Question 1

Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?

Accepted Answer

Evaluating a project by APR alone ignores the potential significant effects that accrue as a result of compounding on a more frequent than annual basis. For example, over a long period of time there is a significant difference to the value of an account that carries monthly as opposed to annual compounding. In a similar manner, the cost of a loan can best be evaluated through the effective annual rate that considers the cost of payments occurring more frequently than annually.

Question 2

As long as the interest rate is positive, the future value will always be larger than the present value given any period of time.

Accepted Answer

A) True 
 B)False  True

Question 3

How much must be saved at the end of each year for the next 10 years in order to accumulate $50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings every year.

Accepted Answer

A)  $3,291.00 
B)  $3,587.87 
C)  $4,500.33 
D) $4,587.79 
A)  $3,291.00 
B)  $3,587.87 
C)  $4,500.33 
D) $4,587.79 A

Question 4

What will be the approximate population of the United States, if its current population of 300 million grows at a compound rate of 2% annually for 25 years?

Accepted Answer

A)  413 million 
B)  430 million 
C)  488 million 
D) 492 million 
A)  413 million 
B)  430 million 
C)  488 million 
D) 492 million

Question 5

How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just credited to the account for interest?

Accepted Answer

A)  $88 
B)  $100 
C)  $112 
D) $200 
A)  $88 
B)  $100 
C)  $112 
D) $200

Question 6

You invested $1,200 three years ago. During the three years, you earned annual rates of return of 4.8%, 9.2%, and 11.6%. What is the value of this investment today?

Accepted Answer

A)  $1,498.08 
B)  $1,512.11 
C)  $1,532.60 
D) $1,549.19 
A)  $1,498.08 
B)  $1,512.11 
C)  $1,532.60 
D) $1,549.19

Question 7

Eighteen years from now, 4 years of college are expected to cost $150,000. How much more must be deposited into an account today to fund this expense if you could only earn 8% rather than the 11% you had hoped to earn on your savings?

Accepted Answer

A)  $12,211.18 
B)  $13,609.21 
C)  $14,006.41 
D) $14,614.03 
A)  $12,211.18 
B)  $13,609.21 
C)  $14,006.41 
D) $14,614.03

Question 8

Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000, $35,000, and $42,000 over the next three years with the first payment of $28,000 occurring one year from today. What is this contract worth today at a discount rate of 7.25%?

Accepted Answer

A)  $88,311.08 
B)  $89,423.91 
C)  $90,580.55 
D) $91,341.41 
A)  $88,311.08 
B)  $89,423.91 
C)  $90,580.55 
D) $91,341.41

Question 9

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

Accepted Answer

A) True 
 B)False

Question 10

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

Accepted Answer

A) True 
 B)False

Question 11

What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments?

Accepted Answer

A)  9.00% 
B)  9.38% 
C)  9.81% 
D) 10.94% 
A)  9.00% 
B)  9.38% 
C)  9.81% 
D) 10.94%

Question 12

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate?

Accepted Answer

A)  $130.00 
B)  $138.83 
C)  $169.00 
D) $353.34 
A)  $130.00 
B)  $138.83 
C)  $169.00 
D) $353.34

Question 13

How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years?

Accepted Answer

A)  $87,200.00 
B)  $675,764.89 
C)  $736,583.73 
D) $802,876.27 
A)  $87,200.00 
B)  $675,764.89 
C)  $736,583.73 
D) $802,876.27

Question 14

In calculating the present value of $1,000 to be received 5 years from today, the discount factor has been calculated to be .7008. What is the apparent interest rate?

Accepted Answer

A)  5.43% 
B)  7.37% 
C)  8.00% 
D) 9.50% 
A)  5.43% 
B)  7.37% 
C)  8.00% 
D) 9.50%

Question 15

What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is made today?

Accepted Answer

A)  $9,655.65 
B)  $10,814.33 
C)  $12,112.05 
D) $13,200.00 
A)  $9,655.65 
B)  $10,814.33 
C)  $12,112.05 
D) $13,200.00

Question 16

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due?

Accepted Answer

A)  $10 
B)  $61.40 
C)  $10 × Number of years in annuity stream 
D) $6.14 × Number of years in annuity stream 
A)  $10 
B)  $61.40 
C)  $10 × Number of years in annuity stream 
D) $6.14 × Number of years in annuity stream

Question 17

A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate. What is its present value?

Accepted Answer

A)  $33,333.33 
B)  $37,681.16 
C)  $38,333.33 
D) $65,217.39 
A)  $33,333.33 
B)  $37,681.16 
C)  $38,333.33 
D) $65,217.39

Question 18

When money is invested at compound interest, the growth rate is the interest rate.

Accepted Answer

A) True 
 B)False

Question 19

What is the present value of a four-year annuity of $100 per year that begins 2 years from today if the discount rate is 9%?

Accepted Answer

A)  $297.22 
B)  $323.97 
C)  $356.85 
D) $272.68 
A)  $297.22 
B)  $323.97 
C)  $356.85 
D) $272.68

Question 20

How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually?

Accepted Answer

A)  9.81 years 
B)  14.27 years 
C)  22.01 years 
D) 25.00 years 
A)  9.81 years 
B)  14.27 years 
C)  22.01 years 
D) 25.00 years

Exam 5: The Time Value of Money

Why is it difficult and perhaps risky to evaluate financial projects based on APR alone?

As long as the interest rate is positive, the future value will always be larger than the present value given any period of time.

How much must be saved at the end of each year for the next 10 years in order to accumulate $50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings every year.

What will be the approximate population of the United States, if its current population of 300 million grows at a compound rate of 2% annually for 25 years?

How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just credited to the account for interest?

You invested $1,200 three years ago. During the three years, you earned annual rates of return of 4.8%, 9.2%, and 11.6%. What is the value of this investment today?

Eighteen years from now, 4 years of college are expected to cost $150,000. How much more must be deposited into an account today to fund this expense if you could only earn 8% rather than the 11% you had hoped to earn on your savings?

Lester's just signed a contract that will provide the firm with annual cash inflows of $28,000, $35,000, and $42,000 over the next three years with the first payment of $28,000 occurring one year from today. What is this contract worth today at a discount rate of 7.25%?

Compound interest pays interest for each time period on the original investment plus the accumulated interest.

Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.

What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments?

How much interest will be earned in an account into which $1,000 is deposited for one year with continuous compounding at a 13% rate?

How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years?

In calculating the present value of $1,000 to be received 5 years from today, the discount factor has been calculated to be .7008. What is the apparent interest rate?

What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is made today?

The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By approximately how much would the value change if these were annuities due?

A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate. What is its present value?

When money is invested at compound interest, the growth rate is the interest rate.

What is the present value of a four-year annuity of $100 per year that begins 2 years from today if the discount rate is 9%?

How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually?

Goals and Governance of the Corporation

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters