Question 1

Which of the following areas does not make significant use of time value of money concepts?

Accepted Answer

Marketing research typically involves studying consumer behavior, market trends, and product demand, and does not typically involve significant use of time value of money concepts. The other areas listed all heavily rely on time value of money concepts.

Question 2

When you graduate from college,your mother plans to give you a gift of $50,000 to start you on your way.However,to determine what you learned in business school,your mother presents you with four options on how to receive the gift.Which of the four options presented by your mother will yield the greatest present value to you?

Accepted Answer

Option A is the best choice as it provides a lump sum of $50,000 today which has the highest present value. The other options involve receiving the gift in installments or after a period of time with a discount rate, which reduces the present value of the gift. Option B involves receiving $25,000 per year for two years which would have a present value of around $48,548 at a 3% discount rate. Option C involves receiving the gift after grad school with a discount rate of 5%, which would have a present value of around $45,284. Option D, although it has a lower discount rate of 3%, still yields a lower present value of around $47,164. Therefore, option A is the most valuable choice.

Question 3

(Present value tables required)You won the lottery and have a number of choices as to how to take the money.Which choice yields a greater present value?

Accepted Answer

The answer of (Present value tables required)You won the lottery...

Question 4

Your hard work in college paid off,quite literally,and you received a graduate assistantship for your MBA program.The assistantship pays a stipend of $10,000 at the end of each of the next 2 years.Using an average discount rate of 3%,the future value of your assistantship can be calculated by

Accepted Answer

The future value of an annuity can be calculated using the annuity future value factor, which accounts for the interest rate and the number of periods.

Question 5

The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.

Accepted Answer

The Future Value of $1 table is used to calculate the future value of a present sum, i.e., how much a certain amount of money today will be worth in the future after a particular period with a certain rate of interest. It is not used to calculate how much $100 in hand today would be worth in 5 years.

Question 6

The time value of money is explained by which of the following?

Accepted Answer

The time value of money is the concept that money today is worth more than the same amount of money in the future because money can earn interest or other income over time.

Question 7

(Present value tables required)The present value of an investment is affected by which of the following?

Accepted Answer

All of the factors mentioned, interest rate, number of time periods, and type of investment (i.e., annuity versus lump sum) can affect the present value of an investment. For example, a higher interest rate will decrease the present value of a future cash flow, while a longer time period or an annuity will increase the present value. Therefore, it is important to consider all of these factors when evaluating the present value of an investment.

Question 8

(Present value tables required)Assuming an interest rate of 10%,the present value of $50,000 to be received 8 years from now would be closest to

Accepted Answer

A)Present value @ 10% for 8 yrs = .467 × 50,000 = $23,350

Question 9

The present value of $1,000,000 received in 13 years,given an interest rate of 3%,is

Accepted Answer

A)Present value @ 3% for 13 yrs = 0.681 × 1,000,000 = $681,000

Question 10

On a whim you purchased a scratch-off lottery ticket at the gas station.It must have been your lucky day because you won $1,000,000.Being logical and rational you decide to invest the money at 3% for 10 years until you are ready to start a family.At the end of 10 years,how much will your investment be worth?

Accepted Answer

B)Future value @ 3% for 10 yrs = 1,000,000 × 1.344 = $1,344,000

Question 11

(Present value tables required)Your grandfather has promised to give you $1,000 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year.Using a discount rate of 6%,which of the following is correct for determining the present value of the gift?

Accepted Answer

We need to determine the present value of an annuity of $1,000 for four years, so we need to use the annuity present value factor for a discount rate of 6% and a time period of four years, which is provided in the present value tables. Therefore, the correct formula to calculate the present value of the gift is PV = $1,000 × (Annuity PV factor,i = 6%,n = 4).

Question 12

The three factors that affect the time value of money are principal,number of periods,and the interest rate.

Accepted Answer

These are the three key factors that determine the time value of money, impacting the present and future value of cash flows.

Question 13

(Present value tables required)If you invest $1,200 at the end of every year for five years at an interest rate of 10%,the balance of your investment in 5 years will be closest to

Accepted Answer

C)Future value annuity @ 10 % for 5 yrs = 6.1051 × 1200 = 7,326

Question 14

Your wealthy neighbor has promised to give you $2,000 a year at the end of each of the next four years to help with college.Using a discount rate of 8%,the present value of the gift can be stated as

Accepted Answer

The present value of an annuity formula should be used to calculate the present value of the gift. Option D matches this formula and uses the correct discount rate and time period. The other options use incorrect formulas, rates, or time periods.

Question 15

(Present value tables required)You have been awarded a scholarship that will pay you $500 per semester at the end of each of the next 8 semesters that you earn a GPA of 3.5 or better.You are a very serious student and you anticipate receiving the scholarship every semester.Using a discount rate of 3% per semester,which of the following is the correct calculation for determining the present value of the scholarship?

Accepted Answer

The present value of an annuity formula should be used to calculate the present value of the scholarship payments. Therefore, the correct calculation is PV = $500 × (Annuity PV factor, i = 3%, n = 8).

Question 16

(Present value tables required)Income from an apartment building you own totals $260,000 per year.You plan on selling the building and retiring to France in 12 years.Assuming you can invest the income from the building each year at 3%,how much money will you have on which to retire?

Accepted Answer

C)Future value @ 3% for 12 yrs = 14.192 × 260,000 = $3,689,920

Question 17

(Present value tables required)You win the lottery and must decide how to take the payout.Use an 8% discount rate.What is the present value of $15,000 a year received at the end of each of the next six years?

Accepted Answer

D)Present value annuity @ 8% for 6 yrs = 4.623 × 15,000 = $69,345

Question 18

(Present value tables required)Assuming an interest rate of 10%,if you invest a lump sum of $5,000 now,the balance of your investment in 7 years will be closest to

Accepted Answer

B)Future value @ 10% for 7 yrs = 1.949 × 5000 = 9,745

Question 19

You recently won a contest sponsored by a local radio station.The radio station will pay you $2,500 at the end of each of the next 15 years.Assuming an interest rate of 3%,what is the present value of this prize?

Accepted Answer

B)Present value annuity @ 3% for 15 yrs = 11.938 × 2,500 = $29,845

Question 20

(Present value tables required)Assuming an interest rate of 10%,the present value of $11,000 received at the end of each year for 6 years would be closest to

Accepted Answer

C)Present value annuity @ 10% for 6 yrs = 4.355 × 11,000 = $47,905

Quiz 12: Capital Investment Decisions and the Time Value of Money

Which of the following areas does not make significant use of time value of money concepts?

(Present value tables required) You won the lottery and have a number of choices as to how to take the money.Which choice yields a greater present value?

Your hard work in college paid off,quite literally,and you received a graduate assistantship for your MBA program.The assistantship pays a stipend of $10,000 at the end of each of the next 2 years.Using an average discount rate of 3%,the future value of your assistantship can be calculated by

The Future Value of $1 table is used to calculate how much $100 in hand today would be worth in 5 years.

The time value of money is explained by which of the following?

(Present value tables required) The present value of an investment is affected by which of the following?

(Present value tables required) Assuming an interest rate of 10%,the present value of $50,000 to be received 8 years from now would be closest to

The present value of $1,000,000 received in 13 years,given an interest rate of 3%,is

(Present value tables required) Your grandfather has promised to give you $1,000 a year at the end of each of the next four years if you earn Cs or better in all of your courses each year.Using a discount rate of 6%,which of the following is correct for determining the present value of the gift?

The three factors that affect the time value of money are principal,number of periods,and the interest rate.

(Present value tables required) If you invest $1,200 at the end of every year for five years at an interest rate of 10%,the balance of your investment in 5 years will be closest to

Your wealthy neighbor has promised to give you $2,000 a year at the end of each of the next four years to help with college.Using a discount rate of 8%,the present value of the gift can be stated as

(Present value tables required) Income from an apartment building you own totals $260,000 per year.You plan on selling the building and retiring to France in 12 years.Assuming you can invest the income from the building each year at 3%,how much money will you have on which to retire?

(Present value tables required) You win the lottery and must decide how to take the payout.Use an 8% discount rate.What is the present value of $15,000 a year received at the end of each of the next six years?

(Present value tables required) Assuming an interest rate of 10%,if you invest a lump sum of $5,000 now,the balance of your investment in 7 years will be closest to

You recently won a contest sponsored by a local radio station.The radio station will pay you $2,500 at the end of each of the next 15 years.Assuming an interest rate of 3%,what is the present value of this prize?

(Present value tables required) Assuming an interest rate of 10%,the present value of $11,000 received at the end of each year for 6 years would be closest to