Q&A Hero

Q: Suppose that you just attended a lecture on Time Value of Money. On your way home, you stopped in to get a cup of coffee. One of your classmates, who missed the lecture, joined you for coffee and asked you to explain to her the key concepts of time value of money and how you could use it to solve some of practical financial problems. What would you tell her?

Q: Suppose you win $10 million in a lottery. You have a choice of how you will receive your winnings. The first choice is to receive a certain lump sum today. The second choice is to receive a certain amount at the end of five years. How will you evaluate your choices to make your decision?

Q: Explain how the future and the present value equations are related.

Q: Explain the difference between simple interest and compound interest.

Q: Omniva Inc. just generated earnings per share of $3.75 for the fiscal year ending September 30, 2014. The firm is expected to achieve earnings per share of $8.76 in 5-years. At what rate will Omniva Inc.'s earnings per share be growing over this 5-year period? (Round off to the nearest 1/10 percent)A) 15.7%B) 18.5%C) 21.3%D) 13.4%

Q: Amanda Sorenson is planning her retirement. She is presently investing in a 401(k) but needs an additional $500,000 to reach her retirement goal. As luck would have it, Amanda just won a brand new car that is worth $36,000 in a raffle. If Amanda were to sell the car and invest the $36,000 proceeds at a rate of 6.50%, compounded annually, how long will it be before Amanda could retire? (Round off to the nearest 1/10 of a year)A) 36.6 yearsB) 41.8 yearsC) 52.2 yearsD) 24.0 years

Q: Albend Holmes wants to deposit $4,500 in a bank account that pays 8.25 percent annually. How many years will it take for his investment to grow to $10,000? (Round off to the nearest year.)A) 8 yearsB) 11 yearsC) 10 yearsD) 12 years

Q: Nickole wants to invest in a bank CD that will pay her 7.8 percent annually. If she invests $11,500 today, when will she reach her goal of $15,000? (Round off to the nearest year.)A) 5 yearsB) 7 yearsC) 2 yearsD) 4 years

Q: Transent Foods announced that its current sales is $1,233,450 this year. The company forecasts a growth rate of 16 percent for the foreseeable future. How long will it take the firm to produce earnings of $3 million? (Round off to the nearest year.)A) 7 yearsB) 6 yearsC) 8 yearsD) 10 years

Q: Animist Designers has generated sales of $625,000 for the current year. If it can grow the sales at a rate of 12 percent every year, how long will it take to triple the sales? (Round off to the nearest year.)A) 8 yearsB) 7 yearsC) 10 yearsD) 9 years

Q: Your uncle is looking to double his investment of $10,000. He claims he can get earn 14 percent on his investment. How long will it take to double his investment? Use the Rule of 72 and round to the nearest year. A) 5 years B) 14 years C) 10 years D) 7 years

Q: Locil Agencies is a fast-growing advertising agency. Currently, its sales is at $700,000. The company expects its sales to grow at an annual rate of 35 percent in the next two years, followed by an annual rate of 25 percent in years 3 through 7. Finally, its growth rate would slow down to 10 percent in years 8"10. What will be its sales as of year 10? (Round to the nearest dollar.)A) $1,698,023B) $2,843,323C) $3,893,280D) $5,181,956

Q: Genor Peterson Electrical Supplies has generated a net income of $161,424 this year. The firm expects to see an annual growth of 30 percent for the next five years, followed by a growth rate of 15 percent for each of the next three years. What will be the firm's expected net income in eight years? (Round to the nearest dollar.)A) $319,157B) $241,329C) $911,546D) $689,259

Q: Manufic, a detergent manufacturer, has announced this year's net income as $832,500. It expects its net earnings to grow at a rate of 15 percent per year for the next two years, before dropping to 12 percent for each of the following two years. What is the firm's net income after four years? (Round to the nearest dollar.)A) $1,381,071B) $1,266,128C) $1,233,099D) $1,072,260

Q: Bovic Inc. is a growing company with sales of $1.25 million this year. The company expects to grow at an annual rate of 25 percent for the next three years, followed by a growth of 20 percent per year for the next two years. What will be Bovic's sales at the end of five years? (Round to the nearest percent.)A) $2,160,000B) $3,515,625C) $1,875,000D) $2,929,688

Q: Finor Traps manufactures an innovative mouse trap. Total sales for the current year is $325,000. The company expects its sales to go up to $500,000 in five years. What is the expected growth rate in sales for this firm? (Round to the nearest percent.)A) 9%B) 11%C) 6%D) 12%

Q: Michael Harper has $3,000 to invest for three years. He wants to receive $5,000 at the end of the three years. What invest rate would his investment have to earn to achieve his goal? (Round to the nearest percent.)A) 19%B) 21%C) 13%D) 16%

Q: Winston Baker wants to invest $25,000 in a spa that his sister is starting. He will triple his investment in six years. What is the rate of return that Winston is being promised? (Rounded to the nearest percent.)A) 18%B) 20%C) 12%D) 25%

Q: Patrick Smith has $5,000 to invest in a small business venture. His partner has promised to pay him back $8,200 in five years. What is the return earned on this investment?A) 9.3%B) 8.7%C) 11.1%D) 10.4%

Q: Anne Morgan wants to borrow $6,000 for a period of four years. She has two choices. Her bank is offering to lend her the amount at 7.25 percent compounded annually. She can also borrow from her firm and will have to repay a total of $8,130.93 at the end of four years. Should Anne go with her bank or the firm, and what is the interest rate if she borrows from her firm? (Round to the nearest percent.)A) She should borrow from the bank as the bank is charging a higher interest of 9%.B) She should borrow from her firm as it is charging a lower interest of 7%.C) She should borrow from the bank as the bank is charging a higher interest of 8%.D) She should borrow from her firm as it is charging a lower interest of 6%.

Q: Your tuition for the coming year is due today. You borrow $8,000 from your uncle and agree to repay in the three years an amount of $9,250. What is the interest rate on this loan? Round to the nearest percent.A) 5%B) 6%C) 7%D) 8%

Q: Which of the following statements is true of the rule of 72? A) It can be used to determine the amount of time it takes to double an investment. B) It is fairly accurate for interest rates between 25 and 50 percent. C) It states that the time to double your money (TDM) approximately equals 72/i, where i represents the years it takes to double your investment. D) It can be used to estimate approximate compound interest earned for a period of 72 days.

Q: As per the rule of 72, the time to double your money (TDM) approximately equals: A) 72/n. B) 72/i. C) 72/Initial investment. D) 72/Future value.

Q: Which of the following equations is used to calculate the present value of a sum to be received in future? A) PV = FVn (1 + i)n B) PV = FVn (1 + i)n C) PV = (1 + i)n + FVn D) PV = (1 + i)n FVn

Q: The process of converting future cash flows to what its present value is called: A) annualizing. B) discounting. C) compounding. D) capital budgeting.

Q: Celesta Frank wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she were to deposit the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.)A) $6,432B) $7,826C) $8,148D) $7,763

Q: Michael Peterson is seeking to accumulate $25,000 in six years to invest in a real estate venture. He can earn 6.35 percent annual interest with monthly compounding in a private investment. How much will he have to invest today to reach his goal? (Round to the nearest dollar.)A) $18,527B) $23,015C) $17,097D) $19,648

Q: Tamera Watson is saving for her daughter's college education. She wants to have $50,000 available when her daughter graduates from high school in four years. If the investment she is considering will pay 8.25 percent compounded monthly, how much will she have to invest today to reach her target? (Round to the nearest dollar.)A) $35,987B) $39,659C) $41,275D) $36,450

Q: You need to have $15,000 in five years to payoff a home equity loan. You can invest in an account that pays 5.75 percent compounded quarterly. How much will you have to invest today to attain your target in five years? (Round to the nearest dollar.)A) $4,903B) $11,275C) $13,184D) $12,250

Q: LeroyDiaz plans to invest some money today so that he will receive $7,500 in three years. If the investment he is considering will pay 3.65 percent compounded daily, how much will he have to invest today?A) $5,276B) $6,722C) $6,897D) $7,140

Q: Robert Kelly wants to start a business in 10 years. He hopes to have $100,000 at that time to invest in the business. To reach his goal, he plans to invest a certain amount today in a bank CD that will pay him 9.50 percent annually. How much will he have to invest today to achieve his target? (Round to the nearest dollar.)A) $54,233B) $63,837C) $91,324D) $40,351

Q: Joyce Thomas wants to buy a house in six years. She hopes to have $25,000 at that time. If the bank CD she wants to invest in will pay 7.5 percent annually, how much will she have to invest today? (Round to the nearest dollar.)A) $18,472B) $13,987C) $16,199D) $23,256

Q: Jacob's friend, Albert, borrows today with a promise to repay $7,418.87 in four years. If Jacob could earn 5.45 percent annually on the any investment he makes today, how much would he be willing to lend Albert today? (Round to nearest dollar.)A) $6,000B) $7,035C) $6,500D) $7,150

Q: Steve Fisher is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)A) $22,680B) $26,454C) $16,670D) $19,444

Q: Juan and Rachel Burpo plan to buy a time-share in six years of $16,860. In order to have adequate funds to do so, the Burpo want to make a deposit to their money market fund today. Assume that they will be able to earn an investment rate of 5.75%, compounded annually. How much will Juan and Rachel need to deposit today to achieve their goal? (Round off to the nearest dollar.)A) $11,138B) $8,885C) $12,055D) $14,243

Q: Which of the following statements is true with respect to the present value of a future amount? A) The higher the discount rate, the higher the present value of a single sum for a given time period. B) The relation between present value and time is exponential. C) The greater the time period, the higher the present value of a single sum for a given interest rate. D) The lower the discount rate, the lower the present value of a single sum for a given time period.

Q: When discount rate: A) increases, the present value of a future cash flow decreases. B) increases, the present value of a future cash flow increases. C) decreases, the present value of a future cash flow will remain the same. D) decreases, the present value of a future cash flow decreases.

Q: When discount rate: A) decreases, the present value of the future cash flow does not change. B) decreases, the present value of any future cash flow increases. C) increases, the present value of any future cash flow increases. D) increases, the present value of any future cash flow does not change.

Q: Which of the following statements is true? A) Present value calculations involve converting the initial amount into a future amount. B) The present value (PV) is often called the compounded value of future cash payments. C) The presentvalue is calculated by using the discount factor. D) The future value of an investment is the reciprocal of its present value.

Q: Joseph Harris is considering an investment that pays 6.5 percent annually. How much must he invest today such that he will have $25,000 in seven years? (Round to the nearest dollar.)A) $17,474B) $18,850C) $16,625D) $16,088

Q: Which of the following equations is used to calculate the future value of an investment when interest is compounded m times a year? A) FVn = PV (1 + i)mn B) FVn = PV (1 + i/m)mn C) FVn = (1 + i)mn+ PV D) FVn = (1 + i)mn PV

Q: Which of the following equations is used to calculate the future value of an investment? A) FVn = PV (1 + i)n B) FVn = PV (1 + i)n C) FVn = (1 + i)n + PV D) FVn = (1 + i)n PV

Q: Shawn Bowker invested $10,000 in a money market account that will pay 5.75 percent compounded daily. How much will the interest on interest be after two years?A) $1,218.63B) $1,150.00C) $33.06D) $68.63

Q: Dat Nguyen is depositing $17,500 in an account paying an annual interest rate of 8.25 percent compounded monthly. What is the interest on interest after six years?A) $8,662.50B) $10,925.44C) $2,497.63D) $1,092.48

Q: Richard McLean wants to invest $3,000 in an account paying 5.25 percent compounded quarterly. What is the interest on interest after four years?A) $695.98B) $65.98C) $630.00D) $157.50

Q: Camille Noah is investing $5,000 in an account paying 6.75 percent annually for three years. What is the interest on interest if interest is compounded? A) $1,012.50 B) $1,082.38 C) $82.38 D) $69.88

Q: Jack Palomo has deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? If the account paid compound interest, what would be the interest on interest in five years? A) $750; $95.56 B) $150; $845.56 C) $150; $95.56 D) $95.56; $845.56

Q: Paul Springer plans to save for a down payment for a house in 10 years. He will be able to invest $12,000 today in a money market account that will pay him an interest of 5.50 percent on a monthly basis. How much will he have at the end of 10 years? A) $12,640 B) $20,773 C) $24,859 D) $23,080

Q: Lorene Buckley wants to invest $3,500 today in a money market fund that pays a quarterly interest at 5 percent. She plans to fund a scholarship with the proceeds at her alma mater, Towson University. How much will Lorene have at the end of seven years? (Round to the nearest dollar.) A) $5,091 B) $3,849 C) $4,956 D) $5,075

Q: Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which will have the highest future value if she plans to invest for three years?A) 3.50% compounded dailyB) 3.25% compounded monthlyC) 3.40% compounded quarterlyD) 3.75% compounded annually

Q: Dynoxo Textiles has a cash inflow of $1 million, which it needs for a long-term investment, at the end of one year. It plans to deposit the money in a bank CD that pays daily interest at 4.50 percent. What will be the value of the investment at the end of the year? (Round to the nearest dollar.) A) $1,020,475 B) $1,000,103 C) $1,037,500 D) $1,046,025

Q: Your brother has asked you to help him to choose an investment. He has $6,000 to invest today for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with the interest being paid quarterly. What will be the value of the investment in two years? A) $6,550 B) $6,529 C) $6,107 D) $6,216

Q: Lori Willis plans to invest for retirement, which she hopes will be in 20 years. She is planning to invest $25,000 today in U.S. Treasury bonds that will earn interest at 6.25 percent annually. How much will she have at the end of 20 years? (Round to the nearest dollar.) A) $68,870 B) $50,625 C) $84,046 D) $75,000

Q: Kevin Robertson would like to buy a condo in Florida in six years. He is looking to invest $75,000 today in a stock that is expected to earn a return of 18.3 percent annually. How much will he have at the end of six years? (Round to the nearest dollar.)A) $205,575B) $157,350C) $184,681D) $273,620

Q: Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank CD that will earn interest at 5.75 percent annually. How much will he have at the end of three years? (Round to the nearest dollar.)A) $8,870B) $8,575C) $8,681D) $8,990

Q: Juan Vinson is planning to buy a house in five years. He is looking to invest $25,000 today in an index mutual fund that will provide him a return of 12 percent annually. How much will he have at the end of five years? (Round to the nearest dollar.) A) $45,000 B) $28,000 C) $44,059 D) $28,530

Q: You are interested in investing $15,000, a gift from your grandparents, for the next four years in a mutual fund that will earn an annual return of 8 percent. What will your investment be worth at the end of four years? (Round to the nearest dollar.) A) $18,816 B) $20,407 C) $20,221 D) $18,089

Q: Your aunt is looking to invest a certain amount today. Which of the following choices will give the maximum interest? A) Three-year CD at 6.5% annual rate B) Three-year CD at 6.75% annual rate C) Three-year CD at 6.25% annual rate D) Three-year CD at 7% annual rate

Q: Joseph Ray just received an inheritance of $35,775 from his great aunt. He plans to invest the funds for retirement. If Joseph can earn 4.75% per year with quarterly compounding for 32 years, how much will he have accumulated? (Round off to the nearest dollar.)A) $237,416B) $71,550C) $184,622D) $162,113

Q: Which of the following statements is true? A) The longer the time period that funds are invested, the greater the future value. B) The lower the discount rate that funds are invested at, the greater the future value. C) The shorter the time period that funds are invested, the greater the future value. D) The higher the interest rate, the slower the value of an investment will grow.

Q: Which of the following investments will have the highest future value? A) $1,300 invested at an annual interest rate of 10% for 5 years B) $1,000 invested at an quarterly interest rate of 2.25% for 10 years C) $1,300 invested at an quarterly interest rate of 2.25% for 5 years D) $1,000 invested at an annual interest rate of 10% for 10 years

Q: Which of the following is true of the future value of an investment? A) The higher the interest rate, the higher the future value of an investment. B) The higher the inflation rate, the lower the future value of an investment. C) The lower the number of compounding periods, the higher the future value of an investment. D) The lower the present value of an investment, the higher the future value of an investment.

Q: The process of converting an amount given at the present time into a future value is called: A) annualizing. B) discounting. C) compounding. D) capital budgeting.

Q: Which of the following equations is used to compute the future value for continuous compounding? A) FV∞ = PV e i n B) FV∞ = PV e i n C) FV∞ = ei PV D) FV∞ = ei PV

Q: Future value measures: A) what one or more cash flows are worth at the end of a specified period. B) what one or more cash flows that is to be received in the future will be worth today. C) the value of an investment after subtracting interest earned on it for one or more periods. D) the value of an investment's worth today.

Q: Which of the following statements is true of time value of money? A) A dollar received today is worth more than a dollar to be received in the future because future dollars are not affected by inflation. B) A dollar received today is worth less than a dollar to be received in the future because future dollars are not affected by inflation. C) A dollar received today is worth more than a dollar to be received in the future because funds received today can be invested to earn a return. D) A dollar to be received in the future is worth more than a dollar received today because it would have less risk associated with it.

Q: Which of the following statements is true? A) The value of a dollar invested at a positive interest rate decreases over time. B) The further in the future you receive a dollar, the less it is worth today. C) A dollar in hand today is worth less than a dollar to be received in the future. D) The higher the rate of interest, the more likely an investor will elect to consume at present and forgo invest his funds.

Q: Which of the following statements is true of the time value of money? A) It means a dollar received today is worth less than a dollar received tomorrow. B) It assumes that inflation rate remains constant for the foreseeable future. C) It refers to the fact that higher cash flows in earlier years are less desirable. D) It is based on the assumption that people prefer to consume things at some time in the future rather than today.

Q: The time value of money refers to the issue of: A) what the value of the stream of future cash flows is today. B) why a dollar received tomorrow is worth more than a dollar received today. C) what the time required to double an amount of money. D) why people prefer to consume things at some time in the future rather than today.

Q: The compound annual growth rate (CAGR) is the average annual growth rate over a specified period of time. A) True B) False

Q: Compound growth occurs when the initial value of a number increases or decreases each period by the factor (1 + growth rate). A) True B) False

Q: The Rule of 72 allows one to calculate the approximate time needed to double an investment. A) True B) False

Q: The Rule of 72 allows one to calculate the return earned on an investment over six years. A) True B) False

Q: The present value factor 1 / (1 + i)n is the reciprocal of the future value factor (1 + i)n. A) True B) False

Q: Future value focuses on the valuation of cash flows received over time, while present value focuses only on the valuation of cash flows received at a point in time. A) True B) False

Q: If you had a choice of choosing a payment of $5,000 to be received in five years being discounted at 8 percent or at 10 percent, you should always choose the higher rate because it gives you the higher present value. A) True B) False

Q: The farther in the future a dollar will be received, the less it is worth today. A) True B) False

Q: The higher the discount rate, the lower the present value of a future cash flow. A) True B) False

Q: The present value of $3,000 to be received in two years at a discount rate of 10 percent is $3,630. A) True B) False

Q: The process of calculating the present value of a future cash flow is called compounding. A) True B) False