Question 1

The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is ________.
A) $ 50
B) $200
C) $518
D) $ 77

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($200), r is the annual interest rate (10% or 0.10), and n is the number of years (10). Plugging in the values, PV = $200 / (1 + 0.10)^10 = $77.06, rounded to $77.

Question 2

Everything else being equal, the higher the interest rate, the higher the future value.

Accepted Answer

This is because a higher interest rate means that the investment will earn more money over time, leading to a higher future value. This is assuming that there are no other factors that would affect the investment's return such as inflation or fees.

Question 3

The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is ________.
A) $236
B) $699
C) $ 42
D) $ 75

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the opportunity cost (or discount rate), and n is the number of years. Plugging in the values, we get PV = 100 / (1 + 0.09)^10 = $42. Therefore, the best choice is (C).

Question 4

Calculate the present value of $89,000 to be received in 15 years, assuming an opportunity cost of 14 percent.

Accepted Answer

The answer of Calculate the present value of $89,000 to...

Question 5

Everything else being equal, the longer the period of time, the lower the present value.

Accepted Answer

This statement is true according to the concept of time value of money, which states that money in the future is worth less than money in the present due to factors such as inflation and opportunity cost. Therefore, the longer the period of time, the greater the discounting effect on future cash flows, making the present value lower.

Question 6

The annual rate of return is referred to as the ________.
A) discount rate
B) marginal rate
C) risk-free rate
D) marginal cost

Accepted Answer

The annual rate of return is often referred to as the discount rate, especially in contexts involving the present value of future cash flows or investments.

Question 7

The future value of $200 received today and deposited at 8 percent for three years is ________.
A) $248
B) $252
C) $158
D) $200

Accepted Answer

The future value can be calculated using the formula:
FV = PV x (1+r)n

Where:
PV = Present Value = $200
r = annual interest rate = 8%
n = number of years = 3

Plugging in the values, we get:
FV = 200 x (1+0.08)3 = $251.98

Rounding off to the nearest whole number, we get:
FV = $252

Therefore, the best choice is B.

Question 8

The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called ________.
A) future value
B) present value
C) future value of an annuity
D) compounded value

Accepted Answer

The concept described in the question is that of present value, where we determine the value of an investment today in order to reach a certain future value. Option A refers to the future amount we want to attain, option C refers to the future value of a series of periodic payments, and option D refers to the value of an investment that compounds over time.

Question 9

Everything else being equal, the higher the discount rate, the higher the present value.

Accepted Answer

A higher discount rate reduces the present value of future cash flows because it decreases the value of money received in the future.

Question 10

Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

Accepted Answer

Time value of money is based on the belief that a dollar today is worth more than a dollar that will be received at some future date, due to its potential earning capacity.

Question 11

The greater the interest rate and the longer the period of time, the higher the present value.

Accepted Answer

The greater the interest rate and the longer the period of time, the lower the present value, because present value is calculated by discounting future cash flows back to their value today, and higher rates or longer periods reduce the present value of those cash flows.

Question 12

For a given positive interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value.

Accepted Answer

This statement is true. The future value of money increases with time when subjected to a positive interest rate due to the compounding effect of the interest rate. The longer the time period, the more opportunities for compounding, resulting in a greater future value.

Question 13

If you expect to retire in 30 years, live on $50,000 per year and expect the inflation to average 3% over the next 30 years, what amount of annual income will you need to live at the same comfort level in 30 years?
A) $121,363
B) $$95,000
C) $20,599
D) $51,500

Accepted Answer

To calculate future income, we need to adjust our current income for inflation. Using the rule of 72, we can estimate that the purchasing power of money will decrease by half in approximately 24 years (72 divided by the inflation rate of 3%). Thus, in 30 years, the cost of living will be approximately twice as much as it is today. Therefore, you would need $100,000 per year to maintain the same purchasing power as $50,000 today. Adjusting this amount for inflation, the required annual income in 30 years would be $121,363.

Question 14

The future value of $100 received today and deposited at 6 percent for four years is ________.
A) $126
B) $ 79
C) $124
D) $116

Accepted Answer

The future value of an investment is calculated using the formula FV = PV(1 + r)^n, where PV is the present value, r is the interest rate per period, and n is the number of periods. Plugging in the values, we get FV = $100(1 + 0.06)^4 = $126.

Question 15

________ is the amount earned on a deposit that has become the part of the principal at the end of a specified time period.
A) Discount interest
B) Compound interest
C) Primary interest
D) Future value

Accepted Answer

Compound interest is the interest earned on both the principal amount and the interest already earned. It is the most common method of calculating interest and leads to higher earnings than simple interest.

Question 16

The future value of a dollar ________ as the interest rate increases and ________ the further in the future an initial deposit is to be received.
A) decreases; decreases
B) decreases; increases
C) increases; increases
D) increases; decreases

Accepted Answer

The future value of a dollar increases as the interest rate increases because the amount of interest earned on the dollar grows. It also increases the further in the future an initial deposit is to be received due to the compound interest effect, where interest is earned on previously earned interest.

Question 17

Calculate the future value of $4,600 received today if it is deposited at 9 percent for three years.

Accepted Answer

The answer of Calculate the future value of $4,600 received...

Question 18

Future value is the value of a future amount at the present time, found by applying compound interest over a specified period of time.

Accepted Answer

Future value is the value of a current asset at a specified date in the future based on an assumed rate of growth over time. It is calculated by applying compound interest over a specified period of time to the present value.

Question 19

Future value increases with increases in the interest rate or the period of time funds are left on deposit.

Accepted Answer

The future value of a deposit increases as the interest rate and time period increases. This is because with a higher interest rate, the investment grows faster, and with a longer time period, there is more time for compound interest to accumulate. Therefore, the statement is true.

Question 20

Since individuals are always confronted with opportunities to earn positive rates of return on their funds, the timing of cash flows does not have any significant economic consequences.

Accepted Answer

The timing of cash flows can have significant economic consequences because individuals may miss out on higher rates of return if they do not invest their funds at the most optimal time. Additionally, the time value of money dictates that a dollar received today is worth more than a dollar received in the future, so the timing of cash flows can impact the overall value of an investment.

Quiz 5: Time Value of Money

The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent, is ________.

Everything else being equal, the higher the interest rate, the higher the future value.

The present value of $100 to be received 10 years from today, assuming an opportunity cost of 9 percent, is ________.

Calculate the present value of $89,000 to be received in 15 years, assuming an opportunity cost of 14 percent.

Everything else being equal, the longer the period of time, the lower the present value.

The annual rate of return is referred to as the ________.

The future value of $200 received today and deposited at 8 percent for three years is ________.

The amount of money that would have to be invested today at a given interest rate over a specified period in order to equal a future amount is called ________.

Everything else being equal, the higher the discount rate, the higher the present value.

Time value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.

The greater the interest rate and the longer the period of time, the higher the present value.

For a given positive interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value.

If you expect to retire in 30 years, live on $50,000 per year and expect the inflation to average 3% over the next 30 years, what amount of annual income will you need to live at the same comfort level in 30 years?

The future value of $100 received today and deposited at 6 percent for four years is ________.

________ is the amount earned on a deposit that has become the part of the principal at the end of a specified time period.

The future value of a dollar as the interest rate increases and the further in the future an initial deposit is to be received.

Calculate the future value of $4,600 received today if it is deposited at 9 percent for three years.

Future value is the value of a future amount at the present time, found by applying compound interest over a specified period of time.

Future value increases with increases in the interest rate or the period of time funds are left on deposit.

Since individuals are always confronted with opportunities to earn positive rates of return on their funds, the timing of cash flows does not have any significant economic consequences.