Deck 5: The Time Value of Money

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

The growth rate over time is exponential.

Answer 3

True

Question 4

The more frequently the interest payments are compounded, the larger the future value of $1 for a given time period.

Question 5

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

Question 6

Compound interest consists of both simple interest and interest-on-interest.

Question 7

Berrian invested $5,000 in an account earning 10 percent for one year. If he had left his investment in that account for another two years, he would expect the total interest earned over the three years to be higher by exactly $1,000.

Question 8

The value of a dollar invested at positive interest rate grows over time.

Question 9

The present value technique uses compounding to find the present value of each cash flow at the beginning of the project.

Question 10

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

Question 11

Future value focuses on the valuation of cash flows received over time, while present value focuses on the valuation of cash flows received at a point in time.

Question 12

Time value of money is based on the belief that people have a positive time preference for consumption.

Question 13

The present value technique uses discounting to find the present value of each cash flow at the beginning of the project.

Question 14

Compounding accelerates the growth of the total interest earned.

Question 15

Compound interest consists of interest-on-interest.

Question 16

The higher the interest rate on an investment, the more money that is accumulated for any time period.

Question 17

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

Question 18

Compounding is the process by which interest earned on an investment is reinvested so that in future periods, interest is earned on the interest as well as the principal.

Question 19

The value of a dollar invested at positive interest rate grows over time but at an increasingly slower rate further into the future.

Question 20

The growth rate over time is linear.

Question 21

The Rule of 72 allows one to calculate the return earned on an investment over six years.

Question 22

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.

Question 23

The present value of an investment of $1,000 to be received in three years at a discount rate of 10 percent is $1,331.

Question 24

The present value can be thought of as the discounted value of a future amount.

Question 25

The future value of an investment of $1,000 to be received in three years at a discount rate of 10 percent is $1,331.

Question 26

If Laura has to choose between a loan that charges quarterly interest and a loan that charges monthly interest, she should always choose the one charging quarterly interest.

Question 27

The present value of an investment of $1,000 to be received in three years at a discount rate of 10 percent is $751.31.

Question 28

Which one of the following statements is NOT true?

A) The value of a dollar invested at a positive interest rate grows over time.
B) The further in the future you receive a dollar, the less it is worth today.
C) A dollar in hand today is worth more than a dollar to be received in the future.
D) The further in the future you receive a dollar, the more it is worth today.

Question 29

Randy has to choose between two cash flows. He could either receive the future value of an investment of $1,000 at 8 percent annually in three years or in five years. Randy should always choose the shorter investment term because it is worth more today.

Question 30

If Bank A pays interest on a monthly basis and Bank B pays the same interest on a quarterly basis, then investing $1,000 in Bank B will lead to a higher future value than investing the same amount in Bank A.

Question 31

Which one of the following statements is true?

A) Individuals prefer to consume goods right away rather than in the future.
B) Individuals prefer to consume goods in the future rather than right away.
C) The time of consumption is irrelevant to individuals.
D) None of the above.

Question 32

The higher the discount rate, the lower the present value of a future cash flow.

Question 33

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

Question 34

The time value of money refers to the issue of:

A) what the value of the stream of future cash flows is today.
B) why a dollar received tomorrow is worth more than a dollar received today.
C) why a dollar received tomorrow is worth the same as a dollar received today.
D) None of the above.

Question 35

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

Question 36

The future value of an investment of $5,000 earning an annual interest of 10 percent equals $6,000 at the end of one year.

Question 37

The lower the discount rate, the lower the present value of a future cash flow.

Question 38

Future value measures:

A) what one or more cash flows are worth at the end of a specified period.
B) what one or more cash flows that is to be received in the future will be worth today.
C) both a and b
D) None of the above

Question 39

Which one of the following statements is NOT true?

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 40

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

Question 41

Compounding: Dat Nguyen is depositing $17,500 in an account paying an annual interest rate of 8.25 percent compounded monthly. What is the interest-on-interest after six years?

A) $8,662.50
B) $734.40
C) $2,497.63
D) $1,092.48

Question 42

Multiple compounding periods (FV): Your mother is trying to choose one of the following bank term deposits to invest $10,000. Which one will have the highest future value if she plans to invest for three years?

A) 3.5% compounded daily
B) 3.25% compounded monthly
C) 3.4% compounded quarterly
D) 3.75% compounded annually.

Question 43

The process of converting future cash flows to what its present value is:

A) time value of money.
B) discounting.
C) compounding.
D) none of the above.

Question 44

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?

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

Question 45

Compounding: Chung Lee wants to invest $3,000 in an account paying 5.25 percent compounded quarterly. What is the interest on interest after four years?

A) $695.98
B) $65.98
C) $630.00
D) $160.63

Question 46

Compounding: Richard Delgado invested $10,000 in a money market account that will pay 5.75 percent compounded daily. How much will the interest-on-interest be after two years?

A) $1,218.63
B) $1,150.00
C) $33.06
D) $68.63

Question 47

Multiple compounding periods (FV): Your brother has asked you to help him with choosing an investment. He has $5,000 to invest today for a period of two years. You identify a bank term deposit that pays an interest rate of 4.25 percent with the interest being paid quarterly. What will be the value of the investment in two years?

A) $5,434
B) $5,441
C) $5,107
D) $5,216

Question 48

Future value: Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank term deposit that will earn interest at 5.75 percent annually. How much will he have at the end of three years? (Round to the nearest dollar.)

A) $8,870
B) $9,225
C) $8,681
D) $8,794

Question 49

Multiple compounding periods (FV): Normandy Textiles had a cash inflow of $1 million, which it needs for a long-term investment at the end of one year. It plans to invest this money in a bank term deposit that pays daily interest at 3.75 percent. What will be the value of the investment at the end of the year? (Round to the nearest dollar.)

A) $1,211,375
B) $1,000,103
C) $1,037,500
D) $1,038,210

Question 50

Future value: You are interested in investing $10,000, a gift from your grandparents, for the next four years in a managed fund that will earn an annual return of 8 percent. What will your investment be worth at the end of four years? (Round to the nearest dollar.)

A) $10,800
B) $13,605
C) $13,200
D) $12,400

Question 51

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.)

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

Question 52

Multiple compounding periods (FV): Carolyn Botti wants to invest $3,500 today in a money market fund that pays quarterly interest at 5.5 percent. She plans to fund a scholarship with the proceeds at Brisbane University. How much will Carolyn have at the end of seven years? (Round to the nearest dollar.)

A) $5,091
B) $3,548
C) $5,130
D) $5,075

Question 53

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.)

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

Question 54

The process of converting an amount given at the present time into a future value is called:

A) time value of money.
B) discounting.
C) compounding.
D) None of the above.

Question 55

Compounding: Trish Harris has deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? If the account paid compound interest, what would be the interest-on-interest in five years?

A) $750; $95.56
B) $150; $845.56
C) $150; $95.56
D) $95.56; $845.56

Question 56

Using higher interest rates will:

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

Question 57

Which one of the following statements is NOT true?

A) Present value calculations involve bringing a future amount back to the present.
B) The present value (PV) is often called the discounted value of future cash payments.
C) The present value factor is more commonly called the discount factor.
D) all of the above are true statements.

Question 58

Using lower interest rates will:

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 59

Multiple compounding periods (FV): Hector started on his first job last year and plans to save for a down payment on a house in 10 years. He will be able to invest $12,000 today in a money market account that will pay him an interest of 6.25 percent on a monthly basis. How much will he have at the end of 10 years?

A) $12,640
B) $22,383
C) $24,839
D) None of the above

Question 60

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.)

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

Question 61

Using lower discount rates will:

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

Question 62

Interest rate: Dominic has $3,000 to invest for three years. He wants to receive $5,000 at the end of the three years. What invest rate would his investment have to earn to achieve his goal? (Round to the nearest percent.)

A) 19%
B) 21%
C) 13%
D) 16%

Question 63

Interest rate: Rachael wants to borrow $6,000 for a period of four years. She has two choices. Her bank is offering to lend her the amount at 7.25 percent compounded annually. She can also borrow from her company and will have to repay a total of $8,130.93 at the end of four years. Should Rachael go with her bank or the company, and what is the interest rate if she borrows from her company? (Round to the nearest percent.)

A) Bank / 9%
B) Company / 7%
C) Bank / 8%
D) Company / 6%

Question 64

Multiple compounding (PV): You need to have $15,000 in five years to pay-off a home equity loan. You can invest in an account that pays 5.75 percent compounded quarterly. How much will you have to invest today to attain your target in five years? (Round to the nearest dollar.)

A) $4,903
B) $11,275
C) $14,184
D) $12,250

Question 65

Multiple compounding (PV): Rick Rodriquez plans to invest some money today so that he will receive $7,500 in three years. If the investment he is considering will pay 3.65 percent compounded daily, how much will he have to invest today?

A) $5,276
B) $6,722
C) $6,897
D) $7,140

Question 66

Interest rate: Sofie wants to invest $25,000 in a spa that her sister is starting. She will triple her investment in six years. What is the rate of return that Sofie is being promised? (Rounded to the nearest per cent.)

A) 18%
B) 20%
C) 12%
D) 25%

Question 67

Present value: Tommie Harris is considering an investment that pays 6.5 percent annually. How much must he invest today such that he will have $25,000 in seven years? (Round to the nearest dollar.)

A) $23,474
B) $38,850
C) $17,133
D) $16,088

Question 68

Present value: Derek's friend, Jack, is asking to borrow today with a promise to repay $7,418.87 in four years. If Derek could earn 5.45 percent annually on the any investment he makes today, how much would he be willing to lend Jackson today? (Round to nearest dollar.)

A) $6,000
B) $7,035
C) $6,500
D) $7,150

Question 69

Multiple compounding (PV): Marcie Witter is saving for her daughter's college education. She wants to have $50,000 available when her daughter graduates from high school in four years. If the investment she is considering will pay 8.25 percent compounded monthly, how much will she have to invest today to reach her target? (Round to the nearest dollar.)

A) $35,987
B) $49,659
C) $41,275
D) $36,450

Question 70

Present value: John Hsu wants to start a business in 10 years. He hopes to have $100,000 at that time to invest in the business. To reach his goal, he plans to invest a certain amount today in a bank term deposit that will pay him 9.50 percent annually. How much will he have to invest today to achieve his target? (Round to the nearest dollar.)

A) $54,233
B) $63,837
C) $91,324
D) $40,351

Question 71

Interest rate: Ray has $5,000 to invest in a small business venture. His partner has promised to pay him back $8,200 in five years. What is the return earned on this investment?

A) 9.3%
B) 8.7%
C) 11.1%
D) 10.4%

Question 72

Present value: Becky Sayers wants to buy a house in six years. She hopes to be able to put down $25,000 at that time. If the bank term deposit she wants to invest in will pay 7.5 percent annually, how much will she have to invest today? (Round to the nearest dollar.)

A) $18,472
B) $13,987
C) $16,199
D) $23,256

Question 73

Multiple compounding (PV): Joan Alexander wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she were to deposit the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.)

A) $6,432
B) $7,826
C) $8,148
D) $7,763

Question 74

Multiple compounding (PV): Darius Miller is seeking to accumulate $50,000 in six years to invest in a real estate venture. He can earn 6.35 percent annual interest with monthly compounding in a private investment. How much will he have invest today to reach his goal? (Round to the nearest dollar.)

A) $37,527
B) $47,015
C) $34,193
D) $31,648

Question 75

Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

A) $16,935
B) $26,454
C) $16,670
D) $19,444

Question 76

The Rule of 72

A) can be used to determine the amount of time it takes to double an investment.
B) is fairly accurate for interest rates between 25 and 50 percent.
C) states that the time to double your money approximately equals 72/i, where 72 represents the years it takes to double your investment.
D) None of the above describe the Rule of 72.

Question 77

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.

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

Question 78

Growth rate: Trojan Traps manufactures an innovative mouse trap. Sales this year are $325,000. The company expects its sales to go up to $500,000 in five years. What is the expected growth rate in sales for this company? (Round to the nearest percent.)

A) 9%
B) 11%
C) 6%
D) 12%

Question 79

Which one of the following statements is NOT true?

A) Present value calculations involve bringing a future amount back to the present.
B) The future value is often called the discounted value of future cash payments.
C) The present value factor is more commonly called the discount factor.
D) The higher the discount rate, the lower the present value of a dollar.

Question 80

Using higher discount rates will:

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