Exam 5: The Time Value of Money

Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

Compounding: Joachim Noah is investing $5,000 in an account paying 6.75 percent annually for three years. What is the interest-on-interest if interest is compounded?

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

Future value: Brittany Willis is looking to invest for retirement, which she hopes will be in 20 years. She is looking to invest $22,500 today in U.S. Treasury bonds that will earn interest at 6.25 percent annually. How much will she have at the end of 20 years? (Round to the nearest dollar.)

Which one of the following statements is NOT true?

Time to attain goal: Elegant Designers have generated sales of $625,000 for the current year. If they can grow their sales at a rate of 12 percent every year, how long will they take to triple their sales? (Round off to the nearest year.)

Using lower interest rates will

Individuals prefer to consume goods in the future rather than right away.

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 firm? (Round to the nearest percent.)

Growth rate: Petry Corp. is a growing company with sales of $1.25 million this year. The firm expects to grow at an annual rate of 25 percent for the next three years, followed by a growth of 20 percent per year for the next two years. What will be Petry's sales at the end of five years? (Round to the nearest percent.)

Compound interest consists only of interest-on-interest.

Compound interest consists of both simple interest and interest-on-interest.

Future value: Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank CD 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.)

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

Using lower discount rates will

Present value: Derek's friend, Jackson, is asking to borrow today with a promise to repay $7,418.87 in four years. If Derek could earn 5.45 percent annually on the any investment he makes today, how much would he be willing to lend Jackson today? (Round to nearest dollar.)

Time value of money is based on the belief that people have a positive time preference for consumption.

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.)

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.)

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.