Question 1

Suppose you invest $1,000 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 = 1,000(1.10)¹⁰ = 2,594; FV = 1,000(1.10)⁵⁰ = $117,391

Question 2

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 3

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 4

Consider the following timeline:  If the current market rate of interest is 7%,then the future value of this timeline as of year 3 is closest to:
A) $2,100
B) $2,013
C) $1,720
D) $1,893

Accepted Answer

C) FV = PV(1 + r)ⁿ FV = 500(1.07)³ + 500(1.07)² + 500(1.07)¹ = $1,719.97 or approximately $1,720

Question 5

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 application of exponential growth or decay formulas, rather than linear or constant growth. Therefore, choice B is the best answer. Choice D is partially correct, as percentage growth is involved, but it does not fully capture the nature of compounding and discounting.

Question 6

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 7

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 8

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 $5,000 below date 1 is the payment you will receive at the end of the first year.
C) The $5,000 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 9

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, usually the present or future value of the cash flows. Comparing or combining cash flows at different present or future time points would not provide accurate information as the value of money changes over time due to factors such as inflation and interest rates.

Question 10

Consider the following timeline:  If the current market rate of interest is 10%,then the future value at time 3 on 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 11

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 12

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, regardless of the number of periods. Therefore, statement C is false. The other statements are true.

Question 13

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

Cash flow sign convention requires us to assign a positive sign in front of cash inflows (i.e., money coming into the business) and a negative sign in front of cash outflows (i.e., money leaving the business). This helps us accurately calculate the net cash flow and determine the financial health of the business.

Question 14

Consider the following timeline:  If the current market rate of interest is 12%,then the present value of the cash flows is closest to:
A) $20.67
B) $320.67
C) -$20.67
D) $70.00

Accepted Answer

A)
PV of year 1 cash flow = PV = FV/(1+r)^n = 40/(1.12)^1 = 35.7143
PV of year 2 cash flow = PV = FV/(1+r)^n = 80/(1.12)^2 = 63.7755
PV of year 3 cash flow = PV = FV/(1+r)^n = 100/(1.12)^3= 71.1780
So the answer is -140 + 35.7143+63.7755+71.1780 = 20.6678

Question 15

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 $2,500 today,you will receive $1,000 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 16

It has long been told that the Dutch purchased Manhattan island in 1,626 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 17

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 of the above.

Accepted Answer

Money or cash flow can be compounded at any frequency, whether monthly, semiannually, or quarterly. Therefore, all of the above choices are correct.

Question 18

Consider the following timeline:  If the current market rate of interest is 8%,then the present value of this timeline is closest to:
A) $1,000
B) $857
C) $860
D) $926

Accepted Answer

B) PV = FV / (1 + r)ⁿ = 1,000 / (1.08)² = 857.34 or approximately $857

Question 19

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 20

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 most useful in tracking cash flows if you interpret each SPACE between two points on the timeline as a period or interval of time, not each POINT on the timeline.

Quiz 4: The Time Value of Money

Suppose you invest $1,000 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?

Which of the following statements is false?

Consider the following timeline: If the current market rate of interest is 7%,then the future value of this timeline as of year 3 is closest to:

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

Which of the following statements 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?

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

Consider the following timeline: If the current market rate of interest is 10%,then the future value at time 3 on this timeline is closest to:

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

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

In cash flow calculations,cash flow sign convention requires us to

Consider the following timeline: If the current market rate of interest is 12%,then the present value of the cash flows is closest to:

It has long been told that the Dutch purchased Manhattan island in 1,626 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?

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

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

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 the timeline is false?