Exam 5: The Time Value of Money

Future value: You are interested in investing $10,000, a gift from your grandparents, for the next four years in a managed fund that will earn an annual return of 8 percent. What will your investment be worth at the end of four years? (Round to the nearest dollar.)

Which one of the following statements is NOT true?

The present value can be thought of as the discounted value of a future amount.

Multiple compounding (PV): Rick Rodriquez plans to invest some money today so that he will receive $7,500 in three years. If the investment he is considering will pay 3.65 percent compounded daily, how much will he have to invest today?

Multiple compounding (PV): Marcie Witter is saving for her daughter's college education. She wants to have $50,000 available when her daughter graduates from high school in four years. If the investment she is considering will pay 8.25 percent compounded monthly, how much will she have to invest today to reach her target? (Round to the nearest dollar.)

The value of a dollar invested at positive interest rate grows over time.

The growth rate over time is linear.

The present value technique uses discounting to find the present value of each cash flow at the beginning of the project.

Which one of the following statements is NOT true?

The time value of money refers to the issue of:

Compounding is the process by which interest earned on an investment is reinvested so that in future periods, interest is earned on the interest as well as the principal.

Future value measures:

Multiple compounding (PV): Joan Alexander wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she were to deposit the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.)

Present value: Becky Sayers wants to buy a house in six years. She hopes to be able to put down $25,000 at that time. If the bank term deposit she wants to invest in will pay 7.5 percent annually, how much will she have to invest today? (Round to the nearest dollar.)

Growth rate: Trojan Traps manufactures an innovative mouse trap. Sales this year are $325,000. The company expects its sales to go up to $500,000 in five years. What is the expected growth rate in sales for this company? (Round to the nearest percent.)

The lower the discount rate, the lower the present value of a future cash flow.

Growth rate: Peterson Electrical Supplies has generated a profit of $161,424 this year. The company expects to see an annual growth of 30 percent for the next five years, followed by a growth rate of 15 percent for each of the next three years. What will be the company's expected profit in eight years? (Round to the nearest dollar.)

Growth rate: Cleargen, a detergent manufacturer, has announced this year's profit as $832,500. It expects its net earnings to grow at a rate of 15 percent per year for the next two years, before dropping to 12 percent for each of the following two years. What is the company's profit after four years? (Round to the nearest dollar.)

If Bank A pays interest on a monthly basis and Bank B pays the same interest on a quarterly basis, then investing $1,000 in Bank B will lead to a higher future value than investing the same amount in Bank A.

Future value: Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank term deposit that will earn interest at 5.75 percent annually. How much will he have at the end of three years? (Round to the nearest dollar.)