FIN202 Chap 5

90. Time to attain goal: Cheryl Merriweather wants to invest in a bank CD that will pay her 7.8 percent annually. If she is investing $11,500 today, when will she reach her goal of $15,000? (Round off to the nearest year.) A) 5 years B) 7 years C) 2 years D) 4 years

D

36. 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.

a

39. 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

a

49. 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.

a

54. Future value: Wes Ottey would like to buy a condo in Florida in six years. He is looking to invest $75,000 today in a stock 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) None of the above

a

68. Present value: Derek's friend, Jackson, 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

a

76. 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 percent. A) 5% B) 6% C) 7% D) 8%

a

46. 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.

c

52. Future value: Ning Gao is planning to buy a house in five years. She is looking to invest $25,000 today in an index mutual 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) $28,000 C) $44,059 D) None of the above

c

69. 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 CD 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

c

87. Time to attain goal: Elegant Designers have generated sales of $625,000 for the current year. If they can grow their sales at a rate of 12 percent every year, how long will they take to triple their sales? (Round off to the nearest year.) A) 8 years B) 7 years C) 10 years D) 9 years

c

95. Present Value: Juan and Carla Herman plan to buy a time-share in six years in the amount of $16,860. In order to have adequate funds to do so, the Herman's want to make a deposit to their money market fund today. Assume that they will be able to earn an investment rate of 5.75%, compounded annually. How much will Juan and Carla need to deposit today to achieve their goal? (Round off to the nearest dollar.) A) $19,138 B) $ 8,885 C) $12,055 D) $14,243

c

37. 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.

d

43. 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.

d

85. Growth rate: Vidmar Agencies is a fast-growing advertising agency. Currently, their sales are at $700,000. They expect their sales to grow at an annual rate of 35 percent in the next two years, followed by an annual rate of 25 percent in years 3 through 7. Finally, their growth rate would slow down to 10 percent in years 8-10. What will be their sales as of year 10? (Round to the nearest dollar.) A) $1,698,023 B) $2,843,323 C) $3,893,280 D) $5,181,956

d

53. Future value: Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank CD 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) $8,000 C) $8,681 D) None of the above

A

56. 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 CD 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

B

50. Your aunt is looking to invest a certain amount today. Which of the following choices should she opt for? A) three-year CD at 6.5% annual rate B) three-year CD at 6.75% annual rate C) three-year CD at 6.25% annual rate D) three-year CD at 7% annual rate

D

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 CD 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

D

40. 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.

a

45. 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 (TDM) 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.

a

58. Multiple compounding periods (FV): Your mother is trying to choose one of the following bank CDs to deposit $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

a

61. 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

a

80. Interest rate: Trayne Rice 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%

a

81. 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 firm? (Round to the nearest percent.) A) 9% B) 11% C) 6% D) 12%

a

83. Growth rate: Cleargen, a detergent manufacturer, has announced this year's net income as $832,500. It expects its net earnings to grow at a rate of 15 percent per year for the next two years, before dropping to 12 percent for each of the following two years. What is the firm's net income after four years? (Round to the nearest dollar.) A) $1,381,071 B) $1,266,128 C) $1,233,099 D) $1,072,260

a

86. Time to attain goal: Your uncle is looking to double his investment of $10,000. He claims he can get earn 14 percent on his investment. How long will it be before he can double his investment? Use the Rule of 72 and round to the nearest year. A) 5 years B) 14 years C) 10 years D) None of the above

a

92. Which of the following statements is true? A) The longer the time period that funds are invested, the greater the future value, regardless of investment rate. B) The lower the discount rate that funds are invested at, the greater the future value. C) The shorter the time period that funds are invested, the greater the future value, regardless of investment rate. D) The higher the interest rate, the slower the value of an investment will grow.

a

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

a

42. 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.

b

44. 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.

b

47. 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.

b

48. 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.

b

51. Future value: You are interested in investing $10,000, a gift from your grandparents, for the next four years in a mutual 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) None of the above

b

60. Multiple compounding periods (FV): Hector Cervantes 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

b

63. 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) None of the above

b

71. 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

b

72. Multiple compounding (PV): You need to have $15,000 in five years to payoff 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

b

75. 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

b

79. Interest rate: Pedro Martinez wants to invest $25,000 in a spa that his sister is starting. He will triple his investment in six years. What is the rate of return that Pedro is being promised? (Rounded to the nearest percent.) A) 18% B) 20% C) 12% D) 25%

b

82. Growth rate: Petry Corp. is a growing company with sales of $1.25 million this year. The firm expects to grow at an annual rate of 25 percent for the next three years, followed by a growth of 20 percent per year for the next two years. What will be Petry's sales at the end of five years? (Round to the nearest percent.) A) $2,160,000 B) $3,515,625 C) $1,875,000 D) $2,929,688

b

88. Time to attain goal: Franklin Foods announced that its sales were $1,233,450 this year. The company forecasts a growth rate of 16 percent for the foreseeable future. How long will it take the firm to produce earnings of $3 million? (Round off to the nearest year.) A) 7 years B) 6 years C) 8 years D) 10 years

b

96. Number of Periods it Takes an Investment to Grow a Certain Amount: Sally Wilson is planning her retirement. She is presently investing in a 401(k) but needs an additional $500,000 to reach her retirement goal. As luck would have it, Sally just won a brand new car that is worth $36,000 in a raffle. If Sally were to sell the car and invest the $36,000 proceeds at a rate of 6.50%, compounded annually, how long will it be before Sally could retire? (Round off to the nearest 1/10 of a year) A) 36.6 years B) 41.8 years C) 52.2 years D) 24.0 years

b

41. 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.

c

55. 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 U.S. Treasury bonds 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) None of the above

c

59. Multiple compounding periods (FV): Carlyn 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 her alma mater, Towson University. How much will Carlyn have at the end of seven years? (Round to the nearest dollar.) A) $5,091 B) $3,548 C) $5,130 D) $5,075

c

64. 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) $10,925 C) $2,497.63 D) $1,092.48

c

67. 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) $22,680 B) $26,454 C) $16,670 D) $19,444

c

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

c

77. Interest rate: Rachael Steele 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 firm 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 firm, and what is the interest rate if she borrows from her firm? (Round to the nearest percent.) A) Bank: 9% B) Firm: 7% C) Bank: 8% D) Firm: 6%

c

84. Growth rate: Peterson Electrical Supplies has generated a net income of $161,424 this year. The firm expects to see an annual growth of 30 percent for the next five years, followed by a growth rate of 15 percent for each of the next three years. What will be the firm's expected net income in eight years? (Round to the nearest dollar.) A) $319,157 B) $241,329 C) $911,546 D) $689,259

c

89. Time to attain goal: Ryan Holmes wants to deposit $4,500 in a bank account that pays 8.25 percent annually. How many years will it take for his investment to grow to $10,000? (Round off to the nearest year.) A) 8 years B) 11 years C) 10 years D) 12 years

c

91. Which of the following statements is true? A) A dollar received today is worth more than a dollar to be received in the future because future dollars are not affected by inflation. B) A dollar to be received in the future is worth more than a dollar received today because of the positive impact of rates of return. C) A dollar received today is worth more than a dollar to be received in the future because funds received today can be invested to earn a return. D) A dollar to be received in the future is worth more than a dollar received today because it would have less risk associated with it.

c

94. Which of the following statements is false with respect to the present value of a future amount? A) The higher the discount rate, the lower the present value of a single sum for a given time period. B) The relation between present value and time is exponential. C) The greater the time period, the lower the present value of a single sum for a given interest rate. D) The lower the discount rate, the lower the present value of a single sum for a given time period.

c

97. Rate of growth: Link Net, Inc. just generated earnings per share of $3.75 for the fiscal year ending September 30, 2010. The firm is expected to achieve earnings per share of $8.76 in 5-years. At what rate will Link Net, Inc.'s earnings per share be growing over this 5-year period? (Round off to the nearest 1/10 percent) A) 15.7% B) 18.5% C) 21.3% D) 13.4%

c

38. 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.

d

57. 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 deposit this money in a bank CD 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

d

62. 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

d

65. 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

d

66. 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) $26,625 D) $16,088

d

78. Interest rate: Ray Seo 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%

d

93. Future Value: Herbert Hall just received an inheritance of $35,775 from his great aunt. He plans to invest the funds for retirement. If Herbert can earn 4.75% per year with quarterly compounding for 32 years, how much will he have accumulated? (Round off to the nearest dollar.) A) $237,416 B) $ 71,550 C) $184,622 D) $162,113

d