Question 1

Provide a graphical illustration of present value over a twenty year time span given rates of return of
0%, 5%, 10%, 15% and 20%.

Accepted Answer

The answer of Provide a graphical illustration of present value...

Question 2

Explain intuitively why it is that present values decrease as the discount rate increases.

Accepted Answer

The answer of Explain intuitively why it is that present...

Question 3

Write a sentence explaining why present values decrease as the discount rate increases.

Accepted Answer

The answer of Write a sentence explaining why present values...

Question 4

An investor is considering depositing $20,000 and making monthly contributions of $250 per
month into investment. If the investor wants to have a future value of $50,000, what will be the rate
of interest if he wishes to have this amount in 5 years? Assume interest is compounded monthly.

Accepted Answer

The answer of An investor is considering depositing $20,000 and...

Question 5

Deﬁne and explain the relationship between the present value and the discount rate. Graphically
illustrate this relationship.

Accepted Answer

The answer of Deﬁne and explain the relationship between the...

Question 6

An investor is considering depositing $10,000 and making $400 semi-annual contributions for the
next ﬁve years. If one investment provides 5% compounded monthly and another investment
provides 5.2% compounded semi-annually, determine the difference between the two investments.

Accepted Answer

The answer of An investor is considering depositing $10,000 and...

Question 7

$15,000 is invested into a plan earning 5% compounded quarterly for the ﬁrst ten years. What will
the rate of interest have to be for the next ten years (compounded monthly) for the value to reach
$40,000?

Accepted Answer

The answer of $15,000 is invested into a plan earning...

Question 8

Present value is used extensively by managers who are reviewing proposed projects. How does
the present value of a cash ﬂow assist management in making these business decisions?

Accepted Answer

The answer of Present value is used extensively by managers...

Question 9

You wish to have $400,000 at the end of twenty-ﬁve years. In the last ten years, you contribute
$1,000 semi-annually at a rate of 5.8% compounded monthly. During the middle ten years, you
withdraw $750 quarterly at a rate of 4.5% compounded annually. Given this information, determine
the initial deposit that has to be made at the start of the ﬁrst ﬁve years at a rate of 4% compounded
monthly.

Accepted Answer

The answer of You wish to have $400,000 at the...

Question 10

Provide a deﬁnition of present value (PV).

Accepted Answer

The answer of Provide a deﬁnition of present value (PV)....

Question 11

How long will it take for money to double at a rate of 6% compounded monthly?

Accepted Answer

The answer of How long will it take for money...

Question 12

An investor is considering depositing $20,000 in an account earning 5% compounded quarterly for
the next three years. Afterwards, he will take this amount and contribute $200 quarterly for the next
four years at a rate of 4% compounded semi-annually. Finally, over the next two years, he will
withdraw $1,000 annually at a rate of 3.5% compounded monthly. Determine the future value at the
end of this time period.

Accepted Answer

The answer of An investor is considering depositing $20,000 in...

Question 13

What is the rate needed (compounded monthly) for $10,000 to mature to $25,000 in 15 years?

Accepted Answer

The answer of What is the rate needed (compounded monthly)...

Question 14

An investor is considering depositing $10,000 in an account earning 3% compounded monthly for
the next two years. Afterwards, he will take this amount and contribute $500 monthly for the next
three years at a rate of 5% compounded annually. Finally, over the next three years, he will
withdraw $500 annually at a rate of 4.5% compounded semi-annually. Determine the future value at
the end of this time period.

Accepted Answer

The answer of An investor is considering depositing $10,000 in...

Question 15

What is the rate needed (compounded annually) for $95,000 to mature to $250,000 in 25 years?

Accepted Answer

The answer of What is the rate needed (compounded annually)...

Question 16

How long will it take for money to tripe at a rate of 4.5% compounded quarterly?

Accepted Answer

The answer of How long will it take for money...

Question 17

You are considering two lottery payment streams. Choice A pays $1,000 today and choice B pays
$1,750 at the end of ﬁve years from now. Using a discount rate of 5%, based on present values,
which would you choose? Using the same discount rate of 5%, based on future values, which would
you choose? What do your results suggest as a general rule for approaching such problems? (Make
your choices based purely on the time value of money.)

Accepted Answer

The answer of You are considering two lottery payment streams....

Question 18

Some ﬁnancial advisors recommend you increase the amount of federal income taxes withheld
from your pay cheque each month so that you will get a larger refund come April. That is, you take
home less today but get a bigger lump sum when you get your refund. Based on your knowledge of
the time value of money, what do you think of this idea? Explain.

Accepted Answer

The answer of Some ﬁnancial advisors recommend you increase the...

Question 19

The notion that money has "time-value" is based on the existence of a nonzero "opportunity rate",
i.e., a rate of return at which it is possible to invest. Why is the opportunity rate so important?

Accepted Answer

The answer of The notion that money has "time-value" is...

Question 20

You wish to have $200,000 at the end of twenty years. In the last ﬁve years, you withdraw $1,000
annually at a rate of 3.8% compounded quarterly. During the middle ten years, you contribute $500
monthly at a rate of 2.8% compounded semi-annually. Given this information, determine the initial
deposit that has to be made at the start of the ﬁrst ﬁve years at a rate of 4% compounded monthly.

Accepted Answer

The answer of You wish to have $200,000 at the...

Quiz 5: Introduction to Valuation: the Time Value of Money

Provide a graphical illustration of present value over a twenty year time span given rates of return of 0%, 5%, 10%, 15% and 20%.

Explain intuitively why it is that present values decrease as the discount rate increases.

Write a sentence explaining why present values decrease as the discount rate increases.

An investor is considering depositing $20,000 and making monthly contributions of $250 per month into investment. If the investor wants to have a future value of $50,000, what will be the rate of interest if he wishes to have this amount in 5 years? Assume interest is compounded monthly.

Deﬁne and explain the relationship between the present value and the discount rate. Graphically illustrate this relationship.

An investor is considering depositing $10,000 and making $400 semi-annual contributions for the next ﬁve years. If one investment provides 5% compounded monthly and another investment provides 5.2% compounded semi-annually, determine the difference between the two investments.

$15,000 is invested into a plan earning 5% compounded quarterly for the ﬁrst ten years. What will the rate of interest have to be for the next ten years (compounded monthly) for the value to reach $40,000?

Present value is used extensively by managers who are reviewing proposed projects. How does the present value of a cash ﬂow assist management in making these business decisions?

Provide a deﬁnition of present value (PV).

How long will it take for money to double at a rate of 6% compounded monthly?

What is the rate needed (compounded monthly) for $10,000 to mature to $25,000 in 15 years?

What is the rate needed (compounded annually) for $95,000 to mature to $250,000 in 25 years?

How long will it take for money to tripe at a rate of 4.5% compounded quarterly?

The notion that money has "time-value" is based on the existence of a nonzero "opportunity rate", i.e., a rate of return at which it is possible to invest. Why is the opportunity rate so important?