What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5%

What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).

A) $893

B) $3,106

C) $429

D) $833

The present value of a single future sum

A) increases as the number of discount periods increases.

B) is generally larger than the future sum.

C) depends upon the number of discount periods.

D) increases as the discount rate increases.

Assuming two investments have equal lives, a high discount rate tends to favor

A) the investment with large cash flow early.

B) the investment with large cash flow late.

C) the investment with even cash flow.

D) neither investment since they have equal lives.

High discount rates favor

A) neither long-term nor short-term investments.

B) both long-term and short-term investments.

C) long-term investments.

D) short-term investments.

An increase in ________ will decrease present value.

A) the discount rate per period

B) the original amount invested

C) the number of periods

D) both A and C

What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.

A) $5,790

B) $11,574

C) $9,210

D) $17,010

Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years.

Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years. What annual rate of interest will you be paying?

Answer:  FVIF[? %, 5 yr] $3,000 = $5,775

FVIF[? %, 5 yr] = $1.925

i = 14%

 Briefly discuss how non-annual compounding (more than one compounding period per year) is preferable to annual compounding if you are an investor.

Answer:  Non-annual compounding is preferable to annual compounding because with non-annual compounding, interest is compounded more frequently within a year period. This means that more interest on interest would be generated on a given investment.

If you deposit $1,000 each year in a savings account earning 4%, compounded annually, how much will you have in 10 years?

Answer:  FV[10] = $1,000(12.006) = $12,006

Earnings per share for XYZ, Inc. grew constantly from $7.99 in 1974 to $12.68 in 1980. What was the compound annual growth rate in earnings-per-share over the period?

Answer:  $12.68 = $7.99 FVIF[? %, 6 yr]

1.587 = FVIF[? %, 6 yr]

        g = 8%

If you invest $450 today and it increases to $6,185 at the end of 20 years, what rate of return have you earned?

Answer:  $6,185 = $450 FVIF[? %, 20 yr]

13.743 = FVIF[? %, 20 yr]

i = 14%

When using a financial calculator, which of the following is a correct way to find the future value of $200

When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?

A) N=16, i=.005, PV=200, PMT=0, solve for FV

B) N=4, i=.5, PV=200, PMT=0, solve for FV

C) N=16, i=.5, PV=-200, PMT=0, solve for FV

D) N=16, i=.03, FV=-200, PMT=0, solve for PV

When using EXCEL to find the future value of $2,000 invested in an account that would earn interest of 7.5% for 18 years, the correct entry would be

A) =FV(7.5,18,0,-1,000)

B) =PV(.075,18,0,-1,000)

C) =FV(7.5,18,0,1,000)

D) =FV(.075,18,0,-1,000)

When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?

A) N=16, i=.005, PV=-200, PMT=0, solve for FV

B) N=4, i=.5, PV=$200, PMT=0, solve for FV

C) N=16, i=.5, PV=-200, PMT=0, solve for FV

D) N=16, i=.03, FV=200, PMT=0, solve for PV

If you purchased a share of Mico.com stock on March 1, 1993 for $45 and you sold the stock at $168 on February 28, 1998, what was your annual rate of return on the stock?

A) 83%

B) 75%

C) 20%

D) 30%

E) 50%

At 8%, compounded annually, how long will it take $750 to double?

A) 9 years

B) 8 years

C) 12 years

D) 4 years

E) 6 years

The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest declines.

Answer:  FALSE

If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, during which we receive 4% interest each period.

Answer:  TRUE

Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation.

Answer:  TRUE

When performing time value of money computations with a financial calculator or EXCEL, PV and FV must have opposite signs.

Answer:  TRUE

Assuming equal annual rates, the more frequent the compounding periods in a year, the higher the future value.

Answer:  TRUE

Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation

Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years. If this city's population continues to grow at 4% per year, what will the population be 10 years from now?

A) 1,560,000

B) 2,220,366

C) 2,100,000

D) 1,824,979

You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?

A) 47%

B) 4.7%

C) 19%

D) 12.8%

You deposit $5,000 today in an account drawing 12% compounded quarterly. How much will you have in the account at the end of 2 1/2 years?

A) $7,401

B) $5,523

C) $7,128

D) $6,720

How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually?

A) 8 years

B) 10 years

C) 11 years

D) 13 years

When using a financial calculator, which of the following is the correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 3% ?

A) N=4, i=.03, PV=-200, PMT=0, solve for FV

B) N=4, i=3, PV=-200, PMT=0, solve for FV

C) N=4, i=3, PV=0, PMT = $200, solve for FV

D) N=4, i=3, FV=200, PMT=0, solve for PV

The future value of a single sum:

A) increases as the compound rate decreases.

B) decreases as the compound rate increases.

C) increases as the number of compound periods decreases.

D) increases as the compound rate increases.

Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones

Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?

A) 73 months

B) 75 months

C) 77 months

D) 79 months

If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the investment be worth in 37 weeks (round to the nearest dollar)?

A) $648

B) $635

C) $634

D) $645

Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?

A) 500(1 + .08)5 

B) 500(1 + .08)20 

C) 500(1 + .02)5 

D) 500(1 + .02)20 

What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?

A) $1,048

B) $1,010

C) $1,038

D) $808

If you want to have $10,000 in 10 years, which of the following formulas represents how much money you must put in a savings account today? Assume that the savings account pays 6% and it is compounded monthly.

A) 10,000/(1 + .05)10 

B) 10,000/(1 + .005)120 

C) 10,000/(1 + .06)10 

D) 10,000/(1 + .006)120 

Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $4,500. Today, the average cost is $29,000. What is the growth rate in tuition cost over this 20-year period? Round off to the nearest 0.1%.

A) 15.5%

B) 4.2%

C) 9.8%

D) 10.6%

If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment

If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)?

A) $827

B) $833

C) $828

D) $1,176

Which of the following is the formula for compound value?

A) FVn = P(1 + i)n 

B) FVn = (1 + i)/P

C) FVn = P/(1 + i)n 

D) FVn = P(1 + i)-n 

At 8% compounded annually, how long will it take $750 to double?

A) 6.5 years

B) 48 months

C) 9 years

D) 12 years

At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?

A) 6%

B) 5%

C) 7%

D) 8%

An increase in future value can be caused by an increase in the

A) annual interest rate.

B) number of compounding periods.

C) original amount invested.

D) both A and B.

A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1.

A) $1,444

B) $1,604

C) $1,764

D) $1,283

You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?

A) $25,000

B) $31,060

C) $38,720

D) $34,310

If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?

A) $72

B) $70

C) $71

D) $57

An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000

An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year.  Her cash flow at time period 0 is

A) $1,000

B) -$1,000

C) $-990

D) $1,010

Financial managers use the time value of money to

A) make business decisions.

B) compare cash flows of different projects.

C) determine the price of common stock.

D) both A and B.

E) all of the above.

The time value of money is created by

A) the existence of profitable investment alternatives and interest rates.

B) the fact that the passing of time increases the value of money.

C) the elimination of the opportunity cost as a consideration.

D) the fact that the value of saving money for tomorrow could be more or less than spending it today. 

Which of the following statements is FALSE?

A) A dollar received one year from now will be worth more than a dollar received today.

B) On monthly compounding loans, the annual percentage yield will be less than the nominal or quoted rate of interest.

C) Compounding essentially means earning interest on interest on an initial balance.

D) Perpetuities pay an equal payment forever.

An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year.  Her cash at time period 10 is

A) $10

B) $1,000

C) $-990

D) $1,010

Answer:  D

Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12 years?

A) $100,000 now

B) $10,000 at the end of each of the next 12 years

C) The answer depends on the time value of money.

D) Either alternative is equally valuable.

Money has a greater time value time value

A) when rates of return are higher.

B) when rates of return are lower.

C) when the future is uncertain.

D) when investors are willing to assume greater risks.

A diagram for visualizing future cash flows is known as

A) a future value vector.

B) a cash flow chart.

C) an FV/PV plot.

D) a timeline.

Answer:  D

On timeline, the present is represented as

A) time sub n

B) time zero

C) time sub i

D) time 1

A timeline typically represents cash flows as an exponential growth curve.

Answer:  FALSE

A timeline is a linear representation of the timing of cash flows.

Answer:  TRUE

A timeline represents the value of a sum invested now at the end of a series of time periods.

Answer:  FALSE

The end of one time period and the beginning of the next occupy the same place on a timeline.

Answer:  TRUE

Timelines are always expressed in years.

Answer:  FALSE

Timelines used to visualize cash flows normally represent present values on the left and future values on the right.

Answer:  TRUE

The last amount shown on a timeline represents the future value of all amounts invested up to that point.

Answer:  FALSE

The first amount on a timeline represent the present value of all the future amounts at a given interest rate.

Answer:  TRUE

Sketch a timeline that represents an immediate investment of $20,000 with $25,000 to be received at the end of 4 years.

Answer: 

_0__________1__________2_________3__________4

-$20,000                                                                          $25,000