Ch.5 The Time Value Of Money Complete Test Bank 5th Edition - Complete Test Bank | Corp Finance 5e Parrino by Robert Parrino. DOCX document preview.
Fundamentals of Corporate Finance, 5e (Parrino)
Chapter 5 The Time Value of Money
1) The time value of money is based on the principle that people have a positive time preference for consumption.
Learning Objective: LO 1
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
2) The time value of money accounts for the fact that people place different value on money over time.
Learning Objective: LO 1
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
3) The time value of money concept recognizes that people require additional compensation for deferring consumption.
Learning Objective: LO 1
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
4) The further in the future you receive a dollar, the more value you place on the dollar today.
Learning Objective: LO 1
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
5) The value of a dollar invested at a positive interest rate grows over time.
Learning Objective: LO 1
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
6) The value of a dollar invested at a positive interest rate grows over time but at a slower rate further into the future.
Learning Objective: LO 1
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
7) The value of a dollar invested at a positive interest rate grows at an increasing rate over time.
Learning Objective: LO 1
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
8) Starting to invest early for retirement reduces the benefits of compound interest.
Learning Objective: LO 1
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement
9) Some of the cash flows shown on a time line can be equal in size, but none can be unequal.
Learning Objective: LO 1
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
10) The higher the rate of interest, the more likely you will forgo current consumption.
Learning Objective: LO 1
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
11) The lower the rate of interest, the more likely you are going to consume now rather than invest money to consume later.
Learning Objective: LO 1
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
12) The future value technique uses discounting to find the future value of each cash flow at the end of a project's life.
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
13) The future value increases as either the interest rate or the number of periods per year increases, other things held constant.
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
14) The process of converting the initial amount into future value is called discounting.
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
15) Compounding is the process by which interest earned on an investment is reinvested so in future periods, there is interest on interest as well as the original principal.
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
16) Compound interest consists of both simple interest and interest on interest.
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
17) Compound interest increases as the number of years decreases.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
18) Compounding increases the growth of the total interest earned.
Learning Objective: LO 2
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
19) Due to compounding effects, the growth in the future value of an investment over time is linear.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
20) The growth in the future value of an investment over time is not linear, but exponential.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
21) William invested $5,000 in an account earning 10 percent for one year. If he had left his investment in that account for another two years, he would expect the total interest earned over the three years to be higher by exactly $1,000.
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
22) Suppose Randy plans to invest $1,000. He can earn an annual rate of 5 percent on Security A, while Security B has an effective annual rate of 10 percent. After 11 years, the compounded value of Security B should be somewhat less than double the compounded value of Security A.
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
23) With a higher interest rate on an investment, more money is accumulated for any time period.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
24) The more frequently the interest payments are compounded, the larger the future value of $1 for a given time period.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
25) If Bank A pays interest on a monthly basis and Bank B pays the same interest rate, but on a quarterly basis, then investing $1,000 in Bank B will result in a higher future value compared to investing the same amount in Bank A.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
26) The future value of an investment of $5,000 earning an interest rate of 10 percent compounded annually equals $6,000 at the end of one year.
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
27) The future value in three years of $5,000 invested today at a rate of 10 percent is $6,655.
Learning Objective: LO 2
Bloomcode: Application
AACSB: Application
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
28) The future value factor for 10 years at 15 percent with annual compounding is calculated as (1 + 0.15)10.
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
29) To calculate the present value of a future amount, we divide the future value by the future value factor.
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
30) The present value is simply the current value of a future cash flow that has been discounted at the relevant discount rate.
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
31) The present value technique uses discounting to find the present value of each cash flow at the beginning of a project.
Learning Objective: LO 3
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
32) The present value factor increases as the number of periods decreases.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
33) If the discount rate increases, then the present value of a potential investment would fall.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
34) If the discount rate falls, then the present value of a potential investment would also fall.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
35) The process of calculating the present value of a future cash flow is called compounding.
Learning Objective: LO 3
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
36) The present value of $3,000 to be received in two years at a discount rate of 10 percent is $3,630.
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
37) The higher the discount rate, the lower the present value of a future cash flow.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
38) The lower the discount rate, the lower the present value of a future cash flow.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
39) The farther in the future a dollar will be received, the less it is worth today.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
40) You need $5,000 in five years. If you could choose a discount rate of 8 percent or 10 percent, you should always choose the higher rate because you would need a higher starting amount.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
41) 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.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
42) The present value factor 1/(1 + i)n is the reciprocal of the future value factor (1 + i)n.
Learning Objective: LO 3
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
43) The Rule of 72 allows one to calculate the return earned on an investment over six years.
Learning Objective: LO 4
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
44) The Rule of 72 allows one to calculate the approximate amount of time required to double an investment.
Learning Objective: LO 4
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
45) Compound growth occurs when the initial value of a number increases or decreases each period by the factor (1 + growth rate).
Learning Objective: LO 4
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
46) The compound annual growth rate (CAGR) is the average annual growth rate over a given number of years.
Learning Objective: LO 4
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
47) Your bank account pays a 6 percent annual rate of interest. The interest is compounded quarterly. This implies that the periodic rate of interest is 1.5 percent and the effective annual rate of interest is greater than 6 percent.
Learning Objective: LO 4
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
48) Jane has $5,000 invested in a bank that pays 4 percent compounded annually. It will take her approximately 28 years for her funds to triple.
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
49) Time value of money refers to the concept of:
A) summing a stream of future cash flows.
B) why a dollar received today is worth more than a dollar received tomorrow.
C) the time required to double an amount of money assuming no application of an interest rate.
D) why people prefer to consume things of equal value at some time in the future rather than today.
Learning Objective: LO 1
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
50) Which of the following statements is correct?
A) A time line is not meaningful unless all cash flows occur annually.
B) Time lines are useful for visualizing complex problems prior to doing actual calculations.
C) Time lines cannot be constructed in situations when the cash flows occur at yearly and quarterly frequencies.
D) Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.
Learning Objective: LO 1
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
51) Which of the following statements about the time value of money concept is true?
A) It means a dollar received today is worth more than a dollar received tomorrow.
B) It assumes that inflation rate remains constant at least for the next 12 months.
C) It refers to the fact that higher cash flows in earlier years are less desirable.
D) It assumes that people prefer to consume things at some time in the future rather than today.
Learning Objective: LO 1
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
52) Which of the following statements about the time value of money 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.
Learning Objective: LO 1
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
53) Which of the following statements about the time value of money concept is true?
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.
Learning Objective: LO 1
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
54) Future value measures:
A) the value of one or more cash flows 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 in today's terms.
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
55) Which of the following equations is used to compute the future value using continuous compounding?
A) FV∞ = PV × e i × n
B) FV∞ = PV ÷ e i × n
C) FV∞ = ei ÷ PV
D) FV∞ = ei × PV
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
56) 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.
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
57) 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 lower the interest rate, the higher 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.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
58) Which of the following statements is correct, assuming positive interest rates and holding other things constant?
A) Banks A and B offer the same annual rate of interest, but A pays interest quarterly and B pays semiannually. A deposit in Bank B will have a higher value in five years.
B) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays monthly. A deposit in Bank B will have a higher value in five years.
C) Banks A and B offer the same nominal annual rate of interest, but A pays interest daily and B pays semiannually. A deposit in Bank B will have a higher value in five years.
D) Banks A and B offer the same nominal annual rate of interest, but A pays interest weekly and B pays quarterly. A deposit in Bank B will have a higher value in five years.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
59) You are considering two investments (ORD and DUE) that each pay $5,000 each year for the next 10 years. Investment ORD makes each payment at the end of the year, and Investment DUE makes payments at the beginning of each year. Which of the following statements is correct?
A) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.
B) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.
C) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.
D) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
60) Which of the following investments will have the highest future value?
A) $1,300 invested at an annual interest rate of 10 percent for 5 years
B) $1,000 invested at a quarterly interest rate of 2.25 percent for 10 years
C) $1,300 invested at a quarterly interest rate of 2.25 percent for 5 years
D) $1,000 invested at an annual interest rate of 10 percent for 10 years
Learning Objective: LO 2
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
61) 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.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
62) 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 percent per year with quarterly compounding for 32 years, how much will he have accumulated? (Round to the nearest dollar.)
A) $237,416
B) $71,550
C) $184,622
D) $162,113
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Applying
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
63) 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 percent annual rate
B) Three-year CD at 6.75 percent annual rate
C) Three-year CD at 6.25 percent annual rate
D) Three-year CD at 7 percent annual rate
Learning Objective: LO 2
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
64) 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
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
65) 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
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
66) 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) $8,870
B) $8,575
C) $8,681
D) $8,990
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
67) 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) $205,575
B) $157,350
C) $184,681
D) $273,620
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
68) 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
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
69) What is the future value of $1,500 after 5 years if the annual return is 6 percent, compounded semiannually?
A) $1,819
B) $1,915
C) $2,016
D) $2,117
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
70) What is the future value of $1,500 after 5 years if the annual return is 6 percent, compounded quarterly?
A) $1,819
B) $2,020
C) $2,016
D) $2,117
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
71) Joseph Ray just received an inheritance of $50,000 from his great aunt. He plans to invest the funds for retirement. If Joseph can earn 6 percent per year with quarterly compounding for 30 years, how much will he have accumulated? (Round to the nearest dollar.)
A) $298,466
B) $271,550
C) $284,622
D) $269,113
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
72) 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 annual 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
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
73) 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 an annual rate of 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
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
74) 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 percent compounded daily
B) 3.25 percent compounded monthly
C) 3.40 percent compounded quarterly
D) 3.75 percent compounded annually
Learning Objective: LO 2
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
75) Lorene Buckley wants to invest $3,500 today in a money market fund that pays an annual rate of 5 percent paid quarterly. 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
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
76) 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 annual interest rate 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
Learning Objective: LO 2
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
77) 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 pays compound interest, what will 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
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
78) Camille Noah is investing $5,000 in an account that pays an annually compounded rate of 6.75 percent 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
Learning Objective: LO 2
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
79) Richard McLean wants to invest $3,000 in an account paying annual interest of 5.25 percent compounded quarterly. What is the interest on interest after four years?
A) $695.98
B) $65.98
C) $630.00
D) $157.50
Learning Objective: LO 2
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
80) 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) $8,662.50
B) $10,925.44
C) $2,497.63
D) $1,092.48
Learning Objective: LO 2
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
81) Shawn Bowker invested $10,000 in a money market account that will pay an annual interest rate of 5.75 percent compounded daily. How much will the interest on interest be after two years?
A) $1,218.63
B) $1,150.00
C) $33.06
D) $68.63
Learning Objective: LO 2
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
82) 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
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
83) 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)m × n
B) FVn = PV × (1 + i/m)m × n
C) FVn = (1 + i)m × n + PV
D) FVn = (1 + i)m × n ÷ PV
Learning Objective: LO 2
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
84) Evelyn has invested $10,000 today for ten years at an annual interest rate of 8 percent. Beginning in the 11th year, interest rates decrease to 6 percent. Approximately how much does she have in her account after fifteen years (round to the nearest dollar)?
A) $27,590
B) $28,891
C) $31,722
D) $23,966
Learning Objective: LO 2
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
85) Joseph Harris is considering an investment that pays 6.5 percent annually. How much does he need to invest today so that he will have $25,000 in seven years? (Round to the nearest dollar.)
A) $17,474
B) $18,850
C) $16,625
D) $16,088
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
86) 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 present value is calculated by using the discount factor.
D) The future value of an investment is the reciprocal of its present value.
Learning Objective: LO 3
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
87) When the 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.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
88) When the 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.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
89) 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 relationship 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.
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
90) 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 percent, compounded annually. How much will Juan and Rachel need to deposit today to achieve their goal? (Round to the nearest dollar.)
A) $11,138
B) $8,885
C) $12,055
D) $14,243
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
91) 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) $22,680
B) $26,454
C) $16,670
D) $19,444
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
92) Albert borrows money from Jacob 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) $6,000
B) $7,035
C) $6,500
D) $7,150
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
93) 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) $18,472
B) $13,987
C) $16,199
D) $23,256
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
94) 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) $54,233
B) $63,837
C) $91,324
D) $40,351
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
95) Leroy Diaz plans to invest some money today so that he will have $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) $5,276
B) $6,722
C) $6,897
D) $7,140
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
96) You need to have $15,000 in five years to pay off 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) $4,903
B) $11,275
C) $13,184
D) $12,250
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
97) 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) $35,987
B) $39,659
C) $41,275
D) $36,450
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
98) Michael Peterson needs $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) $18,527
B) $23,015
C) $17,097
D) $19,648
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
99) Celesta Frank wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she deposits 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) $6,432
B) $7,826
C) $8,148
D) $7,763
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
100) Celesta Frank wants to go on a cruise in three years. She could earn 8 percent compounded daily in an account if she deposits 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) $6,432
B) $7,826
C) $7,866
D) $7,763
Learning Objective: LO 3
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
101) The process of converting future cash flows into their present value is called:
A) annualizing.
B) discounting.
C) compounding.
D) capital budgeting.
Learning Objective: LO 3
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
102) 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
Learning Objective: LO 3
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
103) Based on the rule of 72, the amount of time to double your money (TDM) approximately equals:
A) 72/n.
B) 72/i.
C) 72/Initial investment.
D) 72/Future value.
Learning Objective: LO 4
Bloomcode: Knowledge
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
104) 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.
Learning Objective: LO 4
Bloomcode: Comprehension
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
105) 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%
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
106) Anne Morgan wants to borrow $6,000 for a period of four years. She has two choices. Her bank will 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 choose 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 percent.
B) She should borrow from her firm as it is charging a lower interest of 7 percent.
C) She should borrow from the bank as the firm is charging a higher interest of 8 percent.
D) She should borrow from her firm as it is charging a lower interest of 6 percent.
Learning Objective: LO 4
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
107) 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 that this investment earns?
A) 9.3%
B) 8.7%
C) 11.1%
D) 10.4%
Learning Objective: LO 4
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
108) Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or $250,000 a year for 20 years, with the first payment starting one year from today. What annual interest rate does the second choice provide?
A) 7.12%
B) 7.49%
C) 7.87%
D) 8.26%
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
109) Assume that you own an investment that will pay you $15,000 per year for 12 years, with the first payment today. You need money today to start a new business, and your uncle offers to give you $120,000 for the investment. If you sell it, what rate of return would your uncle earn on the annuity?
A) 7.12%
B) 7.59%
C) 7.99%
D) 8.41%
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
110) Winston Baker will 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? (Round to the nearest percent.)
A) 18%
B) 20%
C) 12%
D) 25%
Learning Objective: LO 4
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
111) 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%
Learning Objective: LO 4
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
112) Finor Traps manufactures an innovative mouse trap. Total sales for the current year is $325,000. The company expects its sales to increase 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%
Learning Objective: LO 4
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
113) 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 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 dollar.)
A) $2,160,000
B) $3,515,625
C) $1,875,000
D) $2,929,688
Learning Objective: LO 4
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
114) 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) $1,381,071
B) $1,266,128
C) $1,233,099
D) $1,072,260
Learning Objective: LO 3
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
115) Your subscription to BusinessWeek is about to expire. You plan to subscribe to the magazine for the rest of your life. You can renew it by paying $50 annually, beginning immediately, or you can get a lifetime subscription for $500, also payable immediately. Assuming that you can earn 6.525 percent on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?
A) 12
B) 15
C) 10
D) 18
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
116) 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) $319,157
B) $241,329
C) $911,546
D) $689,259
Learning Objective: LO 4
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
117) 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 its sales be in year 10? (Round to the nearest dollar.)
A) $1,698,023
B) $2,843,323
C) $3,893,280
D) $5,181,956
Learning Objective: LO 4
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
118) 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
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
119) Animist Designers has generated sales of $625,000 for the current year. If it can increase its sales at a rate of 12 percent every year, how long will it take for its sales to triple? (Round to the nearest year.)
A) 8 years
B) 7 years
C) 10 years
D) 9 years
12 | 0 | -$625,000 | $1,875,000 | |
N | I | PMT | PV | FV |
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
120) 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 to the nearest year.)
A) 7 years
B) 6 years
C) 8 years
D) 10 years
12 | 0 | -$625,000 | $1,875,000 | |
N | I | PMT | PV | FV |
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
121) 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 to the nearest year.)
A) 5 years
B) 7 years
C) 2 years
D) 4 years
7.8 | 0 | -$11,500 | $15,000 | |
N | i | PMT | PV | FV |
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
122) 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 to the nearest year.)
A) 8 years
B) 11 years
C) 10 years
D) 12 years
8.25 | 0 | -$4,500 | $10,000 | |
N | i | PMT | PV | FV |
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
123) 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 percent, compounded annually, how long will it be before Amanda has the additional funds she needs to reach her goal? (Round to the nearest 1/10 of a year.)
A) 36.6 years
B) 41.8 years
C) 52.2 years
D) 24.0 years
Learning Objective: LO 4
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
124) 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 to the nearest 1/10 percent.)
A) 15.7%
B) 18.5%
C) 21.3%
D) 13.4%
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
125) You agree to deposit $500 at the beginning of each month into a bank account for the next 24 months. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what annual interest rate will you have earned?
A) 7.62%
B) 8.00%
C) 8.40%
D) 8.82%
Learning Objective: LO 4
Bloomcode: Application
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
126) You just deposited $2,500 in a bank account that pays a 4.0 percent annual interest rate, compounded quarterly. If you also add $5,000 to the account one year (4 quarters) from now and $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?
A) $15,234.08
B) $16,035.87
C) $16,837.67
D) $17,679.55
Learning Objective: LO 4
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
127) Explain the difference between simple interest and compound interest.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
128) Explain how the future and the present value equations are related.
Learning Objective: LO 2
Bloomcode: Analysis
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
129) 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?
Learning Objective: LO 4
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
130) 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?
pts:
(1) The expected/required rate of return; this is known as rate.
(2) The expected time that the investment will be held; this is known as number of periods.
(3) The expected cash flow(s); this is known as future value, or if a series of future values it is known as payments.
(4) The frequency at which the rate is compounded or discounted; i.e., annually, quarterly, monthly, etc.
The way in which these types of problems can be solved is by usage of mathematical formulas, financial calculators, or spreadsheet models.
Diff: 3
Learning Objective: LO 4
Bloomcode: Evaluation
AACSB: Analytic
IMA: Quantitative Methods
AICPA: Measurement Analysis and Interpretation
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