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

Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from now. If You can earn 7% on your invested funds, which of the following is true?

Interest earned on the reinvestment of previous interest payments is called _____ interest.

Future value is always higher than present value

The price of fuel has tripled over the past fifteen years. Determine the rate of growth over this time period.

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?

Today, your grandmother gave you a gift of $25,000 to help pay for your college education. She told you that this amount was the result of a one-time investment at 8% interest 13 years ago. How Much did your grandmother originally invest?

The value today of future cash flows discounted at the appropriate discount rate is called the _____ value.

The amount an investment is worth after one or more periods of time is the ___________.

Future value can be lower than present value

Courtney invests $1,200 today. If she can earn a 13.25% rate of return for the next two years, how much money will she have at the end of the two years?

The interest rate used to calculate the present value of future cash flows is called the _____ rate.

You would like to invest some money today such that your investment will be worth $100,000 fifteen years from now. Your broker gives you two options. First, you can invest at a guaranteed Annual rate of 4%. Or, you can invest in stocks and hopefully earn an average of 7% per year. How Much more will you have to invest today if you opt for the fixed rate rather than the stocks?

If $10,000 was invested at 4% over ten years, determine the difference if this investment was based on simple interest versus interest that was compounded annually.

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?

The future value of C invested at r% for t periods is:

Some time ago, Richard purchased five acres of land costing $123,400. Today, that land is valued at $189,700. How long has he owned this land if the price of land has been increasing at 5.5% per Year?

The current value of future cash flows discounted at the appropriate discount rate to current time is called the _____ value.

Omar has an investment valued at $12,345 today. He made a one-time investment at 6.5% four years ago. Leon has an investment that is also valued at $12,345 today. Leon invested four years Ago at 7.5%. Omar originally invested _____ and Leon invested _____.

Compound interest is best defined as the interest earned:

You just won the lottery and want to put some money away for your child's college education. College will cost $65,000 in 18 years. You can earn 8% compounded annually. How much do you Need to invest today?