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

Your grandmother invested one lump sum 42 years ago at 3.5% interest. Today, she gave you the proceeds of that investment which totaled $28,204.37. How much did your grandmother originally invest?

Tom and Antonio both want to open savings accounts today. Tom wants to have $1,000 in his savings account six years from now. Antonio wants to have $1,000 in his savings account three years from now. Antonio needs to deposit more money into his account today than does Tom.

Betty invests $500 in an account that pays 3% simple interest. How much money will Betty have at the end of ten years?

The future value interest factor is calculated as:

Five years ago, Precision Tool set aside $50,000 in case of a financial emergency. Today, that account has increased in value to $64,397. What rate of interest is the firm earning on this money?

You are considering two lottery payment streams. Choice A pays $1,000 today and choice B pays $1,750 at the end of five years from now. Using a discount rate of 5%, based on present values, which would you choose? Using the same discount rate of 5%, based on future values, which would you choose? What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.)

Calculating the present value of a future cash flow to determine its value today is called:

Provide a definition of compounding.

What is the present value of $2,800 to be received three years from now if the discount rate is 9.5%?

The current value of future cash flows discounted at the appropriate discount rate is called the:

The future value factor will decrease:

What is the difference in future value if $20,000 is invested at 5% over ten years, with one option compounding interest semi-annually, while the other is based on quarterly compounding?

Mary plans on saving $1,000 a year for ten years. She would like to know the value of these savings today. Mary should solve for the:

Kay purchased some land costing $124,600. Today, that same land is valued at $179,400. How long has she owned this land if the price of land has been increasing at 6% per year?

Present value is used extensively by managers who are reviewing proposed projects. How does the present value of a cash flow assist management in making these business decisions?

The future value will increase the longer the period of time.

Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000 five years from now. Which one of the following statements is correct if both Katie and Wilt apply a 5% discount rate to these amounts?

You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded annually, how long will you have to wait to buy the stereo?

Moe and Joe are twins. Moe invested $1,000, earned 9% annually, and now has $1,992.56. Joe invested $1,000, earned 6.47%, and now has $1,992.97. Joe invested his money _____ years before Moe.

Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations?