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

The I.C. James Co. invested $10,000 six years ago at 5% simple interest. The I.M. Smart Co. invested $10,000 six years ago at 5% interest which is compounded annually. The I.M Smart Co. will earn $525 interest in the second year.

Alexander Industries just had a very profitable year. The owner has decided to invest $225,000 of the profits in a venture that pays an 8% rate of return for fifteen years. How much more would the investment have been worth if the owner could have made 9% on this investment?

At a 6% rate of interest you will double your money in approximately ___ years.

What is the future value of $3,497 invested for 15 years at 7.5% compounded annually?

What is the present value of $36,800 to be received 6 years from today if the discount rate is 12%?

You will be receiving $2,500 from your family as a graduation present. You have decided to save this money for your retirement. You plan to retire 40 years after graduation. How much additional money will you have at that time if you can earn an average of 12.5% on your investment instead of just 12%?

Jessica invests $3,000 in an account that pays 5% simple interest. How much more could she have earned over a 7-year period if the interest had compounded annually?

The rate used to find the present value of a future payment is called the:

The James Co. plans on saving money to buy some new equipment. The company is opening an account today with a deposit of $15,000 and expects to earn 4% interest. After 3 years, the firm wants to add an additional $50,000 to the account. If the account continues to earn 4%, how much money will the James Co. have in their account five years from now?

Today Richard is investing $1,000 at 5% interest for five years. One year ago, Richard invested $1,000 at 6.25% for six years. How much money will Richard have saved in total five years from now if both investments compound interest annually?

At a 3% rate of interest, you will quadruple your money in approximately ____ years.

When you were 26 years old, you received an inheritance of $1,500 from your grandfather. You invested that amount in Nu-Wave stock and have not touched the investment since then. Today, this investment is worth $109,533.59. Nu-Wave stock has earned an average rate of return of 11.3% per year over this time period. How old are you today?

The future value of a single sum will increase more rapidly when the interest rate decreases.

An investor is considering depositing $20,000 and making monthly contributions of $250 per month into investment. If the investor wants to have a future value of $50,000, what will be the rate of interest if he wishes to have this amount in 5 years? Assume interest is compounded monthly.

The rate of return used when computing a present value is referred to as the ______ rate while the rate used when computing a future value is referred to as the _____ rate.

The present value factor will decrease:

Future value is always higher than present value

Which of the following will result in a future value greater than $100?

What is the future value of $25,000 received today if it is invested at 6.5% compounded annually for six years?

Your older sister deposited $5,000 today at 8% interest for five years. You would like to have just as much money at the end of the next five years as your sister. However, you can only earn 6% interest. How much more money must you deposit today than your sister if you are to have the same amount at the end of five years?