Question 1

As the discount rate becomes higher and higher, the present value of inflows approaches

Accepted Answer

As the discount rate becomes higher and higher, the present value of future cash inflows decreases, approaching zero. This is because the discount rate represents the time value of money and the higher the discount rate, the less value is placed on future cash inflows. Therefore, the present value of inflows approaches zero, not infinity or negative infinity.

Question 2

To find the yield on investments which require the payment of a single amount initially, and which then return a single amount some time in the future, the correct table to use is

Accepted Answer

The future value of $1 table is used to find the future value of a single amount invested today. The present value of $1 table is used to find the present value of a single amount received in the future.

Question 3

To save for her newborn son's college education, Lea Wilson will invest $1,000 at the beginning of each year for the next 18 years. The interest rate is 12 percent. What is the future value?

Accepted Answer

The answer of To save for her newborn son's college...

Question 4

If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?

Accepted Answer

The answer of If you were to put $1,000 in...

Question 5

Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years. What is the present value of this 20 year cash flow? Use an 11% discount rate.

Accepted Answer

The answer of Ambrin Corp. expects to receive $2,000 per...

Question 6

Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the next 15 years and expects to earn a 6% annual rate of return. How much money will his daughter have when she starts college?

Accepted Answer

The answer of Mr. Blochirt is creating a college investment...

Question 7

As the time period until receipt increases, the present value of an amount at a fixed interest rate

Accepted Answer

This is due to the time value of money principle, which states that the earlier you receive money, the more valuable it is because you can invest it and earn interest. Therefore, as the time period until receipt increases, the present value of an amount at a fixed interest rate decreases.

Question 8

Sharon Smith will receive $1 million in 50 years. The discount rate is 14%. As an alternative, she can receive $1,000 today. Which should she choose?

Accepted Answer

The answer of Sharon Smith will receive $1 million in...

Question 9

An annuity may be defined as

Accepted Answer

An annuity is defined as a series of consecutive payments of equal amounts. These payments may be made weekly, monthly, quarterly, annually, or at any other regular interval of time. An annuity may be paid for a specific period or for the lifetime of the beneficiary.

Question 10

Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years. The interest rate is 8 percent. What is the future value?

Accepted Answer

The future value of an annuity due can be calculated using the formula FV = P * [(1 + r)^n - 1] * (1 + r) / r, where P is the payment, r is the interest rate, and n is the number of periods. Plugging in the values: FV = $5,000 * [(1 + 0.08)^9 - 1] * (1 + 0.08) / 0.08 = $67,435.

Question 11

Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much return will his investment earn during this time period?

Accepted Answer

The return on the investment can be calculated using the formula for compound interest: A = P(1 + r)^n, where P is the principal amount ($5,000), r is the annual interest rate (0.08), and n is the number of years (7). The total amount A after 7 years is $8,570. Subtracting the initial investment of $5,000 gives a return of $3,570.

Question 12

You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

Accepted Answer

To determine the present value of a future amount (in this case, $12,000 at the end of 5 years), we need to use the present value of $1 table. This table will help us calculate how much we need to invest today at a 6% yield to have a value of $12,000 in 5 years.

Question 13

The concept of time value of money is important to financial decision making because

Accepted Answer

The concept of time value of money recognizes that earning a return on invested capital makes $1 worth more today than $1 received in the future. It emphasizes the importance of earning a return and can be applied to different streams of income to compare their values over time. Therefore, all of these options are correct.

Question 14

Ali Shah sets aside 2,000 each year for 5 years. He then withdraws the funds on an equal annual basis for the next 4 years. If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use the following two tables in this order:

Accepted Answer

To find out the amount of the annuity to be withdrawn each year, Ali needs to determine the future value of his savings over the 5-year period, which will be the present value of an annuity to be withdrawn over the 4-year period. Therefore, he needs to use the present value of an annuity of $1 table first to determine the future value of his savings, and then use the future value of an annuity of $1 table to determine the amount of the annuity to be withdrawn each year. Hence, choice B is the best option.

Question 15

If you invest $10,000 at 10% interest, how much will you have in 10 years?

Accepted Answer

To calculate the future value of an investment, we can use the formula: FV = PV x (1 + r)^n, where FV is the future value, PV is the present value or initial investment, r is the interest rate, and n is the number of years. Applying this formula here:

FV = $10,000 x (1 + 0.1)^10
FV = $10,000 x 2.5937
FV = $25,937.50

Rounding this answer to the nearest dollar gives us:
$25,940

Therefore, the correct answer is B.

Question 16

As the interest rate increases, the present value of an amount to be received at the end of a fixed period

Accepted Answer

As the interest rate increases, the discount rate used to calculate the present value also increases. This leads to a decrease in the present value of an amount to be received in the future.

Question 17

In determining the future value of a single amount, one measures

Accepted Answer

To determine the future value of a single amount, one needs to calculate how much that amount will grow over time at a given interest rate. This can be done by applying the formula: FV = PV x (1 + r)n, where PV is the present value (or starting amount), r is the interest rate, and n is the number of periods the amount is allowed to grow. Therefore, the correct answer is C - the future value of an amount allowed to grow at a given interest rate.

Question 18

Lou Lewis borrows $10,000 to be repaid over 10 years at 9 percent. Repayment of principal in the first year is:

Accepted Answer

The formula to calculate the annual payment on a loan is:

PMT = P * (r / (1 - (1 + r)^(-n)))

Where:

PMT = Annual payment
P = Principal amount borrowed
r = Interest rate per period
n = Total number of periods

Substituting the given values, we have:

PMT = 10,000 * (0.09 / (1 - (1 + 0.09)^(-10)))
PMT = 1,311.39

So, the annual payment for the loan is $1,311.39. To calculate the principal payment for the first year, we need to subtract the interest payment from this amount. The interest payment for the first year can be calculated as:

Interest = P * r
Interest = 10,000 * 0.09
Interest = 900

Subtracting the interest payment from the annual payment, we have:

Principal payment = PMT - Interest
Principal payment = 1,311.39 - 900
Principal payment = 411.39

Therefore, the principal payment in the first year is $411.39 (rounded to the nearest dollar), which corresponds to option B.

Question 19

The IF for the future value of an annuity is 4.641 at 10% for 4 years. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be?

Accepted Answer

We can use the formula for future value of an annuity:

FV = PMT[(1+r)^n - 1]/r

Plugging in the given values:
4.641 = PMT[(1+0.1)^4 - 1]/0.1

Solving for PMT:
PMT = 8,000/(1.1^4-1)/4.641
PMT = $1,724.29

Therefore, the annual payments should be $1,724, which corresponds to choice C.

Question 20

How much must you invest at 8% interest in order to see your investment grow to $8,000 in 10 years?

Accepted Answer

This is a straightforward application of the compound interest formula A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the interest rate, n is the number of times interest is compounded per year, and t is the number of years. In this case, we have:

A = $8,000
r = 8% or 0.08
n = 1 (interest is compounded annually)
t = 10 years

So we can solve for P as:

P = A/(1 + r/n)^(nt) = $8,000/(1 + 0.08/1)^(1*10) = $3,703.82

The closest answer choice to this is B, which is $3,704. Therefore, the best choice is B.

Quiz 9: The Time Value of Money