Question 1

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 2

Use the following information to answer the question(s) below.
Your great aunt Matilda put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday the account balance was $5,033.83.
-The amount of money that would be in the account is you left the money there until your 65th birthday is closest to:
A) $29,556
B) $148,780
C) $168,824
D) $748,932

Accepted Answer

B) FV = PV(1 + i)^N = 5033.83(1.08)^(65 - 21) = $148,779.85

Question 3

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 represent the timing of expected cash flows in a linear format. A series of cash flows lasting several periods is referred to as a stream of cash flows.

Question 4

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.

Accepted Answer

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

Question 5

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 6

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 7

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 8

Use the following information to answer the question(s) below.
Consider the following four alternatives:
1. $132 received in two years.
2. $160 received in five years.
3. $200 received in eight years.
4. $220 received in ten years.
-The ranking of the four alternatives from most valuable to least valuable if the interest rate is 6% per year would be:
A) 1, 2, 3, 4
B) 1, 3, 2, 4
C) 4, 3, 1, 2
D) 3, 4, 2, 1

Accepted Answer

C)
 11ea7e54_8bce_cde0_ba34_050c157d7f6f_TB1620_00

Question 9

At an annual interest rate of 7%,the present value of $5,000 received in five years is closest to:
A) $3,565
B) $6,750
C) $7,015
D) $7,035

Accepted Answer

A) PV = FV/(1 + i)^N = 5000(/1.07)^5 = 3,564.93

Question 10

At an annual interest rate of 7%,the future value of $5,000 in five years is closest to:
A) $3,565
B) $6,750
C) $7,015
D) $7,035

Accepted Answer

C) FV = PV(1 + i)^N = 5000(1.07)^5 = 7,012.76

Question 11

Use the following information to answer the question(s) below.
Your great aunt Matilda put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday the account balance was $5,033.83.
-The amount of money that your great aunt Matilda originally put in the account is closest to:
A) $600
B) $800
C) $1,000
D) $1,200

Accepted Answer

C) PV = FV/(1 + i)^N = 5033.83(/1.08)^21 = 1,000

Question 12

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 useful for tracking cash flows if you interpret each interval, represented by the spaces between the dates, as a specific period of time. Date 0 represents the beginning of the first period, and date 1 represents the end of the first period, not the end of the first year. The timeline can be used to represent any time period, not just a year, and can be used to track any sequence of events or data points, not just cash flows. Therefore, statement D is false.

Question 13

Consider the following timeline: 
If the current market rate of interest is 10%,then the future value of this timeline is closest to:
A) $666
B) $500
C) $605
D) $650

Accepted Answer

A) FV = PV(1 + r)ⁿ = 500(1.10)³ = 665.50 which is approximately $666

Question 14

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 15

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 16

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 17

Consider the following time line: 
If the current market rate of interest is 8%,then the present value of this timeline is closest to:
A) $1000
B) $857
C) $860
D) $926

Accepted Answer

B) PV = FV / (1 + r)ⁿ = 1000 / (1.08)² = 857.34 or approximately $857

Question 18

Use the following information to answer the question(s) below.
Consider the following four alternatives:
1. $132 received in two years.
2. $160 received in five years.
3. $200 received in eight years.
4. $220 received in ten years.
-The ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year would be:
A) 1, 2, 3, 4
B) 4, 3, 2, 1
C) 3, 4 2, 1
D) 2, 3, 1, 4

Accepted Answer

D)
 11ea7e54_8bce_a6cf_ba34_17a07d592239_TB1620_00

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

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...

Quiz 4: The Time Value of Money

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

Which of the following statements is false?

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

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

At an annual interest rate of 7%,the present value of $5,000 received in five years is closest to:

At an annual interest rate of 7%,the future value of $5,000 in five years is closest to:

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

Consider the following timeline: If the current market rate of interest is 10%,then the future value of this timeline is closest to:

Which of the following statements is false?

Which of the following statements is false?

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

Consider the following time line: If the current market rate of interest is 8%,then the present value of this timeline is closest to: