Question 1

Your grandmother has promised to give you $5,000 when you graduate from college.She is expecting you to graduate two years from now.What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

Accepted Answer

A) remains constant 
B) increases 
C) decreases 
D) becomes negative 
E) cannot be determined from the information provided

Question 2

You own a classic automobile that is currently valued at $150,000.If the value increases by 6.5 percent annually,how much will the automobile be worth ten years from now?

Accepted Answer

A) $244,035.00 
B) $251,008.17 
C) $270,013.38 
D) $281,570.62 
E) $291,480.18

Question 3

What is the relationship between present value and future value interest factors?

Accepted Answer

A) The present value and future value factors are equal to each other. 
B) The present value factor is the exponent of the future value factor. 
C) The future value factor is the exponent of the present value factor. 
D) The factors are reciprocals of each other. 
E) There is no relationship between these two factors.

Question 4

Assume the average vehicle selling price in the United States last year was $41,996.The average price 9 years earlier was $29,000.What was the annual increase in the selling price over this time period?

Accepted Answer

A) 3.89 percent 
B) 4.20 percent 
C) 4.56 percent 
D) 5.01 percent 
E) 5.40 percent

Question 5

Luis is going to receive $20,000 six years from now.Soo Lee is going to receive $20,000 nine years from now.Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

Accepted Answer

A) The present values of Luis and Soo Lee's monies are equal. 
B) In future dollars, Soo Lee's money is worth more than Luis' money. 
C) In today's dollars, Luis' money is worth more than Soo Lee's. 
D) Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money. 
E) Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.

Question 6

Shelley won a lottery and will receive $1,000 a year for the next ten years.The value of her winnings today discounted at her discount rate is called which one of the following?

Accepted Answer

A) single amount 
B) future value 
C) present value 
D) simple amount 
E) compounded value

Question 7

What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?

Accepted Answer

The answer of What lesson does the future value formula...

Question 8

You want to deposit sufficient money today into a savings account so that you will have $1,000 in the account three years from today.Explain why you could deposit less money today if you could earn 3.5 percent interest rather than 3 percent interest.

Accepted Answer

The answer of You want to deposit sufficient money today...

Question 9

Steve invested $100 two years ago at 10 percent interest.The first year,he earned $10 interest on his $100 investment.He reinvested the $10.The second year,he earned $11 interest on his $110 investment.The extra $1 he earned in interest the second year is referred to as:

Accepted Answer

A) free interest. 
B) bonus income. 
C) simple interest. 
D) interest on interest. 
E) present value interest.

Question 10

Assume the total cost of a college education will be $300,000 when your child enters college in 16 years.You presently have $75,561 to invest.What rate of interest must you earn on your investment to cover the cost of your child's college education?

Accepted Answer

A) 7.75 percent 
B) 8.50 percent 
C) 9.00 percent 
D) 9.25 percent 
E) 9.50 percent

Question 11

The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?

Accepted Answer

A) compound interest valuation 
B) interest on interest computation 
C) discounted cash flow valuation 
D) present value interest factoring 
E) complex factoring

Question 12

Fourteen years ago,your parents set aside $7,500 to help fund your college education.Today,that fund is valued at $26,180.What rate of interest is being earned on this account?

Accepted Answer

A) 7.99 percent 
B) 8.36 percent 
C) 8.51 percent 
D) 9.34 percent 
E) 10.06 percent

Question 13

One year ago,you invested $1,800.Today it is worth $1,924.62.What rate of interest did you earn?

Accepted Answer

A) 6.59 percent 
B) 6.67 percent 
C) 6.88 percent 
D) 6.92 percent 
E) 7.01 percent

Question 14

Steve just computed the present value of a $10,000 bonus he will receive in the future.The interest rate he used in this process is referred to as which one of the following?

Accepted Answer

A) current yield 
B) effective rate 
C) compound rate 
D) simple rate 
E) discount rate

Question 15

Imprudential,Inc.has an unfunded pension liability of $850 million that must be paid in 25 years.To assess the value of the firm's stock,financial analysts want to discount this liability back to the present.The relevant discount rate is 6.5 percent.What is the present value of this liability?

Accepted Answer

A) $159,803,162 
B) $171,438,907 
C) $176,067,311 
D) $184,519,484 
E) $191,511,367

Question 16

Martin invested $1,000 six years ago and expected to have $1,500 today.He has not added or withdrawn any money from this account since his initial investment.All interest was reinvested in the account.As it turns out,Martin only has $1,420 in his account today.Which one of the following must be true?

Accepted Answer

A) Martin earned simple interest rather than compound interest. 
B) Martin earned a lower interest rate than he expected. 
C) Martin did not earn any interest on interest as he expected. 
D) Martin ignored the Rule of 72 which caused his account to decrease in value. 
E) The future value interest factor turned out to be higher than Martin expected.

Question 17

You just received $225,000 from an insurance settlement.You have decided to set this money aside and invest it for your retirement.Currently,your goal is to retire 25 years from today.How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent?

Accepted Answer

A) $417,137 
B) $689,509 
C) $1,050,423 
D) $1,189,576 
E) $1,818,342

Question 18

Your father invested a lump sum 26 years ago at 4.25 percent interest.Today,he gave you the proceeds of that investment which totaled $51,480.79.How much did your father originally invest?

Accepted Answer

A) $15,929.47 
B) $16,500.00 
C) $17,444.86 
D) $17,500.00 
E) $17,999.45

Question 19

Some time ago,Julie purchased eleven acres of land costing $36,900.Today,that land is valued at $214,800.How long has she owned this land if the price of the land has been increasing at 6 percent per year?

Accepted Answer

A) 28.33 years 
B) 29.98 years 
C) 30.23 years 
D) 31.29 years 
E) 32.08 years

Question 20

You expect to receive $9,000 at graduation in 2 years.You plan on investing this money at 10 percent until you have $60,000.How many years will it be until this occurs?

Accepted Answer

A) 18.78 years 
B) 19.96 years 
C) 21.90 years 
D) 23.08 years 
E) 25.00 years

Exam 5: Introduction to Valuation: The Time Value of Money