Chapter 5 Reading 1

Which of the following is the correct formula for the discount factor? Multiple choice question. (1+r) 1/(1+r) 1/(1+r) x t 1/(1+r)^t

1/(1+r)^t

You deposited $250 in a savings account 12 years ago. Today the balance in that account is $690. What annual rate of interest did you earn? Multiple choice question. 7.99 percent 8.83 percent 8.75 percent 8.10 percent

8.83 percent

HARD***: Today you deposit $1000 in an account paying 6% interest. At the end of years 1, 2 and 3 you will deposit $100 in that account. What is the present value of that stream of cash flows? Multiple choice question. $1.111.12 $1,267.30 $1,237.40 $1,376.32

$1,267.30 Reason: $1000 + $100/(1.06)1 + $100/(1.06)2 + $100/(1.06)3 = $1,267.30

Today you deposit $1000 in an account paying 6% interest. At the end of years 1, 2 and 3 you will deposit $100 in that account. How much will you have at the end of year 4? Multiple choice question. $1,527.99 $1,399.44 $1,599.94 $1,493.94

$1,493.94

A dollar invested today at 7.5 percent interest compounded annually will be worth _______ one year from now. Multiple choice question. $1.075 $1.75 $1.0075

$1.075

A dollar invested today at 7.5 percent simple annual interest will be worth _______ one year from now. Multiple choice question. $1.75 $1.075 $1.1556

$1.075 Reason: FV = $1.00 + $0.075

A dollar invested today at 8.0 percent simple annual interest will be worth _________ three years from now. Multiple choice question. $1.16 $1.26 $1.24

$1.24

A dollar invested today at 8.0 percent interest compounded annually will be worth _______ three years from now. Multiple choice question. $1.08 $1.2597 $1.1664

$1.2597 Reason: FV=$1.00(1+0.08)^3

What is the future value of $100 invested for 4 years at 10% interest? Multiple choice question. $140.00 $145.54 $146.41 $144.00

$146.41

Assume you have $100 to invest today. Investing it at 5% interest compounded annually will yield _______ in 10 years, while investing it at 6% interest compounded annually will yield _______ in 10 years. Multiple choice question. $179.08; $179.08 $179.08; $162.89 $162.89; $179.08 $162.89; $175.00

$162.89; $179.08

Your opened an IRA 35 years ago, making an initial deposit, but no additional deposits after that. Today you have $250,000 in that account. Assume you earned 5% per year. What was the amount of that initial deposit? Multiple choice question. $44,222.99 $45,322.57 $41,322.66 $39,801.22

$45,322.57

You will receive $100 in 1 year, $200 in 2 years and $300 in 3 years. If you can earn a 7.5% rate of interest, what is the present value of this stream of cash flows? (Please note that you receive nothing immediately - there is no initial payment). Multiple choice question. $507.58 $608.98 $487.50 $512.33

$507.58 Reason: $100/(1.075)1 + $200/(1.075)2 + $300/(1.075)3 = $507.58

HARD***: You put $100 in the bank now, $200 in the bank a year from now, and $300 in the bank in two years. How much money will you have available 3 years from now if you earn a 7.5% rate of interest? (Calculate the future value of this stream of cash flows. Refer to Example 5.6.) Multiple choice question. $622.50 $677.85 $640.79 $711.31

$677.85 Reason: $100 x (1.075)^3 + $200 x (1.075)^2 + $300 x (1.075) = $677.85

You put $100 in the bank now, $200 in the bank a year from now, and $300 in the bank in two years. How much money will you have available 3 years from now if you earn a 7.5% rate of interest? (Calculate the future value of this stream of cash flows. Refer to Example 5.6.) Multiple choice question. $640.79 $711.31 $677.85 $622.50

$677.85 Reason: $100 x (1.075)3 + $200 x (1.075)2 + $300 x (1.075) = $677.85

If the interest rate is 10% per year, then what is the present value (PV) of $100 received one year from today? Multiple choice question. $90.00 $90.91 $110.00 $86.78

$90.91 Reason: PV = $100/1.10 = $90.91

Compound growth means that value increases after t periods by: Multiple choice question. (1 - growth rate)^t growth rate^t (1 + growth rate)^t 1/growth rate x t

(1 + growth rate)^t

If the interest rate (r) increases, what will happen to present value (PV) over time? Multiple choice question. PV will remain constant PV will decline PV will increase

PV will decline

True or false: The time value of money functions that are provided by your financial calculator are also available as functions in an Excel spreadsheet. True false question. True False

True

True or false: the discount factor refers to the present value of a $1 future payment. True false question. True False

True Reason: This is true. The discount factor measures the present value of $1 received in year t.

Joseph signs a contract with a company that will pay him $25,000. Following the principles of the time value of money, Joseph would be best off if he received payment: Multiple choice question. at the end of the project at the beginning of the project in 3 equal monthly sums

at the beginning of the project Reason: Concept of TVM

At a rate of interest of 10% (r), the present value (PV) of $100 will ___________ as the time period (t) ________________. Multiple choice question. decrease; decreases remain constant; increases increase; increases decrease; increases

decrease; increases

Interest income is _____________ to interest rate. Multiple choice question. inversely proportional directly proportional unrelated

directly proportional

Another name for the interest rate used to calculate PV is the ______ rate. Multiple choice question. inflation federal funds money market discount

discount

Present value is calculated using a ____________________ calculation. Multiple choice question. straight line depreciation inverted future value discounted cash-flow inverse cash-flow

discounted cash-flow

The value in t years of an investment made today at interest rate r is called the ___________ of your investment. Multiple choice question. future value compound value simple value present value

future value

When money is invested at compound interest, the growth rate is equal to the __________. Multiple choice question. average return on the stock market interest rate simple rate opportunity cost of capital

interest rate

If you are promised $100 in one year, $200 in two years, and $300 in 3 years, then the present value of the combined amount equals ______ $600 today. Multiple choice question. more than exactly less than

less than

The time value of money concept states that a dollar today is worth _______ a dollar tomorrow. Multiple choice question. more than the same as less than

more than

The time value of money concept states that a dollar today is worth _______ a dollar tomorrow. Multiple choice question. the same as more than less than

more than

A stream of cash flows means that ________. Multiple choice question. payments are made over time payments are made up front payments are made at the end of a project

payments are made over time

The interest rate on the financial calculator is expressed as a Multiple choice question. percentage. non-negative number always. decimal. represents a dollar value.

percentage

In Excel, cash inflows are recognized as ______ values and cash outflows are recognized as ______ values. Interest rates should be entered as ______. Multiple choice question. positive, negative, whole numbers positive, negative, decimals negative, positive, decimals negative, positive, whole numbers

positive, negative, decimals

*** Real-world investments often involve many payments received or paid over time. Managers refer to this as a ___________________. Multiple choice question. stream of cash flows amortized flows payment sequence cash flow bonus

stream of cash flows