Question 1

The state lottery has just informed you that you have won $1 million to be paid out in the amount of $50,000 per year for the next 20 years.With a discount rate of 12%,what is the present value of your winnings?
A) $221,950
B) $398,150
C) $373,450
D) $392,150

Accepted Answer

To calculate the present value of the winnings, we need to use the formula: Present Value = Annual Payment * [(1 - (1+i)^-n)/i], where i is the discount rate and n is the number of years. Putting the given values in the formula, we get:
Present Value = $50,000 * [(1 - (1+0.12)^-20)/0.12] = $373,450 (rounded to nearest dollar). Therefore, the best choice is C.

Question 2

The time value of money can be used to estimate future savings with periodic deposits of funds.

Accepted Answer

The concept of time value of money helps in calculating the worth of money in the future by accounting for the interest or inflation rate. This can be useful in estimating the future savings that can be accumulated with periodic deposits of funds, such as in a savings account, retirement plan, or investment portfolio. Therefore, option A is correct.

Question 3

You have set a $100,000 goal for a college funds for your newborn child.You plan on having a fixed amount taken from your salary each month to meet this goal.The calculation to determine the monthly amount is called
A) planning and budgeting.
B) present value of an annuity.
C) future value of an annuity.
D) future value of a series of single payments.

Accepted Answer

The calculation to determine the monthly amount needed to reach a future financial goal, like a college fund, is called the future value of an annuity. This involves calculating how much needs to be saved regularly to reach a specific future sum.

Question 4

Use the data in table 3.1 to answer the following question(s):
  Table 3.1
-Refer to Table 3.1 above.How much will you need to deposit today to enable you to withdraw $1,000 each year for the next 5 years if the money is invested at 7%?
A) $1,403
B) $713
C) $5,751
D) $4,100

Accepted Answer

The answer of Use the data in table 3.1 to...

Question 5

You utilize present and future value concepts in investment,purchase,and retirement decisions.

Accepted Answer

Present and future value concepts are essential in making informed financial decisions related to investment, purchase, and retirement. Present value helps in determining the current value of a future payment, whereas future value facilitates calculating the expected worth of present payments. These concepts aid in evaluating the viability of investment options, determining the appropriate amount to save for retirement, and deciding on the budget for making purchases, among other applications.

Question 6

The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and then summing the resulting present values.

Accepted Answer

This is the correct method for calculating the present value of an annuity.

Question 7

To determine how much you would need to save each year to reach a specific goal,you would use
A) present value of $1.
B) future value of $1.
C) present value of an annuity.
D) future value of an annuity.

Accepted Answer

The future value of an annuity formula is used to calculate how much you would need to save each year to reach a specific financial goal, taking into account regular, equal payments and interest compounding.

Question 8

Yogi Berra Jr.has agreed to play for the New York Mets for $4 million per year for the next 10 years.What table would you use to calculate the value of this contract in today's dollars?
A) Present value of a single amount
B) Future value of an annuity
C) Future value of a single amount
D) Present value of an annuity

Accepted Answer

Since this is a 10-year contract with equal payments each year, we would use the present value of an annuity table to calculate the current value of the contract. Therefore, the correct choice is D - Present value of an annuity.

Question 9

Present and future values concepts are not applied to which of the following?
A) Payments on a home
B) Calculation of withdrawals needed during retirement
C) Calculation of savings for a large purchase
D) The balance of your checking account today

Accepted Answer

Present and future value concepts are not relevant to the balance of your checking account since it is a snapshot of the current amount of money you have available and does not involve any future payments or earnings. However, the other options have future payments or earnings that can be calculated using present and future value concepts.

Question 10

Which of the following decisions would involve the use of the present value of a $1 ordinary annuity table?
A) Your brother buys your car and offers to pay you $500 now or $1,500 in two years.
B) You win a lawsuit and are offered a lump-sum payment today of $100,000 or $15,000 a year for 20 years.
C) Your father and mother wish to deposit enough money on the date of your high school graduation to enable you to take a $7,000 cruise when you graduate from college 4 years hence.
D) You want to have $1,000,000 in order to retire at age 55, but need to know how much you will need to deposit each year from now until your 55th birthday.

Accepted Answer

The present value of a $1 ordinary annuity table is used to determine the present value of a series of equal payments made at regular intervals, such as the $15,000 a year for 20 years option in choice B.

Question 11

Assuming that you had just won $5,000,000 in the lottery,describe the advantages and disadvantages of receiving a lump sum today versus a ten-year annuity.Discuss other factors that are relevant or needed to make this decision.No interest rate is given,but different interest rates can be assumed if necessary to answer this problem.

Accepted Answer

The answer of Assuming that you had just won $5,000,000...

Question 12

It is always better to choose a lump sum rather than to choose periodic payments over time.This is why nearly all lottery winners choose the lump-sum payment.

Accepted Answer

The better choice between a lump sum and periodic payments depends on individual circumstances, including financial situation, investment knowledge, spending habits, and tax implications. Some lottery winners choose periodic payments to ensure a steady income over time and to reduce the risk of spending all the money quickly.

Question 13

Lucky Louie just won the lottery!! He has a choice of taking $1,000,000 in cash or receiving $50,000 per year for 30 years beginning at the end of this year.The best way to make this choice is to
A) consult a tax advisor.
B) consult an oracle.
C) calculate the future value of the annuity payments.
D) calculate the present value of the annuity payments.

Accepted Answer

The best way to make this choice is to calculate the present value of the annuity payments. This will allow Lucky Louie to compare the value of the lump sum payment to the value of the annuity payments. It is important to consider factors such as inflation, taxes, and investment opportunities in order to make an informed decision. A tax advisor may also be helpful in determining the tax implications of each option. Consulting an oracle is not a reliable method for making a financial decision. Calculating the future value of the annuity payments does not take into account the time value of money and may not provide an accurate comparison to the lump sum payment.

Question 14

Assuming interest rates were 6% per annum,what would be the present value of the $50,000 per year for 30 years payment stream? Use the tables or a financial calculator.
A) $688,242
B) $1,500,000
C) $700,002
D) $693,974

Accepted Answer

The answer of Assuming interest rates were 6% per annum,what...

Question 15

Time value concepts can be applied to lottery winnings.The winner can usually choose an annuity or a lump sum.

Accepted Answer

Time value concepts can be used to determine the present value of the annuity payments or lump sum option, and help the winner make an informed decision based on their financial goals and priorities.

Question 16

To determine how much money you would need to save to withdraw $10,000 a year for five years,you would use the present value of an annuity tables.

Accepted Answer

The present value of an annuity tables can help determine the amount of money needed to generate a certain amount of regular payments over a set period of time. In this case, we want to withdraw $10,000 a year for five years, so we would use the present value of an annuity tables to calculate how much money we need to save in order to generate those payments.

Question 17

To compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years,you would need to use
A) the future value of an annuity.
B) the present value of an annuity.
C) both future and present value of an annuity.
D) both present and future value of $1.

Accepted Answer

To compute how much you need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years, you need to consider both the future value of the annuity (to accumulate the savings over the 25 years) and the present value of the annuity (to determine the amount needed today to ensure the 30 years of withdrawals). This involves understanding how much your savings will grow over the saving period and how much capital you need at the beginning of the withdrawal period to sustain the withdrawals.

Question 18

The time value of money can be applied to all of the following except
A) bond valuation.
B) stock valuation.
C) determining the current market value of your home.
D) determining the amount of taxes owed on income this year.

Accepted Answer

The time value of money is not applicable in determining the amount of taxes owed on income this year, as taxes are based on current income and not future value.

Question 19

Using the Time Value of Money charts provided,answer the following question.(Note to Instructors: Provide the appropriate tables to students from Personal Finance,Sixth Edition,Appendix C: Financial Tables.) Jack is 35 years old and is planning to retire at age 65.Based on a variety of factors,he is planning a retirement of 20 years.Jack determines that he will need $20,000 per year during his 20 years of retirement.If he can invest at 9%,how much will he need to save each year beginning today to reach his goal?
A) $11,428.57
B) $6,086.00
C) $1,339.47
D) $20,000.00

Accepted Answer

To find out how much Jack needs to save each year, we use the Present Value of an Annuity formula to determine the total amount needed at retirement, and then use the Future Value of an Annuity formula to find the annual savings required. The calculations show that Jack needs to save approximately $1,339.47 each year.

Question 20

Present and future values concepts are applied in all of the following decisions except
A) purchase of a home.
B) calculation of withdrawals needed during retirement.
C) calculation of savings for a large purchase.
D) annual cash inflows.

Accepted Answer

Present and future value concepts are not typically applied in the calculation of annual cash inflows. These concepts are used in decisions that involve the timing of cash flows, such as determining the amount needed to save for a large purchase or calculating withdrawals needed during retirement. While cash inflows are certainly an important part of financial planning, they do not typically involve the application of present and future value concepts.

Quiz 3: Applying Time Value Concepts

The state lottery has just informed you that you have won $1 million to be paid out in the amount of $50,000 per year for the next 20 years.With a discount rate of 12%,what is the present value of your winnings?

The time value of money can be used to estimate future savings with periodic deposits of funds.

You have set a $100,000 goal for a college funds for your newborn child.You plan on having a fixed amount taken from your salary each month to meet this goal.The calculation to determine the monthly amount is called

Use the data in table 3.1 to answer the following question(s) : Table 3.1 -Refer to Table 3.1 above.How much will you need to deposit today to enable you to withdraw $1,000 each year for the next 5 years if the money is invested at 7%?

You utilize present and future value concepts in investment,purchase,and retirement decisions.

The present value of an annuity can be obtained by discounting the individual cash flows of the annuity and then summing the resulting present values.

To determine how much you would need to save each year to reach a specific goal,you would use

Yogi Berra Jr.has agreed to play for the New York Mets for $4 million per year for the next 10 years.What table would you use to calculate the value of this contract in today's dollars?

Present and future values concepts are not applied to which of the following?

Which of the following decisions would involve the use of the present value of a $1 ordinary annuity table?

It is always better to choose a lump sum rather than to choose periodic payments over time.This is why nearly all lottery winners choose the lump-sum payment.

Lucky Louie just won the lottery!! He has a choice of taking $1,000,000 in cash or receiving $50,000 per year for 30 years beginning at the end of this year.The best way to make this choice is to

Assuming interest rates were 6% per annum,what would be the present value of the $50,000 per year for 30 years payment stream? Use the tables or a financial calculator.

Time value concepts can be applied to lottery winnings.The winner can usually choose an annuity or a lump sum.

To determine how much money you would need to save to withdraw $10,000 a year for five years,you would use the present value of an annuity tables.

To compute how much you would need to save each year for the next 25 years to allow you to withdraw $20,000 for the following 30 years,you would need to use

The time value of money can be applied to all of the following except

Present and future values concepts are applied in all of the following decisions except