Question 1

Christina invested $3,000 five years ago and earns 2 percent annual interest. 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:

Accepted Answer

A)   simplifying.
B)   compounding.
C)   aggregating.
D)   accumulating.
E)   discounting.F) None of the above
G) B) and C)

Question 2

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.

Accepted Answer

A)   $1,256.43
B)   $891.18
C)   $1,124.60
D)   $945.11
E)   $1,219.02F) B) and D)
G) B) and E)

Question 3

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Accepted Answer

A)   Future value
B)   Present value
C)   Principal amount
D)   Discounted value
E)   Invested principalF) All of the above
G) C) and D)

Question 4

The process of determining the present value of future cash flows in order to know their value today is referred to as:

Accepted Answer

A)   compound interest valuation.
B)   interest on interest valuation.
C)   discounted cash flow valuation.
D)   future value interest factoring.
E)   complex factoring.F) C) and D)
G) A) and E)

Question 5

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

Accepted Answer

A)   free interest.
B)   bonus income.
C)   simple interest.
D)   interest on interest.
E)   present value interest.F) A) and B)
G) B) and D)

Question 6

Towne Station is saving money to build a new loading platform. Three years ago, they set aside $23,000 for this purpose. Today, that account is worth $31,406. What rate of interest is Towne Station earning on this investment?

Accepted Answer

A)   8.39 percent
B)   9.47 percent
C)   10.94 percent
D)   8.23 percent
E)   9.01 percentF) A) and C)
G) All of the above

Question 7

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 40 years. Which one of the following statements is correct?

Accepted Answer

A)   The interest you earn in Year 6 will equal the interest you earn in Year 10.
B)   The interest amount you earn will double in value every year.
C)   The total amount of interest you will earn will equal $1,000 × .06 × 40.
D)   The present value of this investment is equal to $1,000.
E)   The future value of this amount is equal to $1,000 × (1 + 40) .⁰⁶.F) A) and E)
G) D) and E)

Question 8

Al invested $3,630 in an account that pays 6 percent simple interest. How much money will he have at the end of five years?

Accepted Answer

A)   $4,910
B)   $5,056
C)   $4,719
D)   $4,678
E)   $5,299F) A) and D)
G) C) and D)

Question 9

Ten years ago, Jackson Supply set aside $125,000 in case of a financial emergency. Today, that account has increased in value to $278,592. What rate of interest is the firm earning on this money?

Accepted Answer

A)   8.80 percent
B)   8.34 percent
C)   7.75 percent
D)   8.01 percent
E)   7.87 percentF) All of the above
G) C) and D)

Question 10

You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annual interest until you have accumulated $50,000. How many years from today will it be when this occurs?

Accepted Answer

A)   51.42 years
B)   49.08 years
C)   54.77 years
D)   48.42 years
E)   51.77 yearsF) A) and B)
G) C) and D)

Question 11

You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100ᵗʰ birthday, 79 years from now. The appropriate discount rate is 6.4 percent. What is the present value of your winnings?

Accepted Answer

A)   $11,288.16
B)   $9,300.82
C)   $10,309.91
D)   $8,333.33
E)   $10,500.00F) A) and D)
G) C) and D)

Question 12

Which one of these will increase the present value of a set amount to be received sometime in the future?

Accepted Answer

A)   Increase in the time until the amount is received
B)   Increase in the discount rate
C)   Decrease in the future value
D)   Decrease in the interest rate
E)   Decrease in both the future value and the number of time periodsF) A) and D)
G) All of the above

Question 13

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

Accepted Answer

A)   growth analysis.
B)   discounting.
C)   accumulating.
D)   compounding.
E)   reducing.F) C) and D)
G) B) and C)

Question 14

Your father invested a lump sum 28 years ago at 4.05 percent annual interest. Today, he gave you the proceeds of that investment, totalling $48,613.24. How much did your father originally invest?

Accepted Answer

A)   $14,929.47
B)   $16,500.00
C)   $15,994.70
D)   $15,500.00
E)   $16,099.45F) All of the above
G) B) and D)

Question 15

You would like to give your child $100,000 to start a career 25 years from now. How much money must you set aside today for this purpose if you can earn 7.5 percent on your investments?

Accepted Answer

A)   $15,388.19
B)   $16,397.91
C)   $16,817.67
D)   $15,911.13
E)   $17,488.37F) B) and E)
G) B) and D)

Question 16

This morning, DJ's invested $225,000 to help fund future projects. How much additional money will the firm have three years from now if it can earn an annual interest rate of 4 percent rather than 3.5 percent?

Accepted Answer

A)   $3,391.90
B)   $3,632.88
C)   $3,008.17
D)   $4,219.68
E)   $3,711.08F) A) and B)
G) A) and D)

Question 17

Suppose the first comic book of a classic series was sold in 1954. In 2017, the estimated price for this comic book was $310,000, which is an annual return of 22 percent. For this to be true, what was the original price of the comic book in 1954?

Accepted Answer

A)   $1.00
B)   $.97
C)   $1.33
D)   $1.12
E)   $1.20F) C) and E)
G) A) and D)

Question 18

Twenty years from now, you want to spend $175,000 for a fancy car. How much must you deposit as a lump sum today to achieve this goal at an annual interest rate of 6.6 percent?

Accepted Answer

A)   $54,208.16
B)   $48,740.95
C)   $57,911.08
D)   $40,019.82
E)   $51,446.60F) B) and C)
G) A) and B)

Question 19

What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent?

Accepted Answer

A)   $959.46
B)   $1,147.07
C)   $841.41
D)   $1,106.18
E)   $1,291.06F) B) and E)
G) C) and D)

Question 20

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:

Accepted Answer

A)   single amount.
B)   future value.
C)   present value.
D)   simple amount.
E)   compounded value.F) A) and C)
G) All of the above

Exam 5: Introduction to Valuation: The Time Value of Money

Towne Station is saving money to build a new loading platform. Three years ago, they set aside $23,000 for this purpose. Today, that account is worth $31,406. What rate of interest is Towne Station earning on this investment?

Correct AnswerverifiedShow Answer

You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100ᵗʰ birthday, 79 years from now. The appropriate discount rate is 6.4 percent. What is the present value of your winnings?

Correct AnswerverifiedShow Answer

Al invested $3,630 in an account that pays 6 percent simple interest. How much money will he have at the end of five years?

Correct AnswerverifiedShow Answer

Ten years ago, Jackson Supply set aside $125,000 in case of a financial emergency. Today, that account has increased in value to $278,592. What rate of interest is the firm earning on this money?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

Correct AnswerverifiedShow Answer

The process of determining the present value of future cash flows in order to know their value today is referred to as:

Correct AnswerverifiedShow Answer

You would like to give your child $100,000 to start a career 25 years from now. How much money must you set aside today for this purpose if you can earn 7.5 percent on your investments?

Correct AnswerverifiedShow Answer

Suppose the first comic book of a classic series was sold in 1954. In 2017, the estimated price for this comic book was $310,000, which is an annual return of 22 percent. For this to be true, what was the original price of the comic book in 1954?

Correct AnswerverifiedShow Answer

You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annual interest until you have accumulated $50,000. How many years from today will it be when this occurs?

Correct AnswerverifiedShow Answer

You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Correct AnswerverifiedShow Answer

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 40 years. Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:

Correct AnswerverifiedShow Answer

This morning, DJ's invested $225,000 to help fund future projects. How much additional money will the firm have three years from now if it can earn an annual interest rate of 4 percent rather than 3.5 percent?

Correct AnswerverifiedShow Answer

What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent?

Correct AnswerverifiedShow Answer

Which one of these will increase the present value of a set amount to be received sometime in the future?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Christina invested $3,000 five years ago and earns 2 percent annual interest. 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:

Correct AnswerverifiedShow Answer

Twenty years from now, you want to spend $175,000 for a fancy car. How much must you deposit as a lump sum today to achieve this goal at an annual interest rate of 6.6 percent?

Correct AnswerverifiedShow Answer

Your father invested a lump sum 28 years ago at 4.05 percent annual interest. Today, he gave you the proceeds of that investment, totalling $48,613.24. How much did your father originally invest?

Correct AnswerverifiedShow Answer

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