Question 1

-When you retire 40 years from now,you want to have $1.2 million.You think you can earn an average of 12 percent on your investments.To meet your goal,you are trying to decide whether to deposit a lump sum today,or to wait and deposit a lump sum 2 years from today.How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit?

Accepted Answer

A)  $1,414.14 
B)  $2,319.47 
C)  $2,891.11 
D)  $3,280.78 
E)  $3,406.78

Question 2

-Suppose that the first comic book of a classic series was sold in 1954.In 2000,the estimated price for this comic book in good condition was about $340,000.This represented a return of 27 percent per year.For this to be true,what was the original price of the comic book in 1954?

Accepted Answer

A)  $5.00 
B)  $5.28 
C)  $5.50 
D)  $5.71 
E)  $6.00

Question 3

Sara invested $500 six years ago at 5 percent interest.She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment.Which type of interest is Sara earning?

Accepted Answer

A)  free interest 
B)  complex interest 
C)  simple interest 
D)  interest on interest 
E)  compound interest

Question 4

-You have just received notification that you have won the $1.4 million first prize in the Centennial Lottery.However,the prize will be awarded on your 100th birthday,78 years from now.The appropriate discount rate is 8 percent.What is the present value of your winnings?

Accepted Answer

A)  $3,288.16 
B)  $3,459.99 
C)  $5,309.91 
D)  $13,333.33 
E)  $25,000.00

Question 5

This afternoon,you deposited $1,000 into a retirement savings account.The account will compound interest at 6 percent annually.You will not withdraw any principal or interest until you retire in forty years.Which one of the following statements is correct?

Accepted Answer

A)  The interest you earn six years from now will equal the interest you earn ten years from now. 
B)  The interest amount you earn will double in value every year. 
C)  The total amount of interest you will earn will equal $1,000 × .06 × 40. 
D)  The present value of this investment is equal to $1,000. 
E)  The future value of this amount is equal to $1,000 × (1 + 40).06.

Question 6

-You are depositing $1,500 in a retirement account today and expect to earn an average return of 7.5 percent on this money.How much additional income will you earn if you leave the money invested for 45 years instead of just 40 years?

Accepted Answer

A)  $10,723.08 
B)  $11,790.90 
C)  $12,441.56 
D)  $12,908.19 
E)  $13,590.93

Question 7

-In 1895,the winner of a competition was paid $150.In 2006,the winner's prize was $70,000.What will the winner's prize be in 2040 if the prize continues increasing at the same rate?

Accepted Answer

A)  $289,400 
B)  $321,122 
C)  $379,311 
D)  $459,866 
E)  $548,121

Question 8

-You just received a $3,000 gift from your grandmother.You have decided to save this money so that you can gift it to your grandchildren 50 years from now.How much additional money will you have to gift to your grandchildren if you can earn an average of 8.5 percent instead of just 8 percent on your savings?

Accepted Answer

A)  $17,318.09 
B)  $22,464.79 
C)  $25,211.16 
D)  $28,811.99 
E)  $36,554.11

Question 9

-Penn Station is saving money to build a new loading platform.Two years ago,they set aside $24,000 for this purpose.Today,that account is worth $28,399.What rate of interest is Penn Station earning on this investment?

Accepted Answer

A)  6.39 percent 
B)  7.47 percent 
C)  8.78 percent 
D)  9.23 percent 
E)  9.67 percent

Question 10

Which one of the following variables is the exponent in the present value formula?

Accepted Answer

A)  present value. 
B)  future value. 
C)  interest rate. 
D)  time. 
E)  There is no exponent in the present value formula.

Question 11

-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 12

-Travis invested $9,250 in an account that pays 6 percent simple interest.How much more could he have earned over a 7-year period if the interest had compounded annually?

Accepted Answer

A)  $741.41 
B)  $773.58 
C)  $802.16 
D)  $833.33 
E)  $858.09

Question 13

Alex invested $10,500 in an account that pays 6 percent simple interest.How much money will he have at the end of four years?

Accepted Answer

A)  $12,650 
B)  $12,967 
C)  $13,020 
D)  $13,256 
E)  $13,500

Question 14

-At 8 percent interest,how long would it take to quadruple your money?

Accepted Answer

A)  16.55 years 
B)  16.64 years 
C)  17.09 years 
D)  18.01 years 
E)  18.56 years

Question 15

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 16

-What is the present value of $150,000 to be received 10 years from today if the discount rate is 11 percent?

Accepted Answer

A)  $52,827.67 
B)  $61,147.07 
C)  $64,141.41 
D)  $69,806.18 
E)  $73,291.06

Question 17

-Today,you earn a salary of $36,000.What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent?

Accepted Answer

A)  $55,032.54 
B)  $57,414.06 
C)  $58,235.24 
D)  $59,122.08 
E)  $59,360.45

Question 18

-This morning,TL Trucking invested $75,000 to help fund a company expansion project planned for 4 years from now.How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings?

Accepted Answer

A)  $2,940.09 
B)  $3,423.58 
C)  $4,008.17 
D)  $4,219.68 
E)  $4,711.08

Question 19

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 20

-You are scheduled to receive $30,000 in two years.When you receive it,you will invest it for 5 more years,at 6 percent per year.How much money will you have 7 years from now?

Accepted Answer

A)  $38,909.19 
B)  $39,381.16 
C)  $40,146.77 
D)  $47,209.19 
E)  $51,414.73

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