Exam 5: The Time Value of Money

Animist Designers has generated sales of $625,000 for the current year. If it can grow the sales at a rate of 12 percent every year, how long will it take to triple the sales? (Round off to the nearest year.)

Which of the following statements is true of the time value of money?

Suppose you win $10 million in a lottery. You have a choice of how you will receive your winnings. The first choice is to receive a certain lump sum today. The second choice is to receive a certain amount at the end of five years. How will you evaluate your choices to make your decision?

The present value factor 1 / (1 + i)ⁿ is the reciprocal of the future value factor (1 + i)ⁿ.

Which of the following statements is true?

The process of converting the initial amount into future value is called discounting.

Explain the difference between simple interest and compound interest.

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

The future value factor for 10 years at 15% is calculated as (1 + 0.15)¹⁰.

Which of the following is true of the future value of an investment?

Joseph Ray just received an inheritance of $35,775 from his great aunt. He plans to invest the funds for retirement. If Joseph can earn 4.75% per year with quarterly compounding for 32 years, how much will he have accumulated? (Round off to the nearest dollar.)

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

Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which will have the highest future value if she plans to invest for three years?

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

Jack Palomo 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?

Which of the following statements is true?

Which of the following statements is true with respect to the present value of a future amount?

Your tuition for the coming year is due today. You borrow $8,000 from your uncle and agree to repay in the three years an amount of $9,250. What is the interest rate on this loan? Round to the nearest percent.

The present value factor increases as the number of period decreases.

Suppose that you just attended a lecture on Time Value of Money. On your way home, you stopped in to get a cup of coffee. One of your classmates, who missed the lecture, joined you for coffee and asked you to explain to her the key concepts of time value of money and how you could use it to solve some of practical financial problems. What would you tell her?