Question 1

You have determined the profitability of a planned project by finding the present value of all the cash flows from that project.Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

Accepted Answer

A decreasing discount rate will increase the present value of the project's cash flows.

Question 2

The present value of $100 to be received 10 years from today,assuming an opportunity cost of 9 percent,is: (Round to the nearest whole dollar)

Accepted Answer

PV = 11ea7fdb_fc2c_0507_a768_699e54bad7bd_TB2902_00 PV = 11ea7fdb_fc2c_0508_a768_03c05895e90e_TB2902_00 = $42.24
Using a financial calculator:
N = 10, I/Y = 9, PMT = 0, FV = -100, cpt PV = $42.24

Question 3

Current assets values may be estimated by calculating:

Accepted Answer

The value of any asset is the sum of all its future cash flows discounted back to today.

Question 4

What is the present value of $2,000 to be received in six years if interest rates are 8% compounded semiannually? (Round to the nearest whole dollar)

Accepted Answer

PV = 11ea7fdb_fc2b_68bd_a768_97d2471940fe_TB2902_00 PV = 11ea7fdb_fc2b_68be_a768_e5b3d60f2454_TB2902_00 = $1,249.19
Using a financial calculator:
N = 12, I/Y = 4, PMT = 0, FV = -2000, cpt PV = $1,249.19

Question 5

You have just won $50,000 on your Scratch and Win ticket,but you won't be awarded the money until your 40th birthday,20 years from now.If the appropriate discount rate is 15%,what is the present value of your winnings?

Accepted Answer

PV = 11ea7fdb_fc2c_7a41_a768_3b50dcd092d4_TB2902_00 PV = 11ea7fdb_fc2c_7a42_a768_b1a403844f81_TB2902_00 = $3,055.01
Using a financial calculator:
N = 20, I/Y = 15, PMT = 0, FV = -50,000, cpt PV = $3,055.01

Question 6

You wish to deposit $7,000 in an account at the Shylock Bank.The bank pays interest at a nominal annual rate of 10% compounded monthly.What is the future value in the account after seven years?

Accepted Answer

FV = PV × 11ea7fdb_fc2a_090b_a768_7f850f7fd81c_TB2902_00 FV = 7,000 × (1.0083333 11ea7fdb_fc2a_090c_a768_897371fb35aa_TB2902_00 = $14,055.44
Using a financial calculator:
N = 84, I/Y = .833333, PV = -7,000, PMT = 0, cpt FV = $14,055.44

Question 7

What is the future value of the following cash flows in year 5 with an interest rate of 6%?

Accepted Answer

Take the future value of each cash flow and then add them together:
FV = PV × 11ea7fdb_fc2a_301e_a768_6f21fe199e90_TB2902_00 FV = 200 × (1.06 11ea7fdb_fc2a_301f_a768_49e3c99fb7e4_TB2902_00 = $252.49
FV = 400 × (1.06 11ea7fdb_fc2a_5730_a768_dbaa4e7d3f4c_TB2902_00 = $476.41
FV = 600 × (1.06 11ea7fdb_fc2a_5731_a768_c13c9a95ebaa_TB2902_00 = $674.16
FV = 800 × (1.06 11ea7fdb_fc2a_5732_a768_1f1155c0cef4_TB2902_00 = $848
252.49 + 476.41 + 674.16 + 848 + 1,000 = $3,251.06

Question 8

You want to have $55,230 at the end of seven years.How much do you have to invest today to accumulate that total if you can earn 14% compounded annually?

Accepted Answer

PV = 11ea7fdb_fc2c_532f_a768_038640876f87_TB2902_00 PV = 11ea7fdb_fc2c_5330_a768_4170de610078_TB2902_00 = $22,071.97
Using a financial calculator:
N = 7, I/Y = 14, PMT = 0, FV = -55,230, cpt PV = $22,071.97

Question 9

You have the opportunity to purchase an insurance policy for your newborn son.You must make the payments shown in the table.After his fifth birthday no more payments are required.If your son reaches the age of 60,then the insurance company will pay him $90,000.Alternatively,you could invest the money in a savings account.Your banker promises to pay you interest at the rate of 8% for the first 5 years (from now until your son's fifth birthday),but only promises 4% every year after that.Should you buy the policy or invest in the savings account?

Accepted Answer

Step 1 - Take the future value of each cash flow and then add them together:
FV = PV × 11ea7fdb_fc2a_a55b_a768_4dd3f8dba1a8_TB2902_00 FV = 600 × (1.08 11ea7fdb_fc2a_cc6c_a768_ab13d6c0c15f_TB2902_00 = $816.29
FV = 650 × (1.08 11ea7fdb_fc2a_cc6d_a768_310573215a13_TB2902_00 = $818.81
FV = 700 × (1.08 11ea7fdb_fc2a_cc6e_a768_e93c2a357687_TB2902_00 = $816.48
FV = 750 × (1.08 11ea7fdb_fc2a_cc6f_a768_6924f85d3037_TB2902_00 = $810
816.29 + 818.81 + 816.48 + 810 + 800 = $4,061.58
Step 2 - Use the future value of the first five birthday cash flows to find the future value of the remaining fifty-five years.
FV = 4,061.58 × (1.04 11ea7fdb_fc2a_cc70_a768_8994bcd37bd0_TB2902_00 = $35,117.91
$35,117.91 < $90,000 so take the policy

Question 10

Your grandfather has left you $150,000 in a trust fund that you cannot have for another seven years.You have decided that you really need this money now to pay for your college expenses.Your attorney offers you $80,000 for an assignment of the proceeds of the trust.If you can get a student loan at 10%,should you accept your attorney's offer?

Accepted Answer

PV = 11ea7fdb_fc2b_ddf5_a768_b7d0d9c5cfb2_TB2902_00 PV = 11ea7fdb_fc2b_ddf6_a768_830ce8508379_TB2902_00 = $76,973.72
Using a financial calculator:
N = 7, I/Y = 7, PMT = 0, FV = -150,000, cpt PV = $76,973.72

Question 11

Suzanne has identified a project with the following cash flows.What is the present value of the cash flows at time 0 if the interest rate is 17%?

Accepted Answer

Find the present value of each cash flow and then add them together.
PV = 11ea7fdb_fc2b_41a8_a768_41e183777690_TB2902_00 PV = 11ea7fdb_fc2b_41a9_a768_bf0eafc7e66a_TB2902_00 = $1,709.40
PV = 11ea7fdb_fc2b_41aa_a768_e58de85b30ab_TB2902_00 = $474.83
PV = 11ea7fdb_fc2b_41ab_a768_3ddf16c47acd_TB2902_00 = $234.14
PV = 11ea7fdb_fc2b_41ac_a768_a52c4c121cdb_TB2902_00 = $640.38
1,709.40 + 474.83 + 234.14 + 640.38 = $3,058.75

Question 12

Penny just won the state lottery that offers a choice of payments.She may opt for either receiving $1,000,000 today or $2,000,000 at the end of ten years.If she can invest her funds at 5% annually,which is the better choice?

Accepted Answer

PV = 11ea7fdb_fc2b_b6e1_a768_d5c9f571dd93_TB2902_00 PV = 11ea7fdb_fc2b_b6e2_a768_0df0b4188282_TB2902_00 = $1,227,827
Using a financial calculator:
N = 10, I/Y = 5, PMT = 0, FV = -2,000,000, cpt PV = $1,227,826.51

Question 13

You want to have $14,521 at the end of four years.How much do you have to invest today to accumulate that total if you can earn 6% compounded annually?

Accepted Answer

PV = 11ea7fdb_fc2c_2c1d_a768_5b920887c6a0_TB2902_00 PV = 11ea7fdb_fc2c_532e_a768_8700fefa0955_TB2902_00 = $11,501.99
Using a financial calculator:
N = 4, I/Y = 6, PMT = 0, FV = -14,521, cpt PV = $11,501.99

Question 14

The present value of $200 to be received 10 years from today,assuming an opportunity cost of 10 percent,is: (Round to the nearest whole dollar)

Accepted Answer

PV = 11ea7fdb_fc2c_0509_a768_5d9e95d3d4f6_TB2902_00 PV = 11ea7fdb_fc2c_050a_a768_f906ef83ce74_TB2902_00 = $77.11
Using a financial calculator:
N = 10, I/Y = 10, PMT = 0, FV = -200, cpt PV = $77.11

Question 15

In 6 years you are going to need $1,000 dollars.How much will you need to invest today at 7% in order to save the money you need?

Accepted Answer

PV = 11ea7fdb_fc2c_2c1b_a768_8983daee2e45_TB2902_00 PV = 11ea7fdb_fc2c_2c1c_a768_1f058be1fedd_TB2902_00 = $666.34
Using a financial calculator:
N = 6, I/Y = 7, PMT = 0, FV = -1,000, cpt PV = $666.34

Question 16

The table shows a series of deposits at different dates into a savings account.If the account pays 10.5% interest (compounded annually),what is their future value at year 6?

Accepted Answer

Take the future value of each cash flow and then add them together:
FV = PV × 11ea7fdb_fc2a_7e44_a768_350b6d2f9624_TB2902_00 FV = 35,000 × (1.105 11ea7fdb_fc2a_7e45_a768_01546111ddfb_TB2902_00 = $57,660.64
FV = 7,000 × (1.105 11ea7fdb_fc2a_7e46_a768_4de25317621d_TB2902_00 = $10,436.31
FV = 13,000 × (1.105 11ea7fdb_fc2a_7e47_a768_0d8a747e6464_TB2902_00 = $17,540.02
FV = 15,000 × (1.105 11ea7fdb_fc2a_7e48_a768_b53d0d0ebafe_TB2902_00 = $18,315.38
FV = 5,000 × (1.105 11ea7fdb_fc2a_7e49_a768_27c9b8d47d66_TB2902_00 = $5,525
57,660.64 + 10,436.31 + 17,540.02 + 18,315.38 + 5,525 = $109,477.35

Question 17

Suzanne has identified a project with the following cash flows.What is the present value of the cash flows at time 0 if the interest rate is 9%?

Accepted Answer

Find the present value of each cash flow and then add them together.
PV = 11ea7fdb_fc2a_f382_a768_0f22e5938d07_TB2902_00 PV = 11ea7fdb_fc2a_f383_a768_37e76d263578_TB2902_00 = $1,834.86
PV = 11ea7fdb_fc2b_1a94_a768_fbc378c9f8f7_TB2902_00 = $547.09
PV = 11ea7fdb_fc2b_1a95_a768_37610e4772fd_TB2902_00 = $289.57
PV = 11ea7fdb_fc2b_1a96_a768_47809147eabe_TB2902_00 = $850.11
1,834.86 + 547.09 + 289.57 + 850.11 = $3,521.63

Question 18

Approximately how much must Tiffany invest today to accumulate $10,000 in ten years if she can earn 10% compounded annually? (Round to the nearest whole dollar)

Accepted Answer

PV = 11ea7fdb_fc2b_8fcf_a768_998abd24cd0d_TB2902_00 PV = 11ea7fdb_fc2b_8fd0_a768_c5f468170396_TB2902_00 = $3,855.43
Using a financial calculator:
N = 10, I/Y = 10, PMT = 0, FV = -10,000, cpt PV = $3,855.43

Question 19

How much does Ralph need to invest today to have $150,000 in five years if he will earn 8% interest compounded quarterly on his investment? (Round to the nearest whole dollar)

Accepted Answer

PV = 11ea7fdb_fc2b_b6e3_a768_4d0457abc293_TB2902_00 PV = 11ea7fdb_fc2b_ddf4_a768_51b6494dab40_TB2902_00 = $100,945.70
Using a financial calculator:
N = 20, I/Y = 2, PMT = 0, FV = -150,000, cpt PV = $100,945.70

Question 20

You wish to deposit $7,000 in an account at the Shylock Bank.The bank pays interest at a nominal annual rate of 10% compounded quarterly.What is the future value in the account after seven years?

Accepted Answer

FV = PV × 11ea7fdb_fc2a_0909_a768_7b62f4df8179_TB2902_00 FV = 7,000 × (1.025 11ea7fdb_fc2a_090a_a768_616f72f45487_TB2902_00 = $13,975.47
Using a financial calculator:
N = 28, I/Y = 2.5, PV = -7,000, PMT = 0, cpt FV = $13,975.47

Quiz 3: Time Value of Money - Introduction