Chapter 4 Time Value of Money 1 Analyzing Verified Test Bank

Finance, 5e (Cornett)

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

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

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.

2) People borrow money because they expect

A) their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on the loan.

B) the time value of money to apply only if they are saving money.

C) interest rates to rise.

D) that consumers don't need to calculate the impact of interest on their purchases.

3) How are future values affected by changes in interest rates?

A) The lower the interest rate, the larger the future value will be.

B) The higher the interest rate, the larger the future value will be.

C) Future values are not affected by changes in interest rates.

D) One would need to know the present value in order to determine the impact.

4) How do you calculate the future value of a single period?

A) Add the interest earned to today's cash flow.

B) Add the interest earned to next year's cash flow.

C) Multiply the interest eared with today's cash flow.

D) Multiply the interest eared with next year's cash flow.

5) How are present values affected by changes in interest rates?

A) The lower the interest rate, the larger the present value will be.

B) The higher the interest rate, the larger the present value will be.

C) Present values are not affected by changes in interest rates.

D) One would need to know the future value in order to determine the impact.

6) We call the process of earning interest on both the original deposit and on the earlier interest payments

A) discounting.

B) multiplying.

C) compounding.

D) computing.

7) Which of these statements is true of discounting?

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.

8) The process of figuring out how much an amount that you expect to receive in the future is worth today is called

A) discounting.

B) multiplying.

C) compounding.

D) computing.

9) The interest rate, i, which we use to calculate present value, is often referred to as the

A) discount rate.

B) multiplier.

C) compound rate.

D) dividend.

10) The Rule of 72 is a simple mathematical approximation for

A) the present value required to double an investment.

B) the future value required to double an investment.

C) the payments required to double an investment.

D) the number of years required to double an investment.

11) With regard to money deposited in a bank, future values are

A) smaller than present values.

B) larger than present values.

C) equal to present values.

D) are completely independent of present values.

12) Which of the following statements about the Rule of 72 is not true?

A) It is a mathematical approximation for the number of years required to double an investment.

B) It illustrates the power of a discounted rate.

C) It can be used to approximate the interest rate needed to double an investment for a specified amount of time.

D) None of the above.

13) A dollar paid (or received) in the future is

A) worth more than a dollar paid (or received) today.

B) worth as much as a dollar paid (or received) today.

C) not worth as much as a dollar paid (or received) today.

D) not comparable to a dollar paid (or received) today.

14) When computing the rate of return from selling an investment, the number of years between the present and future cash flows is an important factor in determining

A) the annual rate earned.

B) the annual payments required.

C) whether the present value or the future value is a cash inflow.

D) whether the present value or the future value is a cash outflow.

15) When calculating the number of years needed to grow an investment to a specific amount of money

A) the lower the interest rate, the shorter the time period needed to achieve the growth.

B) the higher the interest rate, the shorter the time period needed to achieve the growth.

C) the interest rate has nothing to do with the length of the time period needed to achieve the growth.

D) the Rule of 72 is the only way to calculate the time period needed to achieve the growth.

16) Moving cash flows from one point in time to another requires us to use

A) only present value equations.

B) only future value equations.

C) both present value and future value equations.

D) the Rule of 72.

17) The longer money can earn interest,

A) the greater the interest earned on the original deposit exceeds the interest-on-interest.

B) the greater the compounding effect.

C) the greater the present value must be to reach a financial goal.

D) the greater the risk to the investor of not reaching a financial goal.

18) To solve for time-value equations, you need to know:

A) the starting cash flow.

B) the interest rate.

C) the future cash flow.

D) all of the above.

19) What information would you need to know to solve a rate of return problem?

A) the present value cash flow.

B) the number of years of the investment.

C) the future value cash flow.

D) all of the above.

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

A) $28

B) $700

C) $728

D) $1,428

21) What is the future value of $1,000 deposited for one year earning 5 percent interest rate annually?

A) $1,000

B) $1,005

C) $1,050

D) $2,050

22) What is the future value of $2,000 deposited for one year earning 6 percent interest rate annually?

A) $120

B) $2.000

C) $2,120

D) $4,120

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

A) $135.00

B) $140.71

C) $735.00

D) $814.20

24) How much would be in your savings account in 10 years after depositing $50 today if the bank pays 7 percent interest per year?

A) $35.00

B) $98.36

C) $535.00

D) $690.82

25) A deposit of $500 earns the following interest rates?

5 percent in the first year,

6 percent in the second year, and

8 percent in the third year.

What would be the third year future value?

A) $527.14

B) $595.00

C) $601.02

D) $1595.00

26) A deposit of $1,000 earns the following interest rates?

8 percent in the first year,

7 percent in the second year, and

8 percent in the third year.

What would be the third year future value?

A) $1,082.15

B) $1,230.00

C) $1,248.05

D) $3,030.00

27) A deposit of $300 earns interest rates of 7 percent in the first year and 10 percent in the second year. What would be the second year future value?

A) $351.00

B) $353.10

C) $602.17

D) $651.00

28) A deposit of $700 earns interest rates of 10 percent in the first year and 7 percent in the second year. What would be the second year future value?

A) $771.07

B) $819.00

C) $823.90

D) $1519.00

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

A) $475.00

B) $476.19

C) $500.00

D) $525.00

30) What is the present value of a $250 payment in one year when the discount rate is 6 percent?

A) $245.00

B) $235.85

C) $250.00

D) $265.00

31) What is the present value of a $500 payment made in four years when the discount rate is 8 percent?

A) $365.35

B) $367.51

C) $460.00

D) $680.24

32) What is the present value of a $750 payment made in three years when the discount rate is 5 percent?

A) $646.96

B) $647.88

C) $712.50

D) $868.22

33) What is the present value of a $200 payment made in three years when the discount rate is 8 percent?

A) $150.00

B) $158.77

C) $251.94

D) $515.42

34) Approximately how many years does it take to double a $300 investment when interest rates are 8 percent per year?

A) 0.11 years

B) 4.17 years

C) 9 years

D) 11 years

35) Approximately how many years does it take to double a $500 investment when interest rates are 4 percent per year?

A) 0.06 year

B) 6 years

C) 6.94 years

D) 18 years

36) Approximately how many years does it take to double a $600 investment when interest rates are 6 percent per year?

A) 0.08 year

B) 8 years

C) 8.33 years

D) 12 years

37) Approximately what interest rate is needed to double an investment over six years?

A) 6 percent

B) 12 percent

C) 17 percent

D) 100 percent

38) Approximately what interest rate is needed to double an investment over four years?

A) 4 percent

B) 18 percent

C) 25 percent

D) 100 percent

39) Approximately what interest rate is needed to double an investment over eight years?

A) 8 percent

B) 9 percent

C) 12 percent

D) 100 percent

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

A) 0.89 percent

B) 1.12 percent

C) 12.00 percent

D) 89.00 percent

41) Determine the interest rate earned on a $500 deposit when $650 is paid back in one year.

A) 0.77 percent

B) 1.30 percent

C) 30.0 percent

D) 77.0 percent

42) Determine the interest rate earned on a $450 deposit when $475 is paid back in one year.

A) 0.89 percent

B) 1.13 percent

C) 5.56 percent

D) 13.0 percent

43) Consider a $1,000 deposit earning 7 percent interest per year for four years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

A) $28.00

B) $30.00

C) $280.00

D) $310.00

44) Consider a $2,000 deposit earning 6 percent interest per year for five years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

A) $60.00

B) $76.45

C) $600.00

D) $676.45

45) Consider a $500 deposit earning 5 percent interest per year for five years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

A) $13.14

B) $25.00

C) $125.00

D) $138.14

46) Consider a $200 deposit earning 8 percent interest per year for three years. How much total interest is earned on interest (excluding interest earned on the original deposit)?

A) $3.94

B) $24.00

C) $48.00

D) $51.94

47) What is the value in year 3 of a $500 cash flow made in year 5 when interest rates are 6 percent?

A) $374

B) $420

C) $440

D) $445

48) What is the value in year 5 of a $600 cash flow made in year 10 when interest rates are 5 percent?

A) $368.35

B) $450.00

C) $470.12

D) $570.00

49) What is the value in year 3 of a $250 cash flow made in year 15 when interest rates are 12 percent?

A) $45.67

B) $64.17

C) $177.95

D) $220.00

50) What is the value in year 7 of a $700 cash flow made in year 3 when the interest rates are 10 percent?

A) $478.11

B) $980.00

C) $1,024.87

D) $1,364.10

51) What is the value in year 6 of a $900 cash flow made in year 4 when the interest rates are 8 percent?

A) $1,044.00

B) $1,049.76

C) $1,332.00

D) $1,428.19

52) What is the value in year 15 of a $600 cash flow made in year 3 when the interest rates are 4 percent?

A) $374.76

B) $888.00

C) $960.62

D) $1,080.57

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

A) 3.25 percent

B) 4.25 percent

C) 13.47 percent

D) 15.57 percent

54) What annual rate of return is earned on a $5,000 investment when it grows to $7,000 in six years?

A) 1.40 percent

B) 5.45 percent

C) 5.77 percent

D) 40.00 percent

55) What annual rate of return is earned on a $900 investment when it grows to $2,500 in 15 years?

A) 1.78 percent

B) 2.78 percent

C) 6.58 percent

D) 7.05 percent

56) What annual rate of return is earned on a $10,000 investment when it grows to $15,000 in 10 years?

A) 1.50 percent

B) 3.97 percent

C) 4.14 percent

D) 5.00 percent

57) How many years will it take $1 million to grow to $3 million with an annual interest rate of 7 percent?

A) 10.29 years

B) 14.52 years

C) 16.24 years

D) 33.33 years

58) How many years will it take $100 to grow to $1,000 with an annual interest rate of 8 percent?

A) 9.00 years

B) 10.00 years

C) 29.92 years

D) 33.35 years

59) How many years will it take $200 to grow to $250 with an annual interest rate of 4 percent?

A) 1.24 years

B) 5.69 years

C) 6.25 years

D) 18.00 years

60) How long will it take $3,000 to reach $5,000 when it grows at 7 percent per year?

A) 7.00 years

B) 7.55 years

C) 9.52 years

D) 10.29 years

61) How long will it take $100 to reach $500 when it grows at 10 percent per year?

A) 7.20 years

B) 16.89 years

C) 17.46 years

D) 40.00 years

62) How long will it take $4,000 to reach $4,500 when it grows at 8 percent per year?

A) 1.12 years

B) 1.48 years

C) 1.53 years

D) 9.00 years

63) At age 20 you invest $1,000 that earns 7 percent each year. At age 30 you invest $1,000 that earns 10 percent per year. In which case would you have more money at age 60?

A) At age 20 invest $1,000 at 7 percent.

B) At age 30 invest $1,000 at 10 percent.

C) Both yield the same amount at age 60.

D) There is not enough information to determine which case earns the most money at age 60.

64) At age 25 you invest $2,000 that earns 6 percent each year. At age 35 you invest $2,000 that earns 9 percent per year. In which case would you have more money at age 60?

A) At age 25 invest $2,000 at 6 percent.

B) At age 35 invest $2,000 at 9 percent.

C) Both yield the same amount at age 60.

D) There is not enough information to determine which case earns the most money at age 60.

65) You invested $1,000 in the stock market one year ago. Today, the investment is valued at $750. What return did you earn? What return would you need to get next year to break even overall?

A) −112.5 percent, +75 percent, respectively

B) −75 percent, +112.5 percent, respectively

C) −33.33 percent, +25 percent, respectively

D) −25 percent, +33.33 percent, respectively

66) You invested $5,000 in the stock market one year ago. Today, the investment is valued at $4,500. What return did you earn? What return would you need to get next year to break even overall?

A) −111.11 percent, +90 percent, respectively

B) −90 percent, +111.11 percent, respectively

C) −10 percent, +11.11 percent, respectively

D) −11.11 percent, +10 percent, respectively

67) You invested $1,000 in the stock market one year ago. Today, the investment is valued at $1,250. What return did you earn? What return would you suffer next year for your investment to be valued at the original $1,000?

A) +25 percent, −20 percent, respectively

B) −25 percent, +20 percent, respectively

C) 125 percent, −25 percent, respectively

D) 125 percent, −20 percent, respectively

68) You invested $5,000 in the stock market one year ago. Today, the investment is valued at $5,500. What return did you earn? What return would you suffer next year for your investment to be valued at the original $5,000?

A) 10 percent, −9.09 percent, respectively

B) −10 percent, +9.09 percent, respectively

C) 110 percent, −10 percent, respectively

D) 110 percent, −9.09 percent, respectively

69) What annual rate of return is earned on a $4,000 investment made in year 2 when it grows to $8,000 by the end of year 8?

A) 9.00 percent

B) 12.00 percent

C) 12.25 percent

D) 50.00 percent

70) What annual rate of return is earned on a $2,000 investment made in year 3 when it grows to $3,000 by the end of year 6?

A) 6.99 percent

B) 14.47 percent

C) 24.00 percent

D) 50.00 percent

71) What annual rate of return is implied on a $1,000 loan taken next year when $1,500 must be repaid in year 5?

A) 8.45 percent

B) 10.00 percent

C) 10.67 percent

D) 12.50 percent

72) What annual rate of return is implied on a $700 loan taken next year when $800 must be repaid in year 3?

A) 4.55 percent

B) 4.76 percent

C) 6.90 percent

D) 7.14 percent

73) Five years ago, Jane invested $5,000 and locked in an 8 percent annual interest rate for 25 years (end 20 years from now). James can make a 20-year investment today and lock in a 10 percent interest rate. How much money should he invest now in order to have the same amount of money in 20 years as Jane?

A) $3,160.43

B) $3,464.11

C) $5,089.91

D) $7,346.64

74) Ten years ago, Jane invested $1,000 and locked in a 7 percent annual interest rate for 30 years (end 20 years from now). James can made a 20-year investment today and lock in a 6 percent interest rate. How much money should he invest now in order to have the same amount of money in 20 years as Jane?

A) $673.75

B) $1,206.59

C) $1,967.15

D) $2,373.54

75) What is the future value of $600 invested for four years earning an 11 percent interest rate annually?

A) $792.90

B) $803.61

C) $899.23

D) $910.84

76) A deposit of $500 earns 5 percent the first year, 6 percent the second year, and 7 percent the third year. What would be the third year future value?

A) $595.46

B) $615.62

C) $634.91

D) $671.02

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

A) $2,550

B) $2,850

C) $2,950

D) $3,150

78) What is the present value of a $600 payment in one year when the discount rate is 8 percent?

A) $498.61

B) $525.87

C) $555.56

D) $575.09

79) What is the present value of a $7,000 payment made in six years when the discount rate is 4 percent?

A) $5,290.42

B) $5,532.20

C) $5,802.82

D) $6,103.73

80) Compute the present value of $3,000 paid in four years using the following discount rates: 3 percent in year 1, 4 percent in year 2, 5 percent in year 3, and 6 percent in year 4.

A) $1,998.73

B) $2,109.14

C) $2,491.28

D) $2,516.26

81) Compute the present value of $4,000 paid in five years using the following discount rates: 10 percent in year 1, 2 percent in year 2, 12 percent in year 3, and 9 percent in years 4 and 5.

A) $2,679.15

B) $2,206.81

C) $2,317.03

D) $2,362.19

82) Approximately how many years does it take to double a $475 investment when interest rates are 8 percent per year?

A) 18 years

B) 12 years

C) 9 years

D) 4.75 years

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

A) 8 percent

B) 12.2 percent

C) 14.4 percent

D) 15.8 percent

84) Determine the interest rate earned on an $800 deposit when $808 is paid back in one year.

A) 100 percent

B) 10 percent

C) 1 percent

D) 15 percent

85) Which is more valuable, receiving $775 today or receiving $885 in 2.5 years if interest rates are 7.25 percent?

A) receiving $775 today

B) receiving $885 in 2.5 years

C) They are worth the same amount

D) Need more information to make a determination.

86) What would be more valuable, receiving $1,895 today or receiving $3,450 in six years if interest rates are 8 percent?

A) receiving $1,895 today

B) receiving $3,450 in six years

C) They are worth the same amount

D) Need more information to make a determination.

87) What is the value in year 2 of a $200 cash flow made in year 8 if interest rates are 3 percent?

A) $132.89

B) $147.23

C) $152.91

D) $167.50

88) What is the value in year 3 of a $10,000 cash flow made in year 20 if interest rates are 5 percent?

A) $4,362.97

B) $4,491.27

C) $5,374.11

D) $5,572.19

89) What annual rate of return is earned on an $895 investment that grows to $1,976 in eight years?

A) 9.14 percent

B) 9.97 percent

C) 10.41 percent

D) 11.73 percent

90) A stock investor deposited $3,450 six years ago. Today the account is valued at $2,180. What annual rate of return has this investor earned?

A) −7.95 percent

B) −7.37 percent

C) −10.26 percent

D) −9.74 percent

91) How many years (and months) will it take $4 million to grow to $7 million with an annual interest rate of 12 percent?

A) 4 years and 1.92 months

B) 4 years and 11.28 months

C) 5 years and 6.54 months

D) 5 years and 10.86 months

92) How many years (and months) will it take $1 million to grow to $3 million with an annual interest rate of 7.5 percent?

A) 15 years and 2.29 months

B) 17 years and 5.6 months

C) 18 years and 3.8 months

D) 19 years and 2.4 months

93) 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?

A) Scenario A

B) Scenario B

C) Both scenarios have the same value by age 60.

D) Need more data to answer.

94) Scenario A: At age 19 you invest $1,500 that earns 8 percent per year. Scenario B: At age 30 you invest $1,500 that earns 13 percent per year. Under which scenario would you have more money at age 55 and what is the dollar difference at age 55 between the two scenarios?

A) Scenario A, $1,085.49

B) Scenario A, $2,104.73

C) Scenario B, $4,179.36

D) Scenario B, $7,893.55

95) You invested $2,000 in the stock market one year ago. Today, the investment is valued at $9,500. What return did you earn? What return would you need to suffer next year for your investment to be valued at the original $2,000?

A) −78.95 percent, 0 percent

B) 375 percent, −78.95 percent

C) 250 percent, −51.8 percent

D) −78.95 percent, 100 percent

96) 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?

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

97) What annual rate of return is earned on a $13,000 investment made in year 2 when it grows to $17,000 by the end of year 7?

A) 10.64 percent

B) 4.28 percent

C) 8.04 percent

D) 5.51 percent

98) What annual rate of return is implied on a $5,000 loan taken next year when $7,700 must be repaid in year 8?

A) 6.36 percent

B) 7.12 percent

C) 8.54 percent

D) 11.62 percent

99) You just won the lottery and after taxes you have $32,000. You want to have $1,000,000 by the time you are 65, which is 45 years from now. Assuming that you can earn 9 percent each year on your money, how much (in dollars) of the $32,000 must you invest today?

A) $17,891.62

B) $18,524.91

C) $20,692.24

D) $22,943.28

100) Ten years ago, Hailey invested $1,000 and locked in a 9 percent annual rate for 30 years (end 20 years from now). Aidan can make a 20-year investment today and lock in an 8 percent rate. How much money should he invest now in order to have the same amount of money in 20 years as Hailey?

A) $1,589.03

B) $2,846.56

C) $3,109.48

D) $2,109.73

101) You are scheduled to receive a $750 cash flow in one year, a $1,000 cash flow in two years, and pay a $300 payment in four years. If interest rates are 6 percent per year, what is the combined present value of these cash flows?

A) $1,359.92

B) $1,413.92

C) $1,592.63

D) $1,613.02

102) 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?

A) $991.38

B) $1,097.14

C) $1,116.14

D) $1,213.92

103) As the production manager of HPG, Inc., you have received an offer from the supplier who provides the wires used in headsets. Due to poor planning, the supplier has an excess amount of wire and is willing to sell $750,000 worth for only $600,000. You already have one year's supply of wire on hand. This new wire would be used one year from today. What implied interest rate would your firm be earning if you purchased the wire?

A) −20 percent

B) 13.5 percent

C) 21 percent

D) 25 percent

104) An appliance store sells a TV for $1,200 and gives their customers a full three years to pay for the TV. If interest rates are 5 percent, what is the equivalent sales price of the TV when the customer takes the full 3 years to pay for it?

A) $991.72

B) $1,036.61

C) $1,104.14

D) $1,389.15

105) Assume you borrow $5,000 today and pay back the loan in one lump sum four years from today. You are charged 8 percent interest per year. What amount will you pay back and how much interest will you pay?

A) $6,399.56, $1,399.56

B) $6,508.21, $1,508.21

C) $6,802.44, $1,802.44

D) $7,902.11, $2,902.11

106) Assume that you borrow $2,000 from your sister and that you will pay her back in one lump sum. She charges you 9 percent interest in year 1 and increases the rate by 1 percent per year until the loan is paid off. How much will you owe if you wait until year 3 to pay off the loan?

A) $2,467.91

B) $2,661.78

C) $2,775.23

D) $2,809.53

107) Assume you borrow $500 from a payday lender. The terms are that you must pay a fee of $75 in advance (today) and one year from now you need to repay $750. What implied interest rate are you paying?

A) 43.09 percent

B) 55.78 percent

C) 76.47 percent

D) 81.03 percent

108) Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?

A) 12.00 percent

B) 25.00 percent

C) 49.33 percent

D) 86.99 percent

109) Five years ago, sales were $4 million. Today your company's sales are $10 million. What annual rate have sales been growing?

A) 1.5 percent

B) 12.65 percent

C) 16.65 percent

D) 20.11 percent

110) How long will it take for the purchasing power of $1 to be cut in half if inflation is 4 percent?

A) 4.97 years

B) 7.42 years

C) 10.72 years

D) 17.67 years

111) You have $100,000 in your account. Assuming no additional deposits are made and your account earns 15 percent per year, how long will it take for the account to have a balance of $500,000?

A) 10.28 years

B) 11.09 years

C) 11.52 years

D) 12.64 years

112) 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?

A) 28.83 years

B) 29.92 years

C) 50.00 years

D) 90.00 years

113) Which of the following statements is correct?

A) $100 to be received in the future is worth more than that today since it could be invested and earn interest.

B) $100 to be received in the future is worth less than that today since it could be invested and earn interest.

C) The Rule of 72 calculates the compounded return on investments.

D) Discounting is finding the future value of an original investment.

114) You double your money in five years. The reason your return is not 20 percent per year is because:

A) it is probably a "fad" investment.

B) it does not reflect the effect of discounting.

C) it does not reflect the effect of the Rule of 72.

D) it does not reflect the effect of compounding.

115) You borrow $3,500 and will pay back the entire amount in five years. You are charged 9 percent interest per year. How much interest do you pay on this loan?

A) $1,885.18

B) $1,907.35

C) $1,959.02

D) $2,106.81

116) You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?

A) $6,000.00

B) $7,715.61

C) $7,908.48

D) $11,193.97

117) Your firm receives an offer from the supplier who provides computer chips used to manufacture cell phones. Due to poor planning, the supplier has an excess amount of chips and is willing to sell $600,000 worth of chips for only $500,000. You already have two years' supply on hand. It would cost you $7,500 today to store the chips until your firm needs them in two years. What implied interest rate would you be earning if you purchased and store the chips?

A) 6.57 percent

B) 8.73 percent

C) 9.54 percent

D) 18.23 percent

118) You are considering an investment that is expected to pay 5 percent in year 1, 7 percent in years 2 and 3 and 9 percent in year 4. If you invest $2,000 today, what will this investment be worth at the end of the fourth year?

A) $2,501.42

B) $2,693.71

C) $2,713.04

D) $2,620.68

119) You are considering an investment that is expected to pay 3 percent in year 1, 5 percent in years 2 and 3 and 7 percent in year 4. If you invest $1,000 today, what will this investment be worth at the end of the fourth year?

A) $1215.07

B) $1215.51

C) $1275.81

D) $1285.75

120) We call the process of earning interest on both the original deposit and on the earlier interest payments

A) simple interest.

B) compounding.

C) future value.

D) discounting.

121) When your investment compounds, your money will grow in a(n) ________ fashion.

A) linear

B) exponential

C) static

D) implied

122) You invested $1,000 for five years in an account that earns 5 percent. However, today you learn that you are able to move the account into an investment that earns 10 percent. Which of the following statements is correct?

A) If you select the investment earning 10 percent, you will double your profit.

B) If you select the investment earning 10 percent, you will more than double your profit.

C) If you select the investment earning 10 percent, your profit will be less than double.

D) None of the statements is correct.

123) Which of the following statements is incorrect with respect to time lines?

A) A helpful tool for organizing our analysis is the time line.

B) Cash flows we receive are called inflows and denoted with a positive number.

C) Cash flows we pay out are called outflows and designated with a negative number.

D) Interest rates are not included on our time lines.

124) Which of the following will not increase a present value?

A) increase the interest rate

B) decrease the number of periods

C) increase the future value

125) Suppose a U.S. Treasury bond promises to pay $9,780.13 in three years. If bonds of this type are generating a 4 percent annual return, how much would you pay for this bond today?

A) $8,429.71

B) $11,001.32

C) $8,694.50

D) $9,112.78

126) A firm's net income last year was $2.65 million. Its net income grew 8 percent during the last "5" years. If that growth rate continues, how long will it take for the firm's net income to double?

A) 6.6 years

B) 7.1 years

C) 8.2 years

D) 9 years

127) A firm's net income last year was $1.5 million. Its net income grew 5 percent during the last "5" years. If that growth rate continues, how long will it take for the firm's net income to double?

A) 7.6 years

B) 10.47 years

C) 14.21 years

D) 14.55 years

128) You want to retire in 25 years and you have just inherited $300,000. You believe you will need $1,450,000 upon retirement. What rate will you need to earn on the account to achieve this goal?

A) 4.5 percent

B) 5.5 percent

C) 6.5 percent

D) 8.5 percent

129) You want to retire in 40 years and you have $40,000 saved in your retirement account. You believe you will need $1,500,000 upon retirement. What rate will you need to earn on the account to achieve this goal?

A) 6.75 percent

B) 7.48 percent

C) 9.13 percent

D) 9.48 percent

130) Which of the following investments would you prefer?

A) an investment earning 10 percent for 20 years

B) an investment earning 8.5 percent for 20 years

C) an investment earning 5 percent for 40 years

D) an investment earning 3 percent for 40 years

131) Which of the following is the equivalent of $300 received today?

A) Seven hundred ninety-five dollars ninety-nine cents to be received 20 years in the future assuming a 5 percent annual interest rate.

B) Hundred dollars to be received two years from now and $200 three years from now.

C) Three hundred dollars compounded at 10 percent for one year.

D) All of these choices are correct.

132) A $400 investment has doubled to $800 in six years because of a 12.25 percent return. How much longer will it take for the investment to reach $1100 if it continues to earn 12.25 percent?

A) 2.56 years

B) 2.76 years

C) 3.46 years

D) 5 years

133) A $1,000 investment has doubled to $2,000 in seven years. How much longer will it take for the investment to reach $5,000 if it continues to earn the same rate?

A) 6.16 years

B) 6.86 years

C) 7.15 years

D) 9.25 years

134) A $5,000 investment has doubled to $10,000 in ten years. How much longer will it take for the investment to reach $15,000 if it continues to earn the same rate?

A) 5.00 years

B) 5.85 years

C) 6.86 years

D) 7.20 years

135) Which of the following would you prefer?

A) four hundred dollars to be received in nine years when rates are 8 percent

B) two hundred ten dollars today

C) five hundred dollars to be received in 12 years when rates are 8 percent

D) five hundred dollars to be received in 12 years when rates are 9 percent

136) Which of the following would you prefer?

A) five hundred dollars to be received in 10 years when rates are 8 percent

B) three hundred dollars today

C) six hundred dollars to be received in 12 years when rates are 8 percent

D) seven hundred dollars to be received in 12 years when rates are 7 percent

137) What is the value in year 10 of a $1,000 cash flow made in year 5 if interest rates are 9 percent in years 6 and 7, and increase to 13 percent in the remaining years?

A) $1,538.62

B) $1,691.47

C) $1,714.31

D) $1,799.42

138) What is the value in year 4 of a $9,000 cash flow made in year 13 if interest rates are 7 percent in years "4 through 9" and increase to 11 percent after that?

A) $4,226.99

B) $4,472.06

C) $4,698.17

D) $4,716.52

139) What is the value in year 6 of a $9,000 cash flow made in year 14 if interest rates are 7 percent in years "4 through 9" and increase to 10 percent after that?

A) $4,252.19

B) $4,417.46

C) $4,561.71

D) $45,798.53

140) What is the value in year 20 of a $1,000 cash flow made in year 8 if interest rates are 15 percent in years "6 through 13" and increase to 18 percent in the remaining years?

A) $5,779.57

B) $5,912.42

C) $6,005.71

D) $6,407.13

141) A $2 million deposit earns 7 percent for 13 years. If the account earns 9 percent per year forever after that, how long will it take to grow to $5 million?

A) zero; the account exceeds $5 million after 13 years

B) 0.26 year

C) 0.43 year

D) 1.18 years

142) A $7 million deposit earns 5 percent for nine years. If the account loses 2 percent per year after that, how long will it take to be reduced back to $7 million?

A) 6.78 years

B) 10.29 years

C) 11.29 years

D) 21.74 years

143) You deposit $20,000 in an account that doubles in seven years. How many years will it take the account to be reduced to its original value if it loses 12 percent per year?

A) 4.92 years

B) 5.42 years

C) 6.62 years

D) 8.22 years

144) You deposit $20,000 in an account that doubles in seven years. How many years will it take the account to double again if it earns 14 percent per year?

A) 4.92 years

B) 5.29 years

C) 6.62 years

D) 8.22 years

145) Time value of money concepts can be used by

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.

146) How much would be in your savings account in 12 years if you deposited $1,500 today? Assume the bank pays 5 percent per year.

A) $2,387.12

B) $2,491.03

C) $2,693.78

D) $2,771.09

147) An average home in Chicago costs $295,000. If house prices are expected to grow at an average rate of 3 percent per year, what will a house cost in five years?

A) $328,995.61

B) $338,941.27

C) $341,985.85

D) $347,028.19

148) 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?

A) $255,033.41

B) $255,043.97

C) $314,928.01

D) $316,692.52

149) You are offered a choice between $770 today and $815 one year from today. Assume that interest rates are 4 percent. Which do you prefer?

A) $770 today

B) $815 one year from today

C) They are equivalent to each other.

D) $770 today at 3 percent interest rates

150) You deposit $10,000 in an account that doubles in "6" years. How many years will it take the account to be reduced to its original value if it loses 10 percent per year?

A) 6.00 years

B) 6.58 years

C) 7.27 years

D) 10.00 years

151) You deposit $200 in an account that doubles in 10 years. How many years will it take the account to be reduced to its original value if it loses 25 percent per year?

A) 2.00 years

B) 2.41 years

C) 3.11 years

D) 4.00 years

152) Which of the following investments would you prefer?

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

153) If an average home in your town currently costs $350,000, and house prices are expected to grow at an average rate of 3 percent per year, what will an average house cost in "5" years?

A) $402,500.00

B) $405,168.75

C) $405,745.93

D) $507,500.00

154) If an average home in your town currently costs $300,000, and house prices are expected to grow at an average rate of 5 percent per year, what will an average house cost in 10 years?

A) $450,000.00

B) $483,153.01

C) $488,668.39

D) $507,593.74

155) 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.

A) $7,693.95

B) $8,543.26

C) $9,000.00

D) $10,823.01

156) What is the value in year 6 of a $1,000 cash flow made in year 2 if interest rates are 5 percent in years 3 and 4, and increase to 6 percent in the remaining years?

A) $1,215.51

B) $1,238.77

C) $2,970.03

D) $2,982.74

157) Which is more valuable, receiving $1,000 today or receiving $1,200 in 3 years if interest rates are 7 percent?

A) receiving $1,000 today

B) receiving $1,200 in 3 years

C) They are worth the same amount.

D) need more information to make a determination

158) Determine the interest rate earned on a $200 deposit when $208 is paid back in one year.

A) 104 percent

B) 8 percent

C) 4 percent

D) 2 percent