Question 1

Interest rate: Your tuition for the coming year is due today. You borrow $8,000 from your uncle and agree to repay in the three years an amount of $9,250. What is the interest rate on this loan? Round to the nearest per cent.

Accepted Answer

A)  5% 
B)  6% 
C)  7% 
D)  8%

Question 2

The Rule of 72 allows one to calculate the approximate time needed to double an investment.

Accepted Answer

A) True 
 B)False

Question 3

Which one of the following statements is NOT true?

Accepted Answer

A)  The time value money refers to what the value of the stream of future cash flows today is. 
B)  A dollar received today is worth more than a dollar received tomorrow. 
C)  A dollar received tomorrow is worth less than a dollar received today. 
D)  A dollar received today is worth less than a dollar received tomorrow.

Question 4

The further in the future you receive a dollar, the more it is worth today.

Accepted Answer

A) True 
 B)False

Question 5

The higher the rate of interest, the more likely you will elect to invest your funds and forego current consumption.

Accepted Answer

A) True 
 B)False

Question 6

The present value is simply the current value of a future cash flow that has been discounted at the appropriate discount rate.

Accepted Answer

A) True 
 B)False

Question 7

Future value: Wes Ottey would like to buy an apartment in Sydney in six years. He is looking to invest $75,000 today in a share that is expected to earn a return of 18.3 percent annually. How much will he have at the end of six years? (Round to the nearest dollar.)

Accepted Answer

A)  $205,575 
B)  $157,350 
C)  $184,681 
D)  $173,774

Question 8

Suppose you win $10 million in a lottery. You have a choice of how you will receive your winnings. The first choice is to receive a certain lump sum today. The second choice is to receive a certain amount at the end of five years. How will you evaluate your choices to make your decision?

Accepted Answer

The answer of Suppose you win $10 million in a...

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Using lower interest rates will:

Accepted Answer

A)  decrease the future value of any investment. 
B)  increase the future value of any investment. 
C)  not affect the future value of the investment. 
D)  None of the above.

Question 11

The future value technique uses compounding to find the future value of each cash flow at the end of the project's life.

Accepted Answer

A) True 
 B)False

Question 12

Growth rate: Petry Company is a growing company with sales of $1.25 million this year. The company 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.)

Accepted Answer

A)  $2,160,000 
B)  $3,515,625 
C)  $1,875,000 
D)  $2,929,688

Question 13

Time to attain goal: Cheryl Merriweather wants to invest in a bank term deposit that will pay her 7.8 percent annually. If she is investing $11,500 today, when will she reach her goal of $15,000? (Round off to the nearest year.)

Accepted Answer

A)  5 years 
B)  7 years 
C)  2 years 
D)  4 years

Question 14

Compound growth occurs when the initial value of a number increases or decreases each period by the factor (1 + growth rate).

Accepted Answer

A) True 
 B)False

Question 15

The growth rate over time is exponential.

Accepted Answer

A) True 
 B)False

Question 16

Compounding accelerates the growth of the total interest earned.

Accepted Answer

A) True 
 B)False

Question 17

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 an Australian fixed interest mutual fund 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.)

Accepted Answer

A)  $68,870 
B)  $50,625 
C)  $75,642 
D)  $71,192

Question 18

If you had a choice of choosing a payment of $5,000 to be received in five years being discounted at 8 percent or at 10 percent, you should always choose the higher rate because it gives you the higher present value.

Accepted Answer

A) True 
 B)False

Question 19

Future value: Ning Gao is planning to buy a house in five years. She is looking to invest $25,000 today in an index managed fund that will provide her a return of 12 percent annually. How much will she have at the end of five years? (Round to the nearest dollar.)

Accepted Answer

A)  $45,000 
B)  $39,338 
C)  $44,059 
D)  $40,000

Question 20

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?

Accepted Answer

A)  $1,012.50 
B)  $1,082.38 
C)  $82.38 
D)  $69.88

Exam 5: The Time Value of Money

Interest rate: Your tuition for the coming year is due today. You borrow $8,000 from your uncle and agree to repay in the three years an amount of $9,250. What is the interest rate on this loan? Round to the nearest per cent.

The Rule of 72 allows one to calculate the approximate time needed to double an investment.

Which one of the following statements is NOT true?

The further in the future you receive a dollar, the more it is worth today.

The higher the rate of interest, the more likely you will elect to invest your funds and forego current consumption.

The present value is simply the current value of a future cash flow that has been discounted at the appropriate discount rate.

Future value: Wes Ottey would like to buy an apartment in Sydney in six years. He is looking to invest $75,000 today in a share that is expected to earn a return of 18.3 percent annually. How much will he have at the end of six years? (Round to the nearest dollar.)

Suppose you win $10 million in a lottery. You have a choice of how you will receive your winnings. The first choice is to receive a certain lump sum today. The second choice is to receive a certain amount at the end of five years. How will you evaluate your choices to make your decision?

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

Using lower interest rates will:

The future value technique uses compounding to find the future value of each cash flow at the end of the project's life.

Time to attain goal: Cheryl Merriweather wants to invest in a bank term deposit that will pay her 7.8 percent annually. If she is investing $11,500 today, when will she reach her goal of $15,000? (Round off to the nearest year.)

Compound growth occurs when the initial value of a number increases or decreases each period by the factor (1 + growth rate).

The growth rate over time is exponential.

Compounding accelerates the growth of the total interest earned.

If you had a choice of choosing a payment of $5,000 to be received in five years being discounted at 8 percent or at 10 percent, you should always choose the higher rate because it gives you the higher present value.

Future value: Ning Gao is planning to buy a house in five years. She is looking to invest $25,000 today in an index managed fund that will provide her a return of 12 percent annually. How much will she have at the end of five years? (Round to the 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?