Question 1

The future value of an uneven cash flow stream is also referred to as its _____.

Accepted Answer

The future value of an uneven cash flow stream is referred to as its terminal value. This represents the cumulative value of all the cash flows at a particular point in time, usually the end of the cash flow stream. The other answer choices are not applicable to the future value of an uneven cash flow stream.

Question 2

Which of the following is the correct expression for calculating the future value of an investment? (r represents the interest rate and n represents the length of time)

Accepted Answer

The correct expression for calculating the future value of an investment is Future value = Present value × (1 + r)n, where r represents the interest rate and n represents the length of time. This formula takes into account the compounding effect of interest, where the interest earned in previous periods is reinvested and earns additional interest in subsequent periods.

Question 3

Liam is considering putting money in an investment plan that will pay him $52,000 in 12 years. If Liam's opportunity cost rate is 7 percent compounded annually, what is the maximum amount he should be willing to pay for the investment today? Use a financial calculator to determine the amount.

Accepted Answer

The correct answer is A because the present value of the investment is $23,089. This is the maximum amount that Liam should be willing to pay for the investment today.

Question 4

Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.

Accepted Answer

The answer of Shaun is planning to invest $570 in...

Question 5

If the opportunity cost rate is 8% and is compounded annually, what is the present value of $8,200 due to be received in 12 years? Use the equation method to determine the present value.

Accepted Answer

The answer of If the opportunity cost rate is 8%...

Question 6

If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account? Use a financial calculator to determine the amount.

Accepted Answer

The correct answer is A because it takes 23.02 years for Rachel to accumulate $6,500 in her account.

Question 7

Dwayne invests $4,700 in a savings account at the beginning of each of the next twelve years. If his opportunity cost rate is 7 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. (Round your answer to two decimal places.)

Accepted Answer

The answer of Dwayne invests $4,700 in a savings account...

Question 8

The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.

Accepted Answer

Compounding refers to the process of calculating the future value of an investment or a series of cash flows by applying the interest on interest, which results in the growth of the initial amount over time. Discounting, amortization, and consolidation are different financial concepts that involve the calculation of present values, repayment schedules, or the merging of financial statements, respectively. Annualizing is a process of converting a rate or an amount from one time period to an annual basis.

Question 9

Shekhar invests $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calculate the worth of the investment. (Round your answer to two decimal places.)

Accepted Answer

The answer of Shekhar invests $1,820 in a mutual fund...

Question 10

Andrea's opportunity cost rate is 12 percent compounded annually. How much must he deposit in an account today if he wants to receive $2,100 at the beginning of each of the next seven years? Use the equation method to determine the amount.

Accepted Answer

The correct answer is A.The present value of the annuity is:PV = $2,100 * [1 - (1 + 0.12)^-7] / 0.12 = $10,772.

Question 11

Identify the correct expression for calculating the present value of an investment.

Accepted Answer

The correct expression for calculating the present value of an investment is the one that involves dividing the future value by the power of (1 + r) raised to n. This is because the present value represents the current worth of future cash flows, which is adjusted for the time value of money. The formula for present value considers the amount of money, the interest rate, and the number of periods involved. Therefore, the correct expression is D, Present value = Future value / (1 + r)n.

Question 12

Joey is planning to invest his savings in a fixed income fund. He manages to deposit $700 at the end of the first year, $500 at the end of the second year, $300 at the end of the third year, and $600 at the end of the fourth year. If the fund earns 6 percent interest each year, the terminal value of this uneven cash flow stream at the end of Year 4 is _____.

Accepted Answer

The correct answer is A. The terminal value of the uneven cash flow stream at the end of Year 4 is $1,918. This is calculated by taking the sum of the present values of each cash flow, which are:PV of $700 at the end of Year 1 = $700 / (1 + 0.06)^1 = $660.38PV of $500 at the end of Year 2 = $500 / (1 + 0.06)^2 = $453.59PV of $300 at the end of Year 3 = $300 / (1 + 0.06)^3 = $267.96PV of $600 at the end of Year 4 = $600 / (1 + 0.06)^4 = $496.83Total PV = $660.38 + $453.59 + $267.96 + $496.83 = $1,918.76

Question 13

The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.

Accepted Answer

Discounting involves determining the present value of future cash flows by applying a discount rate. Compounding is the process of calculating the future value of a present investment or cash flow. Consolidation is the process of combining financial statements of multiple entities into one statement. Amortization is the process of spreading the cost of an asset over its useful life. Annualizing is the process of converting a rate or amount into an annualized rate or amount. Therefore, the correct answer is B.

Question 14

Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation.

Accepted Answer

The answer of Jude wants to receive $1,100 at the...

Question 15

Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total balance.

Accepted Answer

The correct keystrokes are N = 5 (years), I/Y = 6 (interest rate), and PV = -2,700 (present value, entered as a negative because it's an outflow).

Question 16

Adam plans to invest $1500 today in a mutual fund. If he earns 12 percent interest compounded monthly, to what amount will his investment grow in 20 years? Use a financial calculator to make the calculation.

Accepted Answer

To calculate this using a financial calculator, we can use the formula PV = 1500, N = 240 (20 years x 12 months), I/Y = 1 (12% divided by 12 months), PMT = 0 (since there will be no additional payments). Then, we can solve for FV (future value), which gives us $16,339. Therefore, the answer is C.

Question 17

Robert invests $650 in a savings account at the beginning of each of the next seven years. If his opportunity cost rate is 5 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calculator to determine the amount.

Accepted Answer

The future value of an annuity is calculated using the following formula:FV = PMT * (((1 + r)^n - 1) / r)where:PMT is the amount of each paymentr is the annual interest raten is the number of paymentsIn this case, PMT = $650, r = 5%, and n = 7. Plugging these values into the formula, we get:FV = $650 * (((1 + 0.05)^7 - 1) / 0.05)= $650 * (1.407 - 1) / 0.05= $650 * 0.407 / 0.05= $5,557Therefore, the correct answer is C) $5,557.

Question 18

Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today.

Accepted Answer

The answer of Lisa's opportunity cost rate is 10 percent...

Question 19

Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. Using the equation method, what is the worth of the investment today?

Accepted Answer

The answer of Ten years ago, Emma purchased an investment...

Question 20

Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? Use a financial calculator to determine the amount to be deposited today.

Accepted Answer

The answer of Jason's opportunity cost rate is 8 percent...

Quiz 4: Time Value of Money