chapter 3 personal finance
how much must you invest today at 8% interest in order to see your investment grow to %15000 in 10 years
$6945 PVIF= .463*$15000
mr. berkeley deposits $!0,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much interest will he earn on his investment during this time period?
$7,140 FVIF= 1.714*$10,000=17,140 17,140-10,000= 7,140
you wish to retire in 30 years and determine that you will need $1,00,000 to fund your retirement. if you can invest with a return of 8% you will need to invest ______ each year to reach your goal
$8,827
the concept of time value of money is important to financial decision making because
-it emphasizes earning a return of interest on the money you invested -it recognizes that $1 today has more value that $1 received a year from now -it can be applied to future cash flows in order to compare different streams of income
at what rate would $500 grow to $1948 in 12 years?
12.0% PV= 500/1948= 3.896 look up on 12 year line
the same tables can be used to figure future values and present values of $1
true
the time value of money can be used to estimate future savings with periodic deposits of funds
true
the time value of money concept can help you determine how much money you need to save over a period of time to achieve a specific savings goal
true
time value concepts can be applied to lottery winnings. The winner can usually choose an annuity or a lump sum
true
time value of money calculations, such as percent and future value amounts, can be applied to many day-to-day decisions
true
jack is 35 years old and is planning to retire at age 65. based on a variety of factors, he is planning a retirement of 20 years. jack determines that he will need $20,000 per year during his 20 years of retirement. if he can invest at 9%, how much will he need to save each year beginning today to reach his goal?
$1339.47
if jim wants $25,000 in five years and can earn an 8% interest rate, how much does he need to invest today?
$17,025 FV= 25000/1.469 PV= 25000*0.681
Is Joe has $5600 today and invests it at a 10% interest rate, how much will he have in 12 years?
$17,572.80 FV=$5,600*3.138 PV= $5,600/.319
judy would like to have $200,000 saved in her retirement account in 20 years. Assuming interest rate of 10%, how much should she contribute each year?
$3,491.92 200,000/57.275`
if you invest $12000 today at an interest ate of 10%, how much will you have in 10 years
$31,128 FVIF= 2.594*12,000= 31,128
the state lottery has just informed you that you have won $1 million to be paid out in the amount of $50,000 per year for the next 20 years. with a discount rate of 12%, what is the present value of your winnings?
$373,450 PVIFA= 7.469*50,000
if luis won a lottery and chose to take $1,00,000 in cash, how much money would he have in 30 years if he invested at 6% per annum?
$5,743,491
assuming interest rates were 6% per annum, what would be the present value of the $50,000 per year for 30 years payment stream?
$688,242
if i deposit a sum of money today and want it to double in 10 years, i will need to receive an interest rate of slightly above _______
7%
to determine how long it would take an investment to double at 10%, you could scan down the 10% column until you reach a factor of approximately 2.0 on the _____ table
Future value of $1 table
financial calculator
a business calculator that performs PV/FV calculations
present value interest factor
a factor multiplied by a future value to get the present value of that amount
present value interest factor for an annuity
a factor multiplied by a periodic savings level (annuity) to get the present value of the annuity
future value interest factor
a factor multiplied by todays savings to determine how the savings will accumulate over time
annuity
a series of equal payments received or paid at equal intervals
an ordinary annuity can be defined as
a series of equal payments received or paid at equal intervals of time at the end of each period
annuity due
a series of equal payments that occur at the beginning of each period
present and future values concepts are applied in all of the following decisions except
annual cash inflow
future and present values are depending upon all of the following EXCEPT
annual income
a stream of equal payments either received or paid at equal time intervals is an
annuity
the future value of an ordinary annuity assumes that the payments are received
at the end of the year and the last payment does not compound
the difference between an ordinary annuity and an annuity due is that with an annuity due the payments occur at the _______ of each period
beginning
to compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years, you would need to use
both the future value and present value of an annuity
luis just won the lottery! he has a choice of taking $1,000,000 in cash or receiving $50,000 per year for 30 years beginning at the end of this year. the best way to make this decision is to
calculate the present value of the annuity payments
the earning of interest on interest over time is called
compounding
the process of earning interest on accumulated interest or paying interest on accumulated interest due is called
compounding
as the time period until receipt of an amount of money increases, the present value of the amount at a fixed interest rate
decreases
which of the following decisions is not financially sound?
defer your student loan payments if the interest rate is 7% per annum
the time value of money can be applied to all of the following except
determining the amount of taxes owed on income this year
timelines
diagrams that show payments over time
ann annuity is a stream of equal payments that are received or paid at random periods of time
false
compounding is the process of obtaining present values, discounting is the process of obtaining future values
false
if the payment in an ordinary annuity changes over time, you cannot determine the future value of the payment stream
false
in order to maximize the use of your money, you may want to delay payment of your bills slightly beyond their due dates
false
in the tables for the future value of a single sum, the future value factors are all less than one
false
it is alawys better to choose a lump sum rather than to choose periodic payments over time.
false
the process of obtaining present values is known as compounding
false
the time period over which you save money has very little impact on its growth
false
time value of money computations relate to the future value of lump-sum cash flows only
false
time value of money is only applied to single dollar amounts
false
to determine how much you must save each year to have enough for your daughters college education, you would use the present value of $1 tables
false
when money accumulates interest, it is said to be discounting
false
your utility bill, which varies each month, is an example of an annuity
false
aaron wants to put $200 per month into an individual retirement account at 15% for four years. what is he solving for using his financial calculator
future value
lisa wants to know how much savings she would accumulate in 15 years if she saves $2000 per year and her savings earns 4% per year. she needs to determine the
future value of an annuity
to determine how much you would need to save each year to reach a specific goal, you would need to use
future value of an annuity
you have set a $100,000 goal for a college funds for your new born child. You plan on having a fixed amount taken from your salary each month to meet this goal. the calculation to determine the monthly annuity is called
future value of an annuity
lisa wants to know how much he needs to save every year to accumulate $15,000 in five years at a 10% interest rate. which of the following tables should he use?
future value of an ordinary annuity
everything else being equal, the _______ the interest rate, the ______ the final accumulation of money
higher, higher lower, lower
the ________ the interest rate, the ______present value of an annuity
higher, lower
the process of earning ________ on interest is referred to as compounding
interest
the concept of the time value of money is based on
interest earned over time
byron is investigating a mutual fund that claims that $1000 today will be worth $5000 in five years. What is he solving for?
interest rate
money received today is worth more than the same amount of money received in the future. this is true because
money received today can grow at a compounded rate
which of the following is NOT an annuity
monthly utility bills
the time value of money implies that a dollar received today is worth ______ a dollar received tomorrow
more than
which stream of cash flows is not an example of an annuity
mortgage payment where the interest rate is reset annually
in order to take advantage of the time value of money you should do all of the following EXCEPT
pay bills a little late than the due dates to take advantage of month-ending interest on your savings account
don wants to know how much he needs to save every year to amass $15000 in five years at a 5% interest rate. what is he calculating using his financial calculator
payment
the process of obtaining ______ values is referred to as discounting
present
if you are presented with an offer to accept payment now or a greater amount in the future, you would use
present value of $1
sandy wants to know how much she needs to save today to have $5000 in five years at a 7% interest rate. Which of the following tables should she use
present value of $1
susie wants to know how much she needs to save today to have $5000 in five years. Which of the following tables should she use?
present value of $1
yogi has agreed to play for the new York mets for $4 million per year for the next 10 years. What table would you use to calculate the value of this contract in todays dollars
present value of an annuity
which of the following is not an example of a future value
the balance in your checking account today
present and future value concepts are NOT applied to which of the following
the balance of your checking account today
the time value of money refers to
the difference in the value of money depending on when it is received
the higher the rate used in determining the future value of an annuity
the greater the future value at the end of the period
time value of money is important because
the present value of future cash flows is affected by inflation
compounding
the process of earning interest on interest
the concept that a dollar received today has more value than a dollar received in the future because of the interest it can earn is called
time value of money
an annuity is a stream of equal payments that are received or paid at equal intervals in time
true
ann annuity due differs from an ordinary annuity in that the payments occur at the beginning of the period instead of at the end of the period
true
by paying bills electronically, instead of mailing a check you can pay later and still ensure on time payment
true
in general, a dollar can typically buy more today that it can in one year
true
the cash flows of an annuity due occur at the beginning of each period
true
the periodic interest rate, the number of periods in which your money will be invested, and the initial payment amount, must be known to estimate the future value using a financial calculator
true
the present value interest factor (PVIF) becomes lower as the number of years increases
true
the present value of an annuity can be obtained by discounting the individual cash flows of the annuity and then summing the resulting present values
true
the process of obtaining present values is known as discounting
true
to determine how much money you would need to save to withdraw $10,000 a year for five years, you would use the present value of an annuity table
true
when money earns interest on interest, it is said to be compounding
true
you utilize present and future value concepts in investments, purchase, and retirement decisions
true
which of the following decisions would involve the use of the future value of a $1 ordinary annuity table?
you want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday
discounting
the process of obtaining present values
to save for her newborn sons college education, kelli peterson will invest $1500 at the end of each year for the next 18 years. the interest rate she expects to earn on her investment is 9%. how much money will she have saved by the time her son turns 18?
$61,952 FVIFA= 41.301*1500
assume you owe a large balance on your credit card and only pay the monthly minimum payment equal to 1% of the balance. if the annual interest rate on the credit card is 18%, how many years will it take you to pay off the balance assuming you do not make any additional charges to the card?
you will never pay off the balance
which of the following decisions would involve the use of the present value of a $1 ordinary annuity table?
you win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years
which of the following decisions would involve the use of the future value of $1
your brother buys your car and offers to pay you $500 now or $1500 in two years
which of the following decisions would involve the use of the present value of $1
your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7000 cruise when you graduate from college in 4 years
