periods
C) increase the future value

Accepted Answer

Increasing the interest rate actually decreases the present value of a future amount because the present value is inversely related to the interest rate. Higher interest rates mean a lower present value, as the discounting effect is stronger.

Question 4

You are considering an investment that is expected to pay 3 percent in year 1, 5 percent in years 2 and 3 and 7 percent in year 4. If you invest $1,000 today, what will this investment be worth at the end of the fourth year?
A) $1215.07
B) $1215.51
C) $1275.81
D) $1285.75

Accepted Answer

To calculate the future value of the investment, we need to use the formula: FV = PV x (1+r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of years.

For year 1, the investment will be worth:
PV = $1,000
r = 3%
n = 1
FV = $1,030

For years 2 and 3, the investment will be worth:
PV = $1,030 (which is the FV from year 1)
r = 5%
n = 2
FV = $1,132.02

For year 4, the investment will be worth:
PV = $1,132.02 (which is the FV from years 2 and 3)
r = 7%
n = 1
FV = $1,215.07

Therefore, the investment is expected to be worth $1,215.07 at the end of the fourth year. The closest answer choice is A, $1,215.07.

Question 5

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?
A) $6,000.00
B) $7,715.61
C) $7,908.48
D) $11,193.97

Accepted Answer

To find the interest, we use the formula I = P*r*t, where I is the interest, P is the principle ($10,000), r is the interest rate (6% or 0.06), and t is the time (10 years). 
So, I = 10,000*0.06*10 = $6,000. 
However, this only calculates the interest. To find the total amount paid back, we add the interest to the principle: 
$10,000 + $6,000 = $16,000. 
Therefore, the correct answer is C, $7,908.48 which is the interest, plus the original $10,000 principle, for a total of $17,908.48.

Question 6

When your investment compounds, your money will grow in a(n) __________ fashion.
A) linear
B) exponential
C) static
D) implied

Accepted Answer

When your investment compounds, your money will grow exponentially. This means that your money will not just grow at a linear or static rate, but it will accelerate over time as interest is earned on both the principal and the interest that has already been earned.

Question 7

You have $100,000 in your account. Assuming no additional deposits are made and your account earns 15 percent per year, how long will it take for the account to have a balance of $500,000?
A) 10.28 years
B) 11.09 years
C) 11.52 years
D) 12.64 years

Accepted Answer

We can use the formula for compound interest: 
A = P(1+r/n)^(nt)
where A is the future value, P is the present value, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years.

Plugging in the numbers we have: 
$500,000 = $100,000(1+0.15/1)^(1t)
5 = (1.15)^t
t = log(5)/log(1.15) = 11.52 years

Therefore, it will take approximately 11.52 years for the account to have a balance of $500,000, so the best choice is C.

Question 8

You borrow $3,500 and will pay back the entire amount in five years. You are charged 9 percent interest per year. How much interest do you pay on this loan?
A) $1,885.18
B) $1,907.35
C) $1,959.02
D)$2,106.81

Accepted Answer

The interest paid on the loan can be calculated using the simple interest formula: Interest = Principal × Rate × Time. Here, Principal = $3,500, Rate = 9% or 0.09, and Time = 5 years. So, Interest = $3,500 × 0.09 × 5 = $1,575. Therefore, none of the provided options are correct based on the simple interest calculation. However, if the interest is compounded annually, we use the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount after t years, P is the principal amount ($3,500), r is the annual interest rate (9% or 0.09), n is the number of times the interest is compounded per year (1 for annually), and t is the time the money is borrowed for in years (5). Solving this gives a different amount, but the question asks for the interest paid, not the final amount. The correct calculation for simple interest does not match any of the options, suggesting a possible misunderstanding in the question's premise or a calculation error in the provided options. Given the options and assuming a potential for compound interest without specifying the compounding frequency, none align directly with standard simple or compound interest calculations as described.

Question 9

Assume you borrow $500 from a payday lender. The terms are that you must pay a fee of $75 in advance (today) and one year from now you need to repay $750. What implied interest rate are you paying?
A) 43.09 percent
B)55.78 percent
C) 76.47 percent
D) 81.03 percent

Accepted Answer

To calculate the implied interest rate, we need to find the total cost of borrowing the $500.

Total cost = fee + principal + interest
Total cost = $75 + $500 + $750
Total cost = $1,325

Now we can calculate the implied interest rate using the formula:

Implied interest rate = (total cost / principal) - 1
Implied interest rate = ($1,325 / $500) - 1
Implied interest rate = 2.65 - 1
Implied interest rate = 1.65

So the implied interest rate is 165%, which is equivalent to choice C (76.47%).

Question 10

Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?
A) 12.00 percent
B)25.00 percent
C)49.33 percent
D) 86.99 percent

Accepted Answer

The total cost of borrowing is $25 + $112 = $137.
The interest paid is $137 - $100 = $37.
The implied interest rate can be calculated using the formula:

Interest Rate = (Interest / Principal) x (1 / Time) x 100

In this case, Interest = $37, Principal = $100, and Time = 1 year.
Plug in the values to get:

Interest Rate = (37 / 100) x (1 / 1) x 100 = 37 percent

Therefore, the implied interest rate is 37 percent, which corresponds to Choice C (49.33 percent is incorrect, and both 12.00 percent and 25.00 percent are too low).

Question 11

Suppose a U.S. Treasury bond promises to pay $9,780.13 in three years. If bonds of this type are generating a 4 percent annual return, how much would you pay for this bond today?
A) $8,429.71
B) $11,001.32
C) $8,694.50
D) $9,112.78

Accepted Answer

To calculate the present value of the bond, we use the formula:

PV = FV / (1 + r)^n

where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years.

In this case, FV is $9,780.13, r is 4%, and n is 3 years.

PV = $9,780.13 / (1 + 0.04)^3
PV = $8,694.50

Therefore, the best choice is C, $8,694.50.

Question 12

You want to retire in 25 years and you have just inherited $300,000. You believe you will need $1,450,000 upon retirement. What rate will you need to earn on the account to achieve this goal?
A) 4.5 percent
B)5.5 percent
C) 6.5 percent
D) 8.5 percent

Accepted Answer

To calculate the rate needed to grow the $300,000 inheritance to $1,450,000 over 25 years, we can use the following formula:

Future Value = Present Value x (1 + r)n

Where: 
- Future Value = $1,450,000 
- Present Value = $300,000 
- n = 25 years 
- r = rate

Plugging in the values and solving for r:

$1,450,000 = $300,000 x (1 + r)25

(1 + r)25 = $1,450,000/$300,000 = 4.833

Taking the 25th root of both sides:

1 + r = (4.833)1/25

1 + r = 1.065

r = 0.065 = 6.5%

Therefore, the rate needed to achieve the retirement goal is 6.5%, which is choice C.

Question 13

We call the process of earning interest on both the original deposit and on the earlier interest payments
A) simple interest.
B) compounding.
C) future value.
D) discounting.

Accepted Answer

Compounding is the process of earning interest on both the original deposit and on the earlier interest payments. Simple interest only earns interest on the original deposit, future value refers to the total anticipated value of an investment at a specified date, and discounting is the process of determining the present value of future cash flows.

Question 14

You invested $1,000 for five years in an account that earns 5 percent. However, today you learn that you are able to move the account into an investment that earns 10 percent. Which of the following statements is correct?
A) If you select the investment earning 10 percent, you will double your profit.
B) If you select the investment earning 10 percent, you will more than double your profit.
C) If you select the investment earning 10 percent, your profit will be less than double.
D) None of the statements is correct.

Accepted Answer

After five years, with the initial 5 percent investment, the total amount would be $1,276.28. However, if you move the account to the 10 percent investment after the fifth year, the total amount would be $1,611.11. This is more than double the original amount ($1,000) and exceeds the profit earned with the 5 percent investment. Therefore, choosing the investment earning 10 percent will more than double your profit.

Question 15

You are considering an investment that is expected to pay 5 percent in year 1, 7 percent in years 2 and 3 and 9 percent in year 4. If you invest $2,000 today, what will this investment be worth at the end of the fourth year?
A) $2,501.42
B)$2,693.71
C) $2,713.04
D) $2,620.68

Accepted Answer

The answer of You are considering an investment that is...

Question 16

Five years ago, sales were $4 million. Today your company's sales are $10 million. What annual rate have sales been growing?
A) 1.5 percent
B) 12.65 percent
C) 16.65 percent
D) 20.11 percent

Accepted Answer

The answer of Five years ago, sales were $4 million....

Question 17

A firm's net income last year was $2.65 million. Its net income grew 8 percent during the last "5" years. If that growth rate continues, how long will it take for the firm's net income to double?
A) 6.6 years
B) 7.1 years
C) 8.2 years
D) 9 years

Accepted Answer

The answer of A firm's net income last year was...

Question 18

Your firm receives an offer from the supplier who provides computer chips used to manufacture cell phones. Due to poor planning, the supplier has an excess amount of chips and is willing to sell $600,000 worth of chips for only $500,000. You already have two years' supply on hand. It would cost you $7,500 today to store the chips until your firm needs them in two years. What implied interest rate would you be earning if you purchased and store the chips?
A) 6.57 percent
B) 8.73 percent
C) 9.54 percent
D) 18.23 percent

Accepted Answer

The answer of Your firm receives an offer from the...

Question 19

Which of the following statements is incorrect with respect to time lines?
A) A helpful tool for organizing our analysis is the time line.
B) Cash flows we receive are called inflows and denoted with a positive number.
C) Cash flows we pay out are called outflows and designated with a negative number.
D) Interest rates are not included on our time lines.

Accepted Answer

Interest rates are often included on time lines, especially when calculating the present value or future value of cash flows.

Question 20

You want to retire in 40 years and you have $40,000 saved in your retirement account. You believe you will need $1,500,000 upon retirement. What rate will you need to earn on the account to achieve this goal?
A) 6.75 percent
B) 7.48 percent
C) 9.13 percent
D) 9.48 percent

Accepted Answer

The answer of You want to retire in 40 years...

Quiz 4: Time Value of Money 1: Analyzing Single Cash Flows

A firm's net income last year was $1.5 million. Its net income grew 5 percent during the last "5" years. If that growth rate continues, how long will it take for the firm's net income to double?

You have $50,000 in your account. Assuming no additional deposits are made and your account earns 8 percent per year, how long will it take for the account to have a balance of $500,000?

Which of the following will not increase a present value?

You are considering an investment that is expected to pay 3 percent in year 1, 5 percent in years 2 and 3 and 7 percent in year 4. If you invest $1,000 today, what will this investment be worth at the end of the fourth year?

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?

When your investment compounds, your money will grow in a(n) __________ fashion.

You have $100,000 in your account. Assuming no additional deposits are made and your account earns 15 percent per year, how long will it take for the account to have a balance of $500,000?

You borrow $3,500 and will pay back the entire amount in five years. You are charged 9 percent interest per year. How much interest do you pay on this loan?

Assume you borrow $500 from a payday lender. The terms are that you must pay a fee of $75 in advance (today) and one year from now you need to repay $750. What implied interest rate are you paying?

Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?

Suppose a U.S. Treasury bond promises to pay $9,780.13 in three years. If bonds of this type are generating a 4 percent annual return, how much would you pay for this bond today?

You want to retire in 25 years and you have just inherited $300,000. You believe you will need $1,450,000 upon retirement. What rate will you need to earn on the account to achieve this goal?

We call the process of earning interest on both the original deposit and on the earlier interest payments

You invested $1,000 for five years in an account that earns 5 percent. However, today you learn that you are able to move the account into an investment that earns 10 percent. Which of the following statements is correct?

You are considering an investment that is expected to pay 5 percent in year 1, 7 percent in years 2 and 3 and 9 percent in year 4. If you invest $2,000 today, what will this investment be worth at the end of the fourth year?

Five years ago, sales were $4 million. Today your company's sales are $10 million. What annual rate have sales been growing?

A firm's net income last year was $2.65 million. Its net income grew 8 percent during the last "5" years. If that growth rate continues, how long will it take for the firm's net income to double?

Which of the following statements is incorrect with respect to time lines?

You want to retire in 40 years and you have $40,000 saved in your retirement account. You believe you will need $1,500,000 upon retirement. What rate will you need to earn on the account to achieve this goal?