Exam 5: Introduction to Valuation: the Time Value of Money

The price of gold has gone from $250 an ounce to approximately $1,600. Given an annual growth rate of 8.04%, how long did it take gold to reach its highest value?

The present value will increase the higher the rate of interest.

Chia Burgers began operations by opening 115 restaurants in Western Canada at the end of its first year of operations. By the end of year 2, an additional 5 restaurants were opened. By the end of year 3, there were 130 restaurants operational. At the end of year 5, there were 138 total restaurants. Between the end of year 2 and the end of year 3, the number of eating establishments grew at a rate of _________ compounded annually.

You deposit $1,000 in a retirement account today at 8.5% interest. How much more money will you have if you leave the money invested for 40 years rather than 35 years?

One year ago, you invested $5,000. Today, your investment is worth $6,178.40. What rate of interest did you earn?

You deposit $500,000 in a higher risk investment. Three years later, you receive $711,900 and withdraw your funds. Given this information calculate the interest earned at the end of year 3.

Present values increase the further away in time the future value.

You would like to give your daughter $50,000 towards her college education sixteen years from now. How much money must you set aside today for this purpose if you can earn 7.8% on your funds?

The notion that money has "time-value" is based on the existence of a nonzero "opportunity rate", i.e., a rate of return at which it is possible to invest. Why is the opportunity rate so important?

You deposit $3,000 in a retirement account today at 5.5% interest. How much more money will you have if you leave the money invested for forty-five years rather than forty years?

You setup an educational savings plan that will pay $15,000 to your newborn child in 18 years. If the plan uses a rate of 4.75% per year, what was contributed into this plan?

Provide a graphical illustration of present value over a twenty year time span given rates of return of 0%, 5%, 10%, 15% and 20%.

Interest earned only on the original principal amount invested is called _______________.

You hope to buy your dream house 3 years from now. Today, your dream house costs $247,900. You expect housing prices to rise by an average of 7.5% per year over the next 3 years. How much will your dream house cost by the time you are ready to buy it?

Seven years ago David deposited $10,000 into an account earning 5.25% compounded monthly. Recently, David was quoted by a home improvement firm a price of $15,000 to renovate his roof. Does David have enough cash on hand to pay for the roof?

The term to convert a future value amount into its present value is:

Which one of the following statements is correct if you invest $100 in an account at a simple interest rate of 4% for five years?

The future value will increase the higher the rate of interest.

Tropical Tans is saving money to build a new salon. Three years ago, they set aside $12,000 for this purpose. Today, that account is worth $16,418. What rate of interest is Tropical Tans earning on this money?

You are supposed to receive $2,000 five years from now. At an interest rate of 6%, what is that $2,000 worth today?