Chapter 5: Introduction to Valuation - Time Value of Money

You invested $6,500 in an account that pays 6 percent simple interest. How much more could you have earned over a 10-year period if the interest had compounded annually? a. $1,049.22 b. $930.11 c. $1,182.19 d. $1,201.15 e. $1,240.51

e. $1,240.51

You want to have $30,000 saved 5 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 3.5 percent rather than 2.5 percent on your savings? Today's deposit is the only deposit you will make to this savings account. a. $1,256.43 b. $891.18 c. $1,124.60 d. $945.11 e. $1,219.02

a. $1,256.43

Today, you earn a salary of $28,000. What will be your annual salary twelve years from now if you earn annual raises of 2.6 percent? a. $38,100.12 b. $37,414.06 c. $38,235.24 d. $37,122.08 e. $36,736.00

a. $38,100.12

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true? a. Barb will earn more interest the first year than Andy will. b. Andy will earn more interest in year three than Barb will. c. Barb will earn more interest the second year than Andy. d. After five years, Andy and Barb will both have earned the same amount of interest. e. Andy will earn compound interest.

c. Barb will earn more interest the second year than Andy.

Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years? a.$12,650 b.$12,967 c.$13,020 d.$13,256 e.$13,500

c.$13,020

This morning, DJ's invested $238,000 to help fund a company expansion project planned for three years from now. How much additional money will the firm have three years from now if it can earn 4 percent rather than 3.5 percent on its savings? a. $3,940.09 b. $3,842.78 c. $4,008.17 d. $4,219.68 e. $3,711.08

b. $3,842.78

Your older sister deposited $2,000 today at 6.5 percent interest for 5 years. You would like to have just as much money at the end of the next 5 years as your sister will have. However, you can only earn 6 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years? a. $32.19 b. $47.62 c. $38.78 d. $40.21 e. $53.39

b. $47.62

On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? a. Age 29 b. Age 30 c. Age 31 d. Age 32 e. Age 21

b. Age 30 300 (1+.045)^n = 756

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following? a. Simplifying. b. Compounding. c. Aggregation. d. Accumulation. e. Discounting.

b. Compounding.

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: a. Growth analysis. b. Discounting. c. Accumulating. d. Compounding. e. Reducing.

b. Discounting.

Your father invested a lump sum 33 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest? a. $5,929.47 b. $6,500.00 c. $13,035.72 d. $15,500.00 e. $11,999.45

c. $13,035.72

Sixty years ago, your mother invested $4,500. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment? a. 6.67 percent b. 11.71 percent c. 7.90 percent d. 10.40 percent e. 12.02 percent

c. 7.90 percent 4500 (1+r)^60 = 430,065.11

Some time ago, Tracie purchased 11 acres of land costing $77,900. Today, that land is valued at $54,800. How long has she owned this land if the price of the land has been decreasing by 3.5 percent per year? a. 11.33 years b. 9.08 years c. 9.87 years d. 10.29 years e. 12.08 years

c. 9.87 years

The process of determining the present value of future cash flows in order to know their worth today is referred to as: a. Compound interest valuation. b. Interest on interest computation. c. Discounted cash flow valuation. d. Present value interest factoring. e. Complex factoring.

c. Discounted cash flow valuation.

s 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? a. The present values of Luis and Soo Lee's money are equal. b. In future dollars, Soo Lee's money is worth more than Luis's money. c. In today's dollars, Luis's money is worth more than Soo Lee's. d. Twenty years from now, the value of Luis's money will be equal to the value of Soo Lee's money. e. Soo Lee's money is worth more than Luis's money given the 7 percent discount rate.

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

Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning? a. Free interest. b. Complex interest. c. Simple interest. d. Interest on interest. e. Compound interest.

c. Simple interest.

In 1884, the winner of a competition was paid $100. In 2015, the winner's prize was $375,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate? (Round your answer to the nearest $500.) a. $1,980,000 b. $2,006,500 c. $1,750,000 d. $,1,803,500 e. $1,788,000

d. $,1,803,500

When you retire 35 years from now, you want to have $1.2 million. You think you can earn an average of 9 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 5 years from today. How much more will you have to deposit as a lump sum if you wait for 5 years before making the deposit? a. $27,414.14 b. $26,319.47 c. $29,891.11 d. $31,662.08 e. $33,406.78

d. $31,662.08

You have just made a $1,500 contribution to your individual retirement account. Assume you earn a rate of return of 8.7 percent and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would be if you waited another 5 years before making this contribution? a. $6,306.16 b. $4,658.77 c. $3,311.18 d. $6,907.17 e. $4,117.64

e. $4,117.64 FV = $1,500 × (1 + .087)25 = $12,073.41FV = $1,500 × (1 + .087)20 = $7,955.77Difference = $12,073.41 - 7,955.77 = $4,117.64