FRL 3000 Ch. 5
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
- 1.10^2= 1.21
Suppose we invest $100 now and get back $236.74 in 10 years. What rate of interest will we achieve?
- 9% Calculator PV= -$100 FV= $236.74 N= 10
Which of the following methods can be used to calculate present value?
- An algebraic formula - A time value of money table - A financial calculator
Which of the following are correct spreadsheet functions?
- Discount rate = RATE(nper,PMT,PV,fv) - Present value = PV(rate, nper,pmt,fv) - Future value = FV(rate,nper,pmt,pv)
Which of the following can be determined using the future approach to compound growth developed in this chapter?
- Dividend growth - Sales growth - (Population growth)
True or false: Small changes in the interest rate affect the future value of a small-term investment more than they would affect the value of a long-term investment.
- False (Small rate differences can be worth thousands of dollars, especially when either the amount or the time period is large.)
Which of the following investments would result in a higher future value? Investment A - 12% APR for 10 years Investment B - 12% APR for 12 years
- Investment B 1.12^10=3.11 1.12^12=3.90
If you plan to put a $10,000 down payment on a house in five years and you can earn 6% per year, how much will you need to deposit today?
$10,000/ (1.06)^5 = $7,472.58
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
$11,739.09
If you invest for a single period at an interest rate of r, your money will grow to ___ per dollar invested.
(1 +r)
What is the future value of $100 at 10 percent simple interest for 2 years?
- $120 FV = $100 + 2(0.10 x $100) = $120
If you invest $100 at 10 percent simple interest, how much money will you have in 10 years?
- $200 FV = $100 + 10 ($100 X .10) = $200
The present value interest factor for $1 at 5% compounded annually for 5 years [PVIF(5%,5)] is:
- 0.7835 PV x (1 + r)^t =FV PV = FV / (1 + r)^t = FV x [1/1 + r)^t] $1 / (1.05)^5 = 0.7835
Why is a dollar received today worth more than a dollar received in the future?
- Today's dollar can be reinvested, yielding a greater amount in the future.
True or false: The formula for a present value factor is 1/ (1+r)^t
- True This is the present value interest factor, not the present value itself. In order to get PV, you need to multiply FV by this factor. As the denominator becomes larger due to higher interest or longer periods, it reduces the factor.
True or false: The correct mathematical formula for finding the future value of a $68 present value in 12 years at 9 percent annual interest is FV = $68(1.12)^9.
False
The basic present value equation underlies many of the:
most important ideas in corporate finance
If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.
present
Suppose the present value is $100, future value is $1,000 and N is 10 years. Which formula below is used to find the (decimal) interest rate?
r = (1000/100)^(1/10) - 1
The difference between _____ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ______ every year.
simple; bigger
Assuming the interest rate offered for a 10 year investment plan is same as for a 4 year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?
10 year investment
What is the future value of $1,000 invested for 8 years at 6%?
= 1000(1.06)^8 = $1,593.85
How long will it take $40 to grow to $240 at an interest rate of 6.53% compounded annually?
Calculator I/Y = 6.53 PV = -40 FV= 240 = 28.33 years
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
True
True or false: Discounting is the opposite of compounding.
True (Compounding increases money forward in time, discounting reduces money back in time.)
Furture value is the ______ value of an investment at some time in the future.
cash
The idea behind _____ is that interest is earned on interest.
compounding