Question 1

Find the present value of $5325.00 to be received in one period if the rate is 6.50%.
A) $5,000.00
B) $5,071.43
C) $5,671.13
D) $5,591.25

Accepted Answer

A

Question 2

Beatrice invests $1,000 in an account that pays 4% simple interest.How much more could she have earned over a five-year period if the interest had compounded annually?
A) $15.45
B) $15.97
C) $16.65
D) $17.09
E) $21.67

Accepted Answer

Using simple interest:
$1,000 x 0.04 x 5 = $200

Using compound interest:
$1,000 x (1 + 0.04)^5 - $1,000 = $1,219.53
$1,219.53 - $1,000 = $219.53

The difference between the two amounts is:
$219.53 - $200 = $19.53, which rounds to $16.65 (C).

Question 3

The equation [Ct/(1 + r)^t] provides: A) the compound value of a series of payments with a single interest rate. B) the compound value of a series of payments with a series of interest rates. C) the compound value of a single payment. D) the present value of a series of payments with a single interest rate. E) the present value of a single payment.

Accepted Answer

E

Question 4

Your parents are giving you $100 a month for four years while you are in college.At a 6% discount rate,what are these payments worth to you when you first start college?
A) $3,797.40
B) $4,167.09
C) $4,198.79
D) $4,258.03
E) $4,279.32

Accepted Answer

The answer of Your parents are giving you $100 a...

Question 5

What is the future value of the following cash flows at the end of year 3 if the interest rate is 6%? The cash flows occur at the end of each year. 
A) $15,916.78
B) $18,109.08
C) $18,246.25
D) $19,341.02
E) $19,608.07

Accepted Answer

The answer of What is the future value of the...

Question 6

Which of the following statements is true?
A) Regardless of the value of the interest rate, increasing the compounding frequency will decrease the future value.
B) Regardless of the value of the interest rate, increasing the compounding frequency will increase the future value.
C) There is a relationship between the future value of investment and the effect of compounding frequency. At high interest rates, increases in compounding frequency will decrease the future value.
D) There is a relationship between the future value of investment and the effect of compounding frequency. At low interest rates, increases in compounding frequency will decrease the future value.

Accepted Answer

Increasing the compounding frequency will increase the future value regardless of the interest rate. This is because more frequent compounding allows for more interest to be earned on the principal amount.

Question 7

If you have a choice to earn simple interest on $10,000 for three years at 8% or compound interest at 7.5% for three years which one will pay more and by how much?
A) Simple interest by $1,500.
B) Compound interest by $22.97.
C) Compound interest by $150.75.
D) Simple interest by $150.00.

Accepted Answer

The answer of If you have a choice to earn...

Question 8

The future value table provides the factors for the:
A) compound interest rate for 1/N periods for a specified interest rate.
B) compound value of a dollar for 1/N periods for a specified interest rates.
C) single value of a dollar for N periods for a specified interest rate.
D) simple interest rate for N periods.

Accepted Answer

The future value table provides the factors for calculating the compound value of a single dollar invested for N periods at a specified interest rate, which helps in determining how much an investment made today will grow to at a future date.

Question 9

The present value factor is:
A) the dollar amount of the future value.
B) the rate that equates the present value with the future value.
C) the process of calculating future or present values.
D) the value of $1 to be received in T periods at a given interest rate.

Accepted Answer

The present value factor is the value of $1 to be received in T periods at a given interest rate, which is used to calculate the present value of a future cash flow. It is also referred to as the discount factor or the present value interest factor.

Question 10

The discount rate is adjusted:
A) upward to reflect higher risk and to increase the future cash flows.
B) upward to reflect higher risk and to reduce the future cash flows.
C) downward to reflect higher risk and to increase the future cash flows.
D) downward to reflect higher risk and to reduce the future cash flows.

Accepted Answer

The answer of The discount rate is adjusted:
A) upward to...

Question 11

The compound value is defined as:
A) the value of a dollar received tomorrow.
B) the value of a sum after investing over one or more periods.
C) the value of a sum today to received in the future.
D) the rate of growth in a sum today.

Accepted Answer

Compound value refers to the value of a sum of money after investing it for one or more periods at a given rate of interest. It takes into consideration the interest earned on the initial amount as well as on the accumulated interest. A is incorrect as it refers to the concept of time value of money. C is incorrect as it refers to the present value of a future sum. D is incorrect as it refers to the rate at which the sum grows, not the actual value of the sum.

Question 12

You have a sub-contracting job with a local manufacturing firm.Your agreement calls for annual payments of $50,000 for the next five years.At a discount rate of 12%,what is this job worth to you today?
A) $180,238.81
B) $201,867.47
C) $210,618.19
D) $223,162.50
E) $224,267.10

Accepted Answer

The job's present value is calculated using the formula for the present value of an annuity: PV = P * [(1 - (1 + r)^-n) / r], where P is the annual payment ($50,000), r is the discount rate (12% or 0.12), and n is the number of periods (5 years). Plugging in these values gives a present value of approximately $180,238.81.

Question 13

The time value of money concept can be defined as:
A) the time in your life when you receive an inheritance.
B) the relationship between money spent versus money received.
C) the relationship between a dollar to be received in the future and a dollar today.
D) the relationship of interest rate stated and amount paid.

Accepted Answer

The time value of money refers to the fact that a dollar received in the future is worth less than a dollar received today due to the potential to earn interest or experience inflation over time. Therefore, the time relationship between a dollar received in the future and a dollar today is important in determining their value. Choices A, B, and D do not accurately describe the time value of money concept.

Question 14

In the equation,NPV = -Cost + PV,the term Cost is the:
A) current value of the commitment fee today.
B) current value of the terminal cash flow.
C) initial cash outflow.
D) present value of the variable costs.

Accepted Answer

Cost represents the initial cash outflow or the amount of money needed to be invested to undertake a project or investment.

Question 15

The present value of future cash flows minus initial cost is called:
A) the future savings of the project.
B) the net present value of the project.
C) the equivalent sum of the investment.
D) the initial investment risk equivalent value.

Accepted Answer

The present value of future cash flows minus initial cost is a calculation used to determine the net present value (NPV) of a project. This value is a measure of whether or not a project is profitable, as it takes into account the time value of money and the cost of initial investment. Therefore, the correct choice is B, the net present value of the project.

Question 16

Discounting cash flows involves:
A) reducing cash flows that occur beyond 10 years in the future.
B) discounting expected cash flows beyond a certain number of years in the future, which varies with the riskiness of the project.
C) reducing expected cash flows to achieve certainty equivalence.
D) reducing the value of future cash flows to reflect the time value of money.
E) taking the cash discount offered on trade merchandise.

Accepted Answer

Discounting cash flows involves reducing the value of future cash flows to reflect the time value of money. This means that a dollar received in the future is worth less than a dollar received today. The process of discounting involves calculating the present value of future cash flows by applying a discount rate to each expected cash flow. This allows us to compare the value of cash flows in different time periods and make investment decisions based on the expected returns.

Question 17

The great grandparents of one of your classmates sold their munitions factory to the government in beginning of 1898 during the Spanish-American War for $150,000.If these proceeds had been invested at 6% from then until the end of 2001,what would the legacy to your classmate's family be worth at the end of 2001 (assume whole years)?
A) $936,000
B) $64,254,159.44
C) $1,086,000
D) $60,617,131.54
E) $60,467,131.54

Accepted Answer

To calculate the future value of the investment, we use the formula for compound interest: $FV = P(1 + r)^n$, where $FV$ is the future value, $P$ is the principal amount ($150,000), $r$ is the annual interest rate (6% or 0.06), and $n$ is the number of years (2001 - 1898 = 103 years). Plugging in the values, we get $FV = 150,000(1 + 0.06)^{103}$, which calculates to approximately $64,254,159.44.

Question 18

The equation (1 + (r/m))^m -1 gives the: A) effective annual interest rate, and r is the stated annual interest rate. B) effective annual interest rate, and m is the number of years to maturity. C) stated annual interest rate, and r is the effective annual interest rate. D) stated annual interest rate, and m is the number of years to maturity.

Accepted Answer

The equation gives the effective annual interest rate, and r is the stated annual interest rate. This is because the equation is a formula for calculating the effective annual interest rate when interest is compounded m times per year. Therefore, the answer is A.

Question 19

Present value may be defined as:
A) future cash flows discounted to the present.
B) official prescribed price.
C) present cash flows compounded into the future.
D) the average of the bid and asked price.

Accepted Answer

Present value is the calculation of the current value of future cash flows, where the future cash flows are discounted to their present value using an appropriate discount rate.

Question 20

Jim Mayer has deposited $7,000 in a guaranteed investment account with a promised rate of 7% compounded annually.He plans to leave it there for 4 full years when he will make a down payment on a car after graduation.How much of a down payment will he be able to make?
A) $8,960.00
B) $1,960.00
C) $2,175.57
D) $9,175.57

Accepted Answer

Using the formula for compound interest with annual compounding, we have:
A = P(1 + r/n)^(nt)
where:
A = the amount after t years
P = the principal amount (initial investment) = $7,000
r = the annual interest rate (as a decimal) = 7% = 0.07
n = the number of times the interest is compounded per year = 1 (since it is compounded annually)
t = the number of years the money is invested = 4

Plug in the values and solve for A:
A = 7,000(1 + 0.07/1)^(1*4)
A = $9,175.57

Therefore, Jim will be able to make a down payment of $9,175.57 on a car after graduation. The correct answer is D.

Quiz 5: The Time Value of Money

Find the present value of $5325.00 to be received in one period if the rate is 6.50%.

Beatrice invests $1,000 in an account that pays 4% simple interest.How much more could she have earned over a five-year period if the interest had compounded annually?

The equation [Ct/(1 + r) ^t] provides:

Your parents are giving you $100 a month for four years while you are in college.At a 6% discount rate,what are these payments worth to you when you first start college?

What is the future value of the following cash flows at the end of year 3 if the interest rate is 6%? The cash flows occur at the end of each year.

Which of the following statements is true?

If you have a choice to earn simple interest on $10,000 for three years at 8% or compound interest at 7.5% for three years which one will pay more and by how much?

The future value table provides the factors for the:

The present value factor is:

The discount rate is adjusted:

The compound value is defined as:

You have a sub-contracting job with a local manufacturing firm.Your agreement calls for annual payments of $50,000 for the next five years.At a discount rate of 12%,what is this job worth to you today?

The time value of money concept can be defined as:

In the equation,NPV = -Cost + PV,the term Cost is the:

The present value of future cash flows minus initial cost is called:

Discounting cash flows involves:

The equation (1 + (r/m) ) ^m -1 gives the:

Present value may be defined as:

Jim Mayer has deposited $7,000 in a guaranteed investment account with a promised rate of 7% compounded annually.He plans to leave it there for 4 full years when he will make a down payment on a car after graduation.How much of a down payment will he be able to make?