Question 1

Assume you borrow $5,000 today and pay back the loan in one lump sum four years from today. You are charged 8 percent interest per year. What amount will you pay back and how much interest will you pay?

Accepted Answer

A) $6,399.56, $1,399.56 
B) $6,508.21, $1,508.21 
C) $6,802.44, $1,802.44 
D)  $7,902.11, $2,902.11

Question 2

You have $100,000 in your account. Assuming no additional deposits are made and your account earns 15 percent per year, how long will it take for the account to have a balance of $500,000?

Accepted Answer

A)  10.28 years 
B)  11.09 years 
C)  11.52 years 
D)  12.64 years

Question 3

How many years will it take $1 million to grow to $3 million with an annual interest rate of 7 percent?

Accepted Answer

A)  10.29 years 
B)  14.52 years 
C)  16.24 years 
D) 33.33 years

Question 4

Which of the following is NOT true when developing a time line?

Accepted Answer

A)  Cash inflows are designated with a positive number. 
B)  Cash outflows are designated with a positive number. 
C)  The cost is known as the interest rate. 
D)  The time line shows the magnitude of cash flows at different points in time.

Question 5

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?

Accepted Answer

A)  $6,000.00 
B)  $7,715.61 
C)  $7,908.48 
D)  $11,193.97

Question 6

Compute the present value of $4,000 paid in five years using the following discount rates: 10 percent in year 1, 2 percent in year 2, 12 percent in year 3, and 9 percent in years 4 and 5.

Accepted Answer

A)  $2,679.15 
B)  $2,206.81 
C)  $2,317.03 
D) $2,362.19

Question 7

What is the present value of a $7,000 payment made in six years when the discount rate is 4 percent?

Accepted Answer

A) $5,290.42 
B)  $5,532.20 
C) $5,802.82 
D)  $6,103.73

Question 8

Approximately what interest rate is needed to double an investment over eight years?

Accepted Answer

A)  8 percent 
B)  9 percent 
C)  12 percent 
D)  100 percent

Question 9

Compute the present value of $3,000 paid in four years using the following discount rates: 3 percent in year 1, 4 percent in year 2, 5 percent in year 3, and 6 percent in year 4.

Accepted Answer

A)  $1,998.73 
B)  $2,109.14 
C)  $2,491.28 
D)  $2,516.26

Question 10

What annual rate of return is earned on a $2,000 investment made in year 3 when it grows to $3,000 by the end of year 6?

Accepted Answer

A)  6.99 percent 
B)  14.47 percent 
C)  24.00 percent 
D)  50.00 percent

Question 11

What is the present value of a $500 payment made in four years when the discount rate is 8 percent?

Accepted Answer

A)  $365.35 
B)  $367.51 
C)  $460.00 
D)  $680.24

Question 12

Consider a $500 deposit earning 5 percent interest per year for five years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

Accepted Answer

A)  $13.14 
B)  $25.00 
C)  $125.00 
D)  $138.14

Question 13

You invested $5,000 in the stock market one year ago. Today, the investment is valued at $4,500. What return did you earn? What return would you need to get next year to break even overall?

Accepted Answer

A)  −111.11 percent, +90 percent, respectively 
B) −90 percent, +111.11 percent, respectively 
C)  −10 percent, +11.11 percent, respectively 
D)  −11.11 percent, +10 percent, respectively

Question 14

If an average home in your town currently costs $250,000, and house prices are expected to grow at an average rate of 3 percent per year, what will a house cost in eight years?

Accepted Answer

A)  $255,033.41 
B)  $255,043.97 
C)  $314,928.01 
D)  $316,692.52

Question 15

You are scheduled to receive a $750 cash flow in one year, a $1,000 cash flow in two years, and pay a $300 payment in four years. If interest rates are 6 percent per year, what is the combined present value of these cash flows?

Accepted Answer

A)  $1,359.92 
B)  $1,413.92 
C)  $1,592.63 
D)  $1,613.02

Question 16

You deposit $20,000 in an account that doubles in seven years. How many years will it take the account to be reduced to its original value if it loses 12 percent per year?

Accepted Answer

A)  4.92 years 
B)  5.42 years 
C)  6.62 years 
D)  8.22 years

Question 17

How are future values affected by changes in interest rates?

Accepted Answer

A)  The lower the interest rate, the larger the future value will be. 
B)  The higher the interest rate, the larger the future value will be. 
C)  Future values are not affected by changes in interest rates. 
D)  One would need to know the present value in order to determine the impact.

Question 18

If an average home in your town currently costs $350,000, and house prices are expected to grow at an average rate of 3 percent per year, what will an average house cost in "5" years?

Accepted Answer

A)  $402,500.00 
B)  $405,168.75 
C)  $405,745.93 
D)  $507,500.00

Question 19

A deposit of $300 earns interest rates of 7 percent in the first year and 10 percent in the second year. What would be the second year future value?

Accepted Answer

A)  $351.00 
B)  $353.10 
C)  $602.17 
D)  $651.00

Question 20

A $1,000 investment has doubled to $2,000 in seven years. How much longer will it take for the investment to reach $5,000 if it continues to earn the same rate?

Accepted Answer

A)  6.16 years 
B)  6.86 years 
C)  7.15 years 
D)  9.25 years

Exam 4: Time Value of Money 1: Analyzing Single Cash Flows