Deck 9: The Time Value of Money

Question 1

Higher interest rates reduce the present value amount.

Answer 1

True

Question 2

A major disadvantage to time value of money is that is only considers one item that changes the value of the dollar such as interest.

Answer 2

True

Question 3

The present value of a positive future inflow can become negative as discount rates become higher and higher.

Answer 3

False

Question 4

The future value is the same concept as the way money grows in a bank account.

Question 5

The formula PV = FV(1 + n)ⁱ will determine the present value of $1.

Question 6

The time value of money is not a useful concept in determining the value of a bond or in capital investment decisions.

Question 7

As the interest rate increases, the interest factor (IF) for the present value of $1 increases.

Question 8

The interest factor for the present value of a single amount is the reciprocal of the future value interest factor.

Question 9

Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.

Question 10

An amount of money to be received in the future is worth less today than the stated present value amount.

Question 11

Discounting refers to devaluing the item from the higher future value amount to the present value amount through the consideration of interest.

Question 12

If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could be determined by reference to a "future value of $1" table.

Question 13

To determine the current worth of four annual payments of $1,000 at 4% annual interest, one would refer to a time value of money table for the present value of $1.

Question 14

In determining the future value of an ordinary annuity, the final payment is not compounded at all.

Question 15

The interest factor for the future value of a single sum is equal to (1 + n)ⁱ.

Question 16

Cash flow decisions that ignore time value of money will probably not be as accurate as those decisions that do consider time value of money.

Question 17

The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions covering multiple periods of time.

Question 18

Time value of money considers many changes to the value of the dollar such as interest, inflation, deflation, etc.

Question 19

The interest factor for a future value (FV_IF) is equal to (1 + i)ⁿ

Question 20

The interest factor for the present value of a single sum is equal to (1 + i)/i..

Question 21

When the inflation rate is zero, the present value of $1 is identical to the future value of $1.

Question 22

Discounted at 6%, $1,000 received three years from now is worth less than $800 received today.
PV = FV × PV_IF (App B: 3 periods, 6%)
= $1,000 × .840 = $840

Question 23

If an individual's cost of capital were 6%, the person would prefer to receive $110 at the end of one year rather than $100 right now.
PV = FV × PVIF (App. B: 6%, 1 period)
= $110 × 0.943 = $104

Question 24

Using semi-annual compounding rather than annual compounding will increase the future value of an annuity.

Question 25

The amount of annual payments necessary to accumulate a desired future total can be found by reference to the present value of an annuity table.

Question 26

Compounding more than once a year (semi-annually, quarterly, or monthly) will increase the interest rate and number of periods used in the calculations.

Question 27

The future value of an ordinary annuity assumes that the payments are received at the end of the year and that the last payment does not compound.

Question 28

The farther into the future any given amount is received, the larger its present value.
Time amplifies the growth of money. Consequently, to achieve a certain future value, more time means that you can start with less.

Question 29

When adjusting for semi-annual compounding of an annuity, the adjustments include multiplying the periods and annuity payment amount by 2.

Question 30

The present value of an annuity table provides a "shortcut" for calculating the future value of a steady stream of payments, denoted as
A. The same value can be calculated directly from the following equation:

Question 31

Time value of money can be calculated in a few different ways such as time value of money tables, calculator, and/or equation, which all come up with a very similar answer.

Question 32

The time value of money concept becomes less critical as the prime rate of lending increases.

Question 33

In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of principal increases over the life of the mortgage.

Question 34

The future value of an annuity table provides a "shortcut" for calculating the future value of a steady stream of payments, denoted as
A. The same value can be calculated directly from the following equation:

Question 35

The interest factor for the future value of an annuity is simply the sum of the interest factors for the future value using the same number of periods.

Question 36

The amount of annual payments necessary to repay a mortgage loan can be found by reference to the present value of an annuity table.

Question 37

Calculation of the yield of an investment provides the total return over multiple years.

Question 38

Discounted at 10%, $1,000 received at the end of each year for three years is worth less than $2,700 received today.
PV_A = A × PV_IFA (App. D: 3 periods, 10%)
= $1,000 × 2.487 = $2,487

Question 39

An annuity is a series of consecutive payments of equal amount.
If even ONE of a stream of payments is not the same, we cannot use the "shortcut" of annuity tables and calculations

Question 40

In evaluating capital investment projects, current outlays must be judged against the current value of future benefits.

Question 41

Under what conditions must a distinction be made between money to be received today and money to be received in the future?

A) A period of recession
B) When idle money can earn a positive return
C) When there is no risk of non payment in the future
D) When current interest rates are different from expected future rates

Question 42

As the discount rate becomes higher and higher, the present value of inflows approaches

A) 0.
B) minus infinity.
C) plus infinity.
D) More information is needed.

Question 43

As the compounding rate becomes lower and lower, the future value of inflows approaches

A) 0.
B) the present value of the inflows.
C) infinity.
D) More information is needed to answer the question.

Question 44

If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would you use to find the ending balance in your account?

A) Present value of $1
B) Future value of $1
C) Present value of an annuity of $1
D) Future value of an annuity of $1

Question 45

Shah sets aside $2,000 each year for five years. After five years, he then withdraws the funds on an equal annual basis for the next four years. If Shah wishes to determine the amount of the annuity to be withdrawn in years 6 through 9, he should use the following two tables in this order:

A) present value of an annuity of $1; future value of an annuity of $1
B) future value of an annuity of $1; present value of an annuity of $1
C) future value of an annuity of $1; present value of $1
D) future value of an annuity of $1; future value of $1

Question 46

The concept of time value of money is important to financial decision making because

A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes $1 today worth less than $1 received in the future.
C) it can be applied to future cash flows in order to compare different streams of income.
D) All of these options are true.

Question 47

Time value of money considers which of the following item(s) that change the value of money?

A) Inflation
B) Interest
C) Currency changes
D) All of the options are true

Question 48

An annuity may best be defined as

A) a payment at a fixed interest rate.
B) a series of payments of unequal amount.
C) a series of yearly payments, regardless of amount.
D) a series of consecutive payments of equal amounts.

Question 49

How much must you invest today at 8% interest in order to see your investment grow to $8,000 in 10 years?

A) $3,070
B) $3,704
C) $3,105
D) $17,272

Question 50

To save for her newborn son 's college education, Lea Wilson will invest $1,000 at the end of each year for the next 20 years. The interest rate is 10%. What is the future value?

A) $8,514
B) $2,980
C) $63,440
D) $57,275

Question 51

A company wants to find the yield on an investment that requires a certain amount today in which then returns a single amount some time in the future. Which time value of money table would the company use?

A) the present value of $1 or the future value of $1.
B) the future value of an annuity of $1.
C) present value of an annuity of $1.
D) None of these are correct.

Question 52

You are to receive $12,000 at the end of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

A) Present value of an annuity of $1
B) Future value of an annuity of $1
C) Present value of $1
D) Future value of $1

Question 53

If a father and mother set aside a certain amount each year for their daughter 's college fund, which table would be used to determine the amount necessary to be put away each year in order to reach a certain goal once the daughter attends college?

A) The present value of $1
B) The future value of $1.
C) The future value of an annuity of $1.
D) Present value of an annuity of $1.

Question 54

To calculate "Future or Present Values of an "Annuity Due," we must assume that payments happen twice as often.
Annuities Due simply move TVM calculations back to the beginning of a year, rather than the end.

Question 55

In determining the future value of a single amount, one must consider

A) the periodic payments at a given interest rate and time.
B) the future value at a given interest rate and time.
C) the future periodic payments discounted at a given interest rate and time.
D) the present value at a given interest rate and time.

Question 56

As the interest rate increases, the present value

A) increases.
B) decreases.
C) remains the same.
D) Not enough information is given to tell.

Question 57

If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, how much would you have as an ending balance in your account?

A) Present value of $1
B) Future value of $1
C) Present value of an annuity of $1
D) Future value of an annuity of $1

Question 58

If you invest $10,000 today at 10% interest, how much will you have in 10 years?

A) $13,860
B) $25,940
C) $3,860
D) $80,712

Question 59

As the time period until receipt increases, the present value

A) decreases.
B) remains the same.
C) increases.
D) Not enough information is given to tell.

Question 60

You are to receive $12,000 at the end of each of five years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

A) Present value of an annuity of $1
B) Future value of an annuity of $1
C) Present value of $1
D) Future value of $1

Question 61

Mike Carlson will receive $12,000 a year from the end of the third year to the end of the 12^th year (10 payments). The discount rate is 10%. The present value today of this deferred annuity is ______.

A) $61,450
B) $42,185
C) $60,909
D) $55,379

Question 62

Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars?

A) Present value of an annuity
B) Present value of a single amount
C) Future value of an annuity
D) Future value of a dollar

Question 63

Lou Lewis borrows $10,000 to be completely repaid over 10 years at 8%. Repayment of principal in the first year is ______.

A) $1,493
B) $693
C) $690
D) $885

Question 64

The interest factor (IF) for the future value of an ordinary annuity is 4.641 at 10% for four years. If we wish to accumulate $8,000 by the end of four years, how much should the annual payments be?

A) $2,500
B) $2,000
C) $1,724
D) $37,128

Question 65

Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an 8% annual return. How much should he set aside at the end of each year?

A) $879
B) $627
C) $924
D) $9,738

Question 66

A dollar today is worth more than a dollar to be received in the future because

A) a stated rate of return is guaranteed on all investment opportunities.
B) the dollar can be invested today and earn interest.
C) inflation will increase the purchasing power of a future dollar.
D) None of these options are true.

Question 67

Joe Nautilus has $210,000 and wants to retire. What approximate return must his money earn so he may receive annual benefits of $30,000 for the next 10 years?

A) Greater than 10%
B) Between 8% and 10%
C) Between 6% and 8%
D) Lower than 6%

Question 68

Mr. Bubble wants to sell his bubble machine for $1,000,000, but it might take awhile before it is valued that high. He bought it for $149,000 and is earning annual interest of 10% on the machine. How long will Mr. Bubble have to wait before the machine is valued at $1,000,000?

A) 20 years
B) 10 years
C) 5 years
D) More than 20 years

Question 69

Football player Walter Johnson signs a contract calling for payments of $250,000 per year, which begins 10 years from now and then continue for five more years after that. To find the value of this contract today, which table or tables should you use?

A) The future value of $1
B) The future value of an annuity of $1 and the future value of $1
C) The present value of an annuity of $1 and the present value of $1
D) The present value of $1 and the future value of $1

Question 70

The shorter the length of time between a present value and its corresponding future value,

A) the lower the present value, relative to the future value.
B) the higher the present value, relative to the future value.
C) the higher the interest rate used in the discounting to the present value.
D) None of these options are correct.

Question 71

Mr. Fish wants to build a house in ten years. He estimates that the total cost will be $150,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

A) Between 8% and 10%
B) Between 6% and 8%
C) Above 10%
D) Between 4% and 6%

Question 72

Fishermen's Corp. is considering purchasing a boat. If the boat was purchased, it is expected to receive $20,000 at the end of the first year, $40,000 at the end of the second year, and $60,000 at the end of the third year within its business. What is the boat worth to Fishermen's Corp today, assume an 8% discount rate.

A) $120,000
B) $100,440
C) $47,640
D) $98,756

Question 73

The higher the interest rate used in determining the future value of a $1 annuity,

A) the smaller the future value at the end of the period.
B) the greater the future value at the end of a period.
C) the greater the present value at the beginning of a period.
D) None of these options. The interest has no effect on the future value of an annuity.

Question 74

Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the annual return on his investment?

A) 2%
B) Between 3% and 4%
C) 10%
D) Less than 1%

Question 75

Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% compounded for four years. How much total return will his investment earn during this time period?

A) $3,675
B) $1,800
C) $6,254
D) $8,570

Question 76

Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the next 5 years starting one year from now and expects to earn a 6% annual rate of return. How much money will his daughter have when she starts college?

A) $4,212
B) $12,263
C) $5,000
D) $5,637

Question 77

Ambrin Corp. expects to receive $2,000 at the end of each year for 10 years. Then the corporation expects to receive $3,500 per year for the following 10 years, at the end of each year. What is the approximate present value of this 20-year cash flow? Use an 8% discount rate.

A) $24,294
B) $27,870
C) $32,389
D) $2,547

Question 78

Sharon Smith will receive $1 million in 20 years. The discount rate is 10%. As an alternative, she can receive $200,000 today. Which should she choose?

A) The $200,000 today.
B) The $1 million in 20 years.
C) Both equal the same value.
D) Neither option would be preferred.

Question 79

Increasing the number of periods will increase all of the following except

A) the present value of an annuity.
B) the present value of $1.
C) the future value of $1.
D) the future value of an annuity.

Question 80

Pedro Gonzalez will invest $5,000 at the end of each year. If the interest rate is 8%, what will the value be after three years?

A) $12,885
B) $6,300
C) $16,230
D) $15,400