Question 1

Which of the following investments would you prefer?

Accepted Answer

A)  an investment earning 6 percent for 10 years 
B)  an investment earning 5 percent for 20 years 
C)  an investment earning 4 percent for 30 years 
D)  an investment earning 3 percent for 40 years

Question 2

What is the future value of $2,500 deposited for one year earning a 14 percent interest rate annually?

Accepted Answer

A)  $2,550 
B)  $2,850 
C)  $2,950 
D)  $3,150

Question 3

Compute the present value of $9,000 paid in four years using the following discount rates: 4 percent in year 1, 5 percent in year 2, 4 percent in year 3, and 3 percent in year 4.

Accepted Answer

A)  $7,693.95 
B)  $8,543.26 
C)  $9,000.00 
D)  $10,823.01

Question 4

You have $50,000 in your account. Assuming no additional deposits are made and your account earns 8 percent per year, how long will it take for the account to have a balance of $500,000?

Accepted Answer

A)  28.83 years 
B)  29.92 years 
C)  50.00 years 
D)  90.00 years

Question 5

You invested $1,400 in the stock market one year ago. Today the investment is valued at $1,100. What return did you earn? What return would you need to get back next year to break even overall?

Accepted Answer

A)  −14.62 percent, 31.19 percent 
B)  −9.43 percent, 31.67 percent 
C)  −21.43 percent, 27.27 percent 
D)  −29.17 percent, 32.18 percent

Question 6

Determine the interest rate earned on a $1,500 deposit when $1,680 is paid back in one year.

Accepted Answer

A)  0.89 percent 
B)  1.12 percent 
C)  12.00 percent 
D)  89.00 percent

Question 7

What annual rate of return is earned on a $200 investment when it grows to $850 in 10 years?

Accepted Answer

A)  3.25 percent 
B)  4.25 percent 
C)  13.47 percent 
D)  15.57 percent

Question 8

Which of the following is NOT true when developing a time line?

Accepted Answer

A)  Cash inflows are designated with a positive number. 
B)  Cash outflows are designated with a positive number. 
C)  The cost is known as the interest rate. 
D)  The time line shows the magnitude of cash flows at different points in time.

Question 9

Which of the following will not increase a present value?

Accepted Answer

A)  increase the interest rate 
B)  decrease the number of periods 
C)  increase the future value

Question 10

You are scheduled to pay a $350 cash flow in one year, and receive a $1,000 cash flow in years 3 and 4. If interest rates are 10 percent per year, what is the combined present value of these cash flows?

Accepted Answer

A)  $991.38 
B)  $1,097.14 
C)  $1,116.14 
D)  $1,213.92

Question 11

How much would be in your savings account in 7 years after depositing $100 today if the bank pays 5 percent interest per year?

Accepted Answer

A)  $135.00 
B)  $140.71 
C)  $735.00 
D)  $814.20

Question 12

What is the future value of $700 deposited for one year earning 4 percent interest rate annually?

Accepted Answer

A)  $28 
B)  $700 
C)  $728 
D)  $1,428

Question 13

Approximately what rate is needed to double an investment over five years?

Accepted Answer

A)  8 percent 
B)  12.2 percent 
C)  14.4 percent 
D)  15.8 percent

Question 14

What is the present value of a $500 payment in one year when the discount rate is 5 percent?

Accepted Answer

A)  $475.00 
B)  $476.19 
C)  $500.00 
D)  $525.00

Question 15

Time value of money concepts can be used by

Accepted Answer

A)  individuals doing personal financial planning. 
B)  CFOs and CEOs to make business decisions. 
C)  investors calculating a return on an investment. 
D)  All of these choices are correct.

Question 16

If an average home in your town currently costs $250,000, and house prices are expected to grow at an average rate of 3 percent per year, what will a house cost in eight years?

Accepted Answer

A)  $255,033.41 
B)  $255,043.97 
C)  $314,928.01 
D)  $316,692.52

Question 17

Scenario A: At age 27, you invest $1,500 that earns 9 percent each year. Scenario B: At age 40, you invest $2,500 that earns 11 percent per year. Under which scenario do you accumulate more money by age 60?

Accepted Answer

A)  Scenario A 
B)  Scenario B 
C)  Both scenarios have the same value by age 60. 
D)  Need more data to answer.

Question 18

Which of these statements is true of discounting?

Accepted Answer

A)  It is the reverse of compounding. 
B)  It significantly decreases the value of a future amount to the present. 
C)  It is the process of figuring out how much an amount that you expect to receive in the future is worth today. 
D)  All of the above.

Exam 4: Time Value of Money 1: Analyzing Single Cash Flows