Exam 5: The Time Value of Money

Compounding: Trish Harris has deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? If the account paid compound interest, what would be the interest-on-interest in five years?

The future value of an investment of $5,000 earning an annual interest of 10 percent equals $6,000 at the end of one year.

The future value of an investment of $1,000 to be received in three years at a discount rate of 10 percent is $1,331.

Interest rate: Rachael wants to borrow $6,000 for a period of four years. She has two choices. Her bank is offering to lend her the amount at 7.25 percent compounded annually. She can also borrow from her company and will have to repay a total of $8,130.93 at the end of four years. Should Rachael go with her bank or the company, and what is the interest rate if she borrows from her company? (Round to the nearest percent.)

Which one of the following statements is NOT true?

The present value of an investment of $1,000 to be received in three years at a discount rate of 10 percent is $751.31.

Interest rate: Dominic has $3,000 to invest for three years. He wants to receive $5,000 at the end of the three years. What invest rate would his investment have to earn to achieve his goal? (Round to the nearest percent.)

The process of converting future cash flows to what its present value is:

Present value: John Hsu wants to start a business in 10 years. He hopes to have $100,000 at that time to invest in the business. To reach his goal, he plans to invest a certain amount today in a bank term deposit that will pay him 9.50 percent annually. How much will he have to invest today to achieve his target? (Round to the nearest dollar.)

Multiple compounding periods (FV): Normandy Textiles had a cash inflow of $1 million, which it needs for a long-term investment at the end of one year. It plans to invest this money in a bank term deposit that pays daily interest at 3.75 percent. What will be the value of the investment at the end of the year? (Round to the nearest dollar.)

Present value: Tommie Harris is considering an investment that pays 6.5 percent annually. How much must he invest today such that he will have $25,000 in seven years? (Round to the nearest dollar.)

Using higher discount rates will:

Randy has to choose between two cash flows. He could either receive the future value of an investment of $1,000 at 8 percent annually in three years or in five years. Randy should always choose the shorter investment term because it is worth more today.

The process of converting an amount given at the present time into a future value is called:

The more frequently the interest payments are compounded, the larger the future value of $1 for a given time period.

Time to attain goal: Your uncle is looking to double his investment of $10,000. He claims he can get earn 14 percent on his investment. How long will it be before he can double his investment? Use the Rule of 72 and round to the nearest year.

The present value of an investment of $1,000 to be received in three years at a discount rate of 10 percent is $1,331.

Which one of the following statements is true?

Explain the difference between simple interest and compound interest.

Time to attain goal: Ryan Holmes wants to deposit $4,500 in a bank account that pays 8.25 percent annually. How many years will it take for his investment to grow to $10,000? (Round off to the nearest year.)