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

Sue and Neal are twins.Sue invests $5,000 at 7 percent when she is 25 years old.Neal invests $5,000 at 7 percent when he is 30 years old.Both investments compound interest annually.Both Sue and Neal retire at age 60.Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

Sara invested $500 six years ago at 5 percent interest.She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment.Which type of interest is Sara earning?

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment.By leaving her interest earnings in her account,she increases the amount of interest she earns each year.The way she is handling her interest income is referred to as which one of the following?

When you retire 40 years from now,you want to have $1.2 million.You think you can earn an average of 12 percent on your investments.To meet your goal,you are trying to decide whether to deposit a lump sum today,or to wait and deposit a lump sum 2 years from today.How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit?

Terry is calculating the present value of a bonus he will receive next year.The process he is using is called:

In 1895,the winner of a competition was paid $150.In 2006,the winner's prize was $70,000.What will the winner's prize be in 2040 if the prize continues increasing at the same rate?

Travis invested $9,250 in an account that pays 6 percent simple interest.How much more could he have earned over a 7-year period if the interest had compounded annually?

You want to have $1 million in your savings account when you retire.You plan on investing a single lump sum today to fund this goal.You are planning on investing in an account which will pay 7.5 percent annual interest.Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I.Invest in a different account paying a higher rate of interest. II.Invest in a different account paying a lower rate of interest. III.Retire later. IV.Retire sooner.

You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years.Assume you can earn 6 percent on your savings.Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different.

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

Ten years ago,Jackson Supply set aside $130,000 in case of a financial emergency.Today,that account has increased in value to $330,592.What rate of interest is the firm earning on this money?

Forty years ago,your mother invested $5,000.Today,that investment is worth $430,065.11.What is the average annual rate of return she earned on this investment?

On your ninth birthday,you received $300 which you invested at 4.5 percent interest,compounded annually.Your investment is now worth $756.How old are you today?

You invested $1,400 in an account that pays 5 percent simple interest.How much more could you have earned over a 20-year period if the interest had compounded annually?

You collect old coins.Today,you have two coins each of which is valued at $300.One coin is expected to increase in value by 6 percent annually while the other coin is expected to increase in value by 4.5 percent annually.What will be the difference in the value of the two coins 15 years from now?

You would like to give your daughter $75,000 towards her college education 17 years from now.How much money must you set aside today for this purpose if you can earn 8 percent on your investments?

This afternoon,you deposited $1,000 into a retirement savings account.The account will compound interest at 6 percent annually.You will not withdraw any principal or interest until you retire in forty years.Which one of the following statements is correct?

You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?

Your coin collection contains fifty-four 1941 silver dollars.Your grandparents purchased them for their face value when they were new.These coins have appreciated at a 10 percent annual rate.How much will your collection be worth when you retire in 2060?

Sixteen years ago,Alicia invested $500.Eight years ago,Travis invested $900.Today,both Alicia's and Travis' investments are each worth $2,400.Assume that both Alicia and Travis continue to earn their respective rates of return.Which one of the following statements is correct concerning these investments?