Chapter 5 Missed

13. This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in forty years. Which one of the following statements is correct?

D. The present value of this investment is equal to $1,000.

35. What is the present value of $150,000 to be received 8 years from today if the discount rate is 11 percent?

A. $65,088.97 Present value = $150,000 × [1/1 + .11)8] = $65,088.97 8=N, 11=I/Y, 150,000=FV, solve for PV

18. Which one of the following will produce the highest present value interest factor?

A. 6 percent interest for five years

20. Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true?

B. Martin earned a lower interest rate than he expected.

45. Sixteen years ago, Alicia invested $1,000. Eight years ago, Travis invested $2,000. Today, both Alicia's and Travis' investments are each worth $2,400. Assume that both Alicia and Travis continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments?

B. One year ago, Alicia's investment was worth less than Travis' investment. Alicia: $2,400 = $1,000 × (1 + r)16; r = 5.62 percent Travis: $2,400 = $2,000 × (1 + r)8; r = 2.31 percent Alicia: N=16, PV= -1,000, FV= 2,400, solve for I/Y Travis: N= 8, PV= -2,000, FV= 2,400, solve for I/Y

7. Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

B. discounting.

15. Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

C. In today's dollars, Luis' money is worth more than Soo Lee's.

16. Which one of the following variables is the exponent in the present value formula?

D. time

14. Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

C. decreases

9. The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?

C. discounted cash flow valuation

43. According to the Rule of 72, you can do which one of the following?

C. double your money in 8 years at 9 percent interest

6. Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following?

C. present value

4. Interest earned on both the initial principal and the interest reinvested from prior periods is called:

E. compound interest.