FINC 3304 [QUIZ] Chapter 4 TIME VALUE OF MONEY

CHAPTER 4  TIME VALUE OF MONEY

1. The value of an investment after one or more time periods is called the:

A. true value.

B. future value.

C. present value.

D. discounted value.

E. complex value.

2. The process of adding the interest earned on an investment to the original investment in order to earn more interest is called:

A. discounting.

B. compounding.

C. duplicating.

D. multiplying.

E. indexing.

3. The current value of future cash flows discounted at the appropriate discount rate is called the:

A. simple value.

B. future value.

C. present value.

D. complex value.

E. principal value.

4. Which one of the following will increase the future value of a lump sum invested today?

A. decreasing the amount of the lump sum

B. increasing the rate of interest

C. paying simple interest rather than compound interest

D. paying interest only at the end of the investment period

E. shortening the investment time period

5. Given an interest rate of zero percent, the future value of a lump sum invested today will always:

A. remain constant, regardless of the investment time period.

B. decrease if the investment time period is shortened.

C. decrease if the investment time period is lengthened.

D. be equal to $0.

E. be greater than the initial investment amount.

6. You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

A. 6 years

B. 8 years

C. 9 years

D. 10 years

E. 12 years

PV= -10, FV = 20, i = 6%, Find N=??

7. What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?

A. $5,629.53

B. $7,644.15

C. $8,419.11

D. $8,536.85

E. $8,564.35

Enter      8       7        -4,900        0

              N       I/Y        PV      PMT        FV

                                                             8,419.11

8. Taylor has just received an insurance settlement of $58,400. She wants to save this money until her oldest daughter goes to college. Taylor can earn an average of 8.5 percent, compounded annually, on this money. How much will she have saved for her daughter's college education if her daughter enters

college 14 years from now?

A. $104,587.01

B. $105,223.03

C. $182,990.77

D. $187,302.09

E. $210,459.16

Enter 14 8.5 -58,400

N I/Y PV PMT FV

Solve for 182,990.77

9. Twenty years ago, you deposited $1,000 into an account. Fifteen years ago, you added an additional $3,000 to your account. You earned 6 percent, compounded annually, for the first 5 years and 10 percent, compounded annually, for the last 15 years. How much money do you have in your account today?

A. $4,925.34

B. $5,634.48

C. $13,880.59

D. $18,121.84

E. $19,369.43

Enter      5       6      -1,000      0

               N     I/Y       PV     PMT      FV

                                                       1,338.2256

$1,338.2256 + $3,000 = $4,338.2256

Enter    15     10      -4,338.2256         0

            N       I/Y         PV               PMT      FV

                                                                    18,121.84

10. You have just won the lottery and received $10,000. You deposited your winnings into an account that pays 7.5 percent interest compounded annually. How long will you have to wait until your winnings are worth$15,000?

A. 5.46 years

B. 5.61 years

C. 5.83 years

D. 16.19 years

E. 16.46 years

Enter            7.5      -10,000       0       15,000

            N      I/Y         PV      PMT       FV

         5.61

11. When you were born, your parents opened an investment account in your name and deposited $2,000 into the account. The account has earned an average annual rate of return of 8 percent. Today, the account is valued at $21,735.34. How old are you?

A. 25 years

B. 31 years

C. 44 years

D. 50 years

E. 61 years

12. Thirteen years from now, you will be inheriting $30,000. What is this inheritance worth to you today if you can earn 4 percent interest compounded annually?

A. $18,017.22

B. $20,741.87

C. $23,190.98

D. $26,359.88

E. $28,846.15

13. You and your brother are planning a large anniversary party 5 years from today for your grandparents' 50th wedding anniversary. You have estimated that you will need $9,000 for this party. You can earn 4 percent compounded annually on your savings. How much would you and your brother have to deposit today in one lump sum to pay for the entire party?

A. $7,383.13

B. $7,397.34

C. $8,151.26

D. $8,175.24

E. $8,853.19

14. How long will it take to double your savings at 5 percent compounded semi-annually?

A. 7.10 years

B. 14.04 years

C. 14.21 years

D. 28.10 years

E. 28.32 years

15. Your firm has been told that it needs $100,000 today to fund a $150,000 expansion project 8 years from now. What rate of interest was used in the present value computation?

A. 5.20 percent

B. 6.83 percent

C. 7.94 percent

D. 9.08 percent

E. 10.40 percent

16. Today, Jonathan is investing $34,000 at 5 percent, compounded semi-annually, for 7 years. How much additional income could Jonathan earn if he had invested this amount at 6 percent, compounded semi-annually?

A. $1,400.39

B. $3,282.02

C. $3,386.94

D. $9,553.06

E. $9,863.51

Enter   7×2       5/2      -34,000        0

            N         I/Y           PV         PMT      FV

                                                                48,041.11

Enter   7×2      6/2       -34,000         0

            N         I/Y            PV         PMT        FV

                                                                    51,428.05

Difference = $51,428.05 − $48,041.11 = $3,386.94

17. You want to have $15,000 for a down payment on a house 5 years from now. If you can earn 13 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal?

A. $7,858.11

B. $8,141.40

C. $9,803.58

D. $12,464.28

E. $14,213.25

18. You need $20,000 in cash to buy a car 5 years from today. You expect to earn 6.5 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose?

A. $12,468.07

B. $12,502.14

C. $14,597.62

D. $17,044.32

E. $17,129.01

19. Amanda only has $600 today but needs $1,300 to buy a new laptop. How long will Amanda have to wait to buy the laptop if she earns 8 percent compounded annually on her money?

A. 9.74 years

B. 9.86 years

C. 9.93 years

D. 10.05 years

E. 10.11 years

20. Your friend claims to have invested $3,000 eleven years ago and has seen that investment grow to $25,000 today. For this to be true, what rate of return did your friend have to earn?

A. 12.45 percent

B. 15.24 percent

C. 19.86 percent

D. 21.26 percent

E. 25.14 percent

Enter     11                    -3,000       0         25,000

              N       I/Y          PV      PMT       FV

                   21.25811

REVIEW QUIZ FOR CHAPTER 4

TIME VALUE OF MONEY

1. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent per year. How long will you have to wait until your account is worth $50,000?

a. 9.47 years b. 11.28 years c. 14.67 years d. 17.51 years

2. Your savings account is currently worth $1,200. The account pays 4.5 percent interest compounded annually. How much will your account be worth 6 years from now?

a. $1,524.00 b. $1,562.71 c. $1,611.18 d. $1,627.19

3. Felix wants to have $28,000 four years from now to buy a new car. He wants to make one deposit today to fund this expenditure. How much does he have to deposit if he will earn 5.5 percent per year on his investment?

a. $22,602.07 b. $24,414.14 c. $25,003.09 d. $26,540.28

4. Fifteen years ago, your parents opened an investment account with an initial deposit of $5,000. Today, that account is worth $39,533.32. What average annual rate of return did they earn on their investment?

a. 14.47 percent b. 14.59 percent c. 14.78 percent d. 15.03 percent

5. Marcia invested $500 with the Simpleton Bank 3 years ago. The bank pays 3.5 percent simple

interest on its savings accounts. What is the total amount of interest Marcia has earned on her account over the past 3 years?

a. $17.50 b $27.00 c. $37.50 d. $52.50

6. You are 20 years old today. You want to retire at age 50 and have $4 million at that time. Assume you can earn an average annual rate of return of 9.25 percent. Your hope is that you will win the lottery today and be able to fund your retirement dream with one lump sum deposit today. How much would you have to win, after taxes, to make an investment today sufficient to fund your dream?

a. $180,414.07 b. $281,459.96 c. $879,004.11 d. $1,307,468.24

7. You purchased a new sports car 40 years ago at a cost of $3,900. Today, you sold that car for $97,500. What annual rate of return did you earn on this vehicle?

a. 7.62 percent b. 7.99 percent c. 8.04 percent d. 8.38 percent

8. Which one of the following statements is correct, all else held constant?

a. There is an inverse relationship between the present value and the future value.

b. The future value decreases as the time period increases.

c. The interest rate is inversely related to the present value.

d. The present value decreases as the time period decreases.

9. Steve invested $2,500 this morning with The Branch Bank at 7 percent interest, compounded annually. After making this investment, he discovered that he could have invested his money with Tyler Bank and earned 7 percent interest, compounded quarterly. How much additional interest could Steve have earned over the next 5 years if he had invested with the Tyler Bank instead of with The Branch Bank?

a. $30.57 b. $48.11 c. $52.60 d. $57.20

10. Your goal is to earn an annual salary of $100,000 five years from now. You expect to increase your salary by 6.5 percent annually. How much do you need to earn this year if you are going to reach your goal?

a. $72,988.08 b. $84,311.16 c. $87,878.88 d. $84,363.13

1. d $50,000 = $7,200 × (1 + .117)t

6.94444 = 1.117t

ln6.94444= t × ln1.117

1.93794 = .11065t

t = 17.51

Enter 11.7 -7,200 50,000

N I/Y PV PMT FV

Solve for 17.51

2. b FV = $1,200 × (1 + .045)6

FV = $1,562.71

Enter 6 4.5 -1,200

N I/Y PV PMT FV

Solve for 1,562.71

3. a PV = $28,000 / (1 + .055)4

PV = $22,602.07

Enter 4 5.5 28,000

N I/Y PV PMT FV

Solve for -22,602.07

4. c Enter 15 -5,000 39,533.32

N I/Y PV PMT FV

Solve for 14.78

5. d $500 × .035 × 3 = $52.50

6. b $4,000,000 = PV × (1 + .0925)(50 − 20)

$4,000,000 = PV × 14.21161289

PV = $281,459.96

Enter (50 − 20) 9.25 4,000,000

N I/Y PV PMT FV

Solve for -281,459.96

7. d Enter 40 -3,900 97,500

N I/Y PV PMT FV

Solve for 8.379839

8. c There is an inverse relationship between the interest rate and the present value.

9. a The Branch Bank:

FV = $2,500 × (1 + .07)5

FV = $3,506.38

Enter 5 7 -2,500

N I/Y PV PMT FV

Solve for 3,506.38

Tyler Bank:

FV = $2,500 × [1 + (.07 / 4)]5 × 4

FV = $3,536.95

Enter 5 × 4 7 / 4 -2,500

N I/Y PV PMT FV

Solve for 3,536.95

Difference = $3,536.95 − $3,506.38 = $30.57

Steve could have earned an additional $30.57 in interest.

10. a PV = $100,000 / (1 + .065)5

PV = $72,988.08

Enter 5 6.5 100,000

N I/Y PV PMT FV

Solve for -72,988.08