Question 1

In cash flow calculations,Cash Flow Sign Convention requires us to
A) assign a positive sign in front of cash inflows and a negative sign in front of cash outflows.
B) assign a negative sign in front of cash inflows and a positive sign in front of cash outflows.
C) assign a positive sign in front of both cash inflows and cash outflows.
D) assign no signs. None of the cash flows need signs assigned to them.

Accepted Answer

The Cash Flow Sign Convention requires us to assign a positive sign in front of cash inflows (money coming in) and a negative sign in front of cash outflows (money going out). This convention helps to accurately represent the direction of cash flow and determine the net cash flow for a given period.

Question 2

Use the figure for the question(s) below. 
-Which of the following statements regarding the timeline is false?
A) Date 1 is one year from now.
B) The $5000 below date 1 is the payment you will receive at the end of the first year.
C) The $5000 below date 2 is the payment you will receive at the beginning of the second year.
D) Date 0 represents today.

Accepted Answer

The statement in C is false because the $5,000 below date 2, according to standard financial timeline conventions, represents a payment at the end of the second year, not the beginning. Payments are typically assumed to occur at the end of the period unless specified otherwise.

Question 3

Use the figure for the question(s) below. 
-Which of the following statements regarding the timeline is false?
A) Date 1 is the end of the first year.
B) Date 0 is the beginning of the first year.
C) The space between date 0 and date 1 represents the time period between two specific dates.
D) You will find the timeline most useful in tracking cash flows if you interpret each point on the timeline as a period or interval of time.

Accepted Answer

The timeline is not specifically designed to track cash flows, but can be used to track any type of event or data that occurs over a period of time.

Question 4

Which of the following statements is false?
A) The process of moving a value or cash flow backward in time is known as discounting.
B) FV = 
C) The process of moving a value or cash flow forward in time is known as compounding.
D) The value of a cash flow that is moved forward in time is known as its future value.

Accepted Answer

B) FV = C(1 + r)ⁿ

Question 5

When money moves forward on the timeline,the money should be
A) discounted with the given rate of interest.
B) compounded with the given rate of interest.
C) multiplied with the given rate of interest.
D) none of the above.

Accepted Answer

When money moves forward on the timeline, it should be compounded with the given rate of interest to account for the interest earned over time.

Question 6

When money or cash flow moves forward in time,the money or cash flows could be compounded
A) monthly .
B) semiannually.
C) quarterly.
D) all the above.

Accepted Answer

Compounding refers to adding interest on the initial principal amount as well as on the accumulated interest over time. The frequency at which the interest is compounded affects the final amount. Money or cash flow moving forward in time can be compounded monthly, semiannually or quarterly, hence all the choices are correct.

Question 7

Which of the following statements is false?
A) The process of moving a value or cash flow forward in time is known as compounding.
B) The effect of earning interest on interest is known as compound interest.
C) It is only possible to compare or combine values at the same point in time.
D) A dollar in the future is worth more than a dollar today.

Accepted Answer

D) A dollar in the future is worth less than a dollar today.

Question 8

Use the information for the question(s) below.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
-Assume that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest.Draw a timeline that details the amount of money she will need to have in the future four each of her four years of her undergraduate education (assuming that she begins college at age 18).

Accepted Answer

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

Question 9

When money moves backward on the timeline,the money should be
A) divided by the given rate of interest
B) subtracted from its future value
C) compounded with the given rate of interest
D) discounted with the given rate of interest

Accepted Answer

When money moves backward on the timeline, it means we are looking at the present value of a future sum of money. To calculate the present value, we need to discount the future sum using the given rate of interest. This is why the correct choice is to discount the future value with the given rate of interest (option D).

Question 10

Use the table for the question(s) below. 
-Draw a timeline detailing the cash flows from investment "A."

Accepted Answer

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

Question 11

Use the figure for the question(s) below. 
-Which of the following statements regarding timelines is false?
A) Timelines are an important first step in organizing and then solving a financial problem.
B) We refer to a series of cash flows lasting several periods as a stream of cash flows.
C) Not every stream of cash flows can be represented on a timeline.
D) A timeline is a linear representation of the timing of the (expected) cash flows.

Accepted Answer

Every stream of cash flows can be represented on a timeline, so statement C is false. Timelines are important for organizing and solving financial problems, and they represent the timing of cash flows in a linear manner. A series of cash flows lasting several periods is referred to as a stream of cash flows.

Question 12

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 10%.The amount of money will you have in 10 years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?
A) $386; $9
B) $2,594; $45,259
C) $2,594; $117,391
D) $3,138; $ 1,311,892

Accepted Answer

C) FV = 1000(1.10)¹⁰ = 2,594; FV = 1000(1.10)⁵⁰ = $117,391

Question 13

Use the table for the question(s) below. 
-Draw a timeline detailing the cash flows from investment "B."

Accepted Answer

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

Question 14

It has long been told that the Dutch purchased Manhattan island in 1626 for the value of 60 guilders ($24).Assuming that the Dutch invested this money into an account earning 5%,approximately how much would their investment be worth 380 years later in 2006?
A) $2.7 billion
B) $3.1 billion
C) $4.5 billion
D) $1.9 trillion

Accepted Answer

A) FV = 24(1.05)³⁸⁰ = 2,704,860,602 or 2.7 billion

Question 15

Which of the following statements is false?
A) Finding the present value and compounding are the same.
B) A dollar today and a dollar in one year are not equivalent.
C) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time.
D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

Accepted Answer

A) Finding the present value and discounting are the same.

Question 16

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%.
-Draw a timeline detailing Joe's cash flows from the sale of the family business.

Accepted Answer

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

Question 17

Use the information for the question(s) below.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year.
-Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education.They decide to make deposits into an educational savings account on each of their daughter's birthdays,starting with her first birthday.Assume that the educational savings account will return a constant 7%.The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year.Draw a timeline that details the amount that would be available for the daughter's college expenses on her 18th birthday.

Accepted Answer

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

Question 18

When a value or a cash flow is compounded or discounted,the value or cash flow will have
A) linear growth.
B) exponential growth.
C) constant growth.
D) percentage growth.

Accepted Answer

Compounding and discounting involve the use of exponential functions, which result in exponential growth or decay of the value or cash flow being analyzed.

Question 19

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%.
-You have been offered the following investment opportunity: if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Draw a timeline detailing this investment opportunity.

Accepted Answer

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

Question 20

When you compare or combine cash flows,you can only compare or combine them
A) at different present time points.
B) at one time point.
C) at different future time points.
D) none of the above.

Accepted Answer

Cash flows can only be compared or combined at one time point because they represent a specific amount of money at a specific moment in time. It is not possible to compare or combine cash flows at different present or future time points because they may have different values due to factors such as inflation or interest rates. Therefore, the only logical option is to compare or combine them at one specific time point.

Quiz 4: The Time Value of Money

In cash flow calculations,Cash Flow Sign Convention requires us to

Use the figure for the question(s) below. -Which of the following statements regarding the timeline is false?

Use the figure for the question(s) below. -Which of the following statements regarding the timeline is false?

Which of the following statements is false?

When money moves forward on the timeline,the money should be

When money or cash flow moves forward in time,the money or cash flows could be compounded

Which of the following statements is false?

When money moves backward on the timeline,the money should be

Use the table for the question(s) below. -Draw a timeline detailing the cash flows from investment "A."

Use the figure for the question(s) below. -Which of the following statements regarding timelines is false?

Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 10%.The amount of money will you have in 10 years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?

Use the table for the question(s) below. -Draw a timeline detailing the cash flows from investment "B."

It has long been told that the Dutch purchased Manhattan island in 1626 for the value of 60 guilders ($24) .Assuming that the Dutch invested this money into an account earning 5%,approximately how much would their investment be worth 380 years later in 2006?

Which of the following statements is false?

When a value or a cash flow is compounded or discounted,the value or cash flow will have

When you compare or combine cash flows,you can only compare or combine them