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

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Question 1

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You hope to buy your dream car four years from now.Today,that car costs $82,500.You expect the price to increase by an average of 4.8 percent per year over the next four years.How much will your dream car cost by the time you are ready to buy it?

A) $98,340.00
B) $98,666.67
C) $99,517.41
D) $99,818.02
E) $100,023.16

F) A) and B)
G) A) and C)

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Question 2

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Which one of the following variables is the exponent in the present value formula?

A) present value.
B) future value.
C) interest rate.
D) time.
E) There is no exponent in the present value formula.

F) C) and D)
G) All of the above

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Question 3

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Penn Station is saving money to build a new loading platform.Two years ago,they set aside $24,000 for this purpose.Today,that account is worth $28,399.What rate of interest is Penn Station earning on this investment?

Theo needs $40,000 as a down payment for a house 6 years from now.He earns 2.5 percent on his savings.Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum.How much additional money must he deposit if he waits for one year rather than making the deposit today?

Alex invested $10,500 in an account that pays 6 percent simple interest.How much money will he have at the end of four years?

Some time ago,Julie purchased eleven acres of land costing $36,900.Today,that land is valued at $214,800.How long has she owned this land if the price of the land has been increasing at 6 percent per year?

At an interest rate of 10 percent and using the Rule of 72,how long will it take to double the value of a lump sum invested today? How long will it take after that until the account grows to four times the initial investment? Given the power of compounding,shouldn't it take less time for the money to double the second time?

This afternoon,you deposited $1,000 into a retirement savings account.The account will compound interest at 6 percent annually.You will not withdraw any principal or interest until you retire in forty years.Which one of the following statements is correct?

You have just received notification that you have won the $1.4 million first prize in the Centennial Lottery.However,the prize will be awarded on your 100^th birthday,78 years from now.The appropriate discount rate is 8 percent.What is the present value of your winnings?

Martin invested $1,000 six years ago and expected to have $1,500 today.He has not added or withdrawn any money from this account since his initial investment.All interest was reinvested in the account.As it turns out,Martin only has $1,420 in his account today.Which one of the following must be true?

Assume the average vehicle selling price in the United States last year was $41,996.The average price 9 years earlier was $29,000.What was the annual increase in the selling price over this time period?

You collect old coins.Today,you have two coins each of which is valued at $300.One coin is expected to increase in value by 6 percent annually while the other coin is expected to increase in value by 4.5 percent annually.What will be the difference in the value of the two coins 15 years from now?

Andy deposited $3,000 this morning into an account that pays 5 percent interest,compounded annually.Barb also deposited $3,000 this morning into an account that pays 5 percent interest,compounded annually.Andy will withdraw his interest earnings and spend it as soon as possible.Barb will reinvest her interest earnings into her account.Given this,which one of the following statements is true?

You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years.Assume you can earn 6 percent on your savings.Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different.

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

You own a classic automobile that is currently valued at $150,000.If the value increases by 6.5 percent annually,how much will the automobile be worth ten years from now?

Imprudential,Inc.has an unfunded pension liability of $850 million that must be paid in 25 years.To assess the value of the firm's stock,financial analysts want to discount this liability back to the present.The relevant discount rate is 6.5 percent.What is the present value of this liability?

What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?

You are considering two separate investments.Both investments pay 7 percent interest.Investment A pays simple interest and Investment B pays compound interest.Which investment should you choose,and why,if you plan on investing for a period of 5 years?

You invested $1,400 in an account that pays 5 percent simple interest.How much more could you have earned over a 20-year period if the interest had compounded annually?