Question 1

To calculate the future value of an investment,you need ________ inputs.
A)2
B)3
C)4
D)5

Accepted Answer

To calculate the future value of an investment, you need three inputs: the present value (PV), the interest rate (r), and the number of periods (n). You may also need to know the payment (PMT) if the investment involves regular payments, but this is not always necessary. Therefore, option B is the best choice.

Question 2

On January 1,2019,bonds with a face value of $94,000 were sold.The bonds mature on January 1,2029.The face interest rate is 8% annually.The bonds pay interest semiannually on July 1 and January 1.The market rate of interest is 10% annually.What is the market price of the bonds on January 1,2019? The present value of $1 for 20 periods at 5% is 0.377.The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462.The present value of $1 for 10 periods at 10% is 0.463.The present value of an ordinary annuity of $1 for 10 periods at 10% is 6.145.(Round your final answer to the nearest dollar. )
A)$82,295
B)$66,627
C)$94,000
D)$97,760

Accepted Answer

($94,000 × 0.377)+ ($94,000 × 4% × 12.462)= $82,295

Question 3

Tanko Financing leases phones to various companies for business use.Tanko has just signed a 2-year lease agreement that requires annual year-end lease payments of $340,000.The present value of $1 for 2 periods at 5% is 0.907.The present value of an ordinary annuity of $1 for 2 periods at 5% is 1.859.What is the present value of the lease when the lease commences using a 5% interest rate?
A)$680,000
B)$340,000
C)$632,060
D)$308,380

Accepted Answer

$340,000 × 1.859 = $632,060

Question 4

On January 1,2018,bonds with a face value of $72,000 were sold.The bonds mature on January 1,2028.The face interest rate is 6%.The bonds pay interest semiannually on July 1 and January 1.The market rate of interest is 10%.What is the market price of the bonds on January 1,2018? The present value of $1 for 20 periods at 5% is 0.377.The present value of an ordinary annuity of $1 for 20 periods at 5% is 12.462.The present value of $1 for 20 periods at 3% is 0.554.The present value of an ordinary annuity of $1 for 20 periods at 3% is 14.878.(Round your final answer to the nearest dollar. )
A)$54,062
B)$74,160
C)$72,024
D)$72,000

Accepted Answer

($72,000 × 0.377)+ ($72,000 × 3% × 12.462)= $54,062

Question 5

You have won $4,400,000 in a lottery.Your winnings will be paid to you in equal annual year-end installments of $440,000 over 10 years.You estimate that you can earn 6% on your investments.The present value of $1 for 10 periods at 6% is 0.558.The present value of an ordinary annuity of $1 for 10 periods at 6% is 7.36.The present value of your $4,400,000 winnings would be closest to:
A)$4,400,000.
B)$3,238,400.
C)$2,978,800.
D)$3,850,000.

Accepted Answer

$440,000 × 7.36 = $3,238,400

Question 6

The future value of an investment that pays interest will always be:
A)equal to the investment.
B)greater than the investment.
C)less than the investment.
D)equal to the interest rate.

Accepted Answer

The future value of an investment that pays interest will always be greater than the investment because interest is earned on the initial investment as well as any interest that has accrued over time. Therefore, the investment will grow in value over time.

Question 7

What is the future value of a single $4,800 investment today that pays interest of 6% compounded annually for the next 3 years? (Round all intermediary calculations and final calculations to the nearest whole dollar. )
A)$5,717
B)$5,088
C)$5,393
D)$4,800

Accepted Answer

$4,800 × (1 + 0.06)= $5,088
$5,088 × (1 + 0.06)= $5,393
$5,393 × (1 + 0.06)= $5,717

Question 8

Smith Financing leases cars to car rental companies.Smith has just signed a 5-year lease agreement that requires annual year-end lease payments of $470,000.The present value of $1 for 5 periods at 6% is 0.747.The present value of an ordinary annuity of $1 for 5 periods at 6% is 4.212.What is the present value of the lease when the lease commences using a 6% interest rate?
A)$1,979,640
B)$2,350,000
C)$$2,173,750
D)$1,588,600

Accepted Answer

$470,000 × 4.212 = $1,979,640

Question 9

You are calculating the present value of $10,000 that you will receive five years from now. Which table will you use to calculate the present value of that $10,000?
A)Present Value of $1 table
B)Future Value of $1 table
C)Present Value of Ordinary Annuity of $1 table
D)Future Value of Ordinary Annuity of $1 table

Accepted Answer

To calculate the present value of a future cash flow, the Present Value of $1 table is used. This table helps to determine the value of an amount in today's dollars based on the future value of that amount and the time frame in which the payment is due.

Question 10

A single amount of $10,500 is to be received in 3 years.If the single amount is discounted at 8% for 3 periods,the present value is ________.The present value of $1 for 3 periods at 8% is 0.794.The present value of an ordinary annuity of $1 for 3 periods at 8% is 2.577.(Round your final answer to the nearest dollar. )
A)$8,316
B)$10,500
C)$8,337
D)$27,059

Accepted Answer

$10,500 × 0.794 = $8,337

Question 11

You have won $1,250,000 in a lottery.Your winnings will be paid to you in equal annual year-end installments of $250,000 over 5 years.You estimate that you can earn 4% on your investments.The present value of $1 for 5 periods at 4% is 0.822.The present value of an ordinary annuity of $1 for 5 periods at 4% is 4.452.The present value of your $1,250,000 winnings would be closest to:
A)$1,113,000.
B)$205,500.
C)$1,027,500.
D)$1,250,000.

Accepted Answer

$260,000 × 4.329 = $1,125,540

Question 12

In present value calculations,the process of determining the present value of a single sum of money is called:
A)allocating.
B)pricing.
C)negotiating.
D)discounting.

Accepted Answer

The process of determining the present value of a single sum of money is called discounting. This involves applying a discount rate to reduce the future value of the sum to its present value. The other options are not directly relevant to present value calculations.

Question 13

Which of the following discount rates will produce the smallest present value of a single sum of money?
A)4%
B)6%
C)7%
D)9%

Accepted Answer

The higher the discount rate, the lower the present value of a single sum of money. Therefore, of the given choices, 9% will produce the smallest present value.

Question 14

You are calculating the present value of $15,000 that you will receive at the end of every year for the next ten years.Which table will you use to obtain the present value of those $15,000 payments you will be receiving?
A)Present Value of $1 table
B)Future Value of $1 table
C)Present Value of Ordinary Annuity of $1 table
D)Future Value of Ordinary Annuity of $1 table

Accepted Answer

In this scenario, we are looking for the present value of a series of payments (an annuity) rather than a single lump sum. Thus, we would use the Present Value of Ordinary Annuity of $1 table to calculate the present value of the $15,000 payments.

Question 15

A single amount of $6,400 is to be received in 4 years.If the single amount is discounted at 8% for 4 periods,the present value is ________.The present value of $1 for 4 periods at 8% is 0.735.The present value of an ordinary annuity of $1 for 4 periods at 8% is 3.312.(Round your final answer to the nearest dollar. )
A)$4,704
B)$5,376
C)$6,400
D)$21,197

Accepted Answer

$6,400 × 0.735 = $4,704

Question 16

You have received a settlement offer from an automobile manufacturer due to mechanical problems with your automobile.The manufacturer will pay you $49,000 in one lump sum five years from now.You can earn 6% on your investments.The present value of $1 for 5 periods at 6% is 0.747.The present value of an ordinary annuity of $1 for 5 periods at 6% is 4.212.The present value of the manufacturer's settlement offer is closest to:
A)$36,015.
B)$49,000.
C)$36,603.
D)$206,388.

Accepted Answer

$49,000 × 0.747 = $36,603

Question 17

Cooper Company has purchased equipment that requires annual payments of $18,000 to be paid at the end of each of the next 6 years.The discount rate is 8%.The present value of $1 for six periods at 8% is 0.630.The present value of an ordinary annuity of $1 for six periods at 8% is 4.623.What amount will be assigned to the equipment at the purchase date? (Round your final answer to the nearest dollar. )
A)$3,894
B)$83,214
C)$94,554
D)$11,340

Accepted Answer

$18,000 × 4.623 = $83,214

Question 18

You have received a settlement offer from a restaurant for your medical expenses due to food poisoning.The restaurant will pay you $110,000 in one lump sum two years from now.You can earn 10% on your investments.The present value of $1 for 2 periods at 10% is 0.826.The present value of an ordinary annuity of $1 for 2 periods at 10% is 1.736.The present value of the settlement offer is closest to:
A)$220,000.
B)$110,000.
C)$190,960.
D)$90,860.

Accepted Answer

$110,000 × 0.826 = $90,860

Question 19

A single amount of $4700 is to be received in 3 years.If the single amount is discounted at 6% for 3 periods,the present value is ________.The present value of $1 for 3 periods at 6% is 0.840.The present value of an ordinary annuity of $1 for 3 periods at 6% is 2.673.(Round your final answer to the nearest dollar. )
A)$3948
B)$4418
C)$4700
D)$12,563

Accepted Answer

$4700 × 0.840 = $3948

Question 20

Which of the following statements regarding the concept of present value is INCORRECT?
A)Compound interest is not only interest earned on the principal amount but also the interest received on the interest already earned.
B)Ordinary annuity investments provide multiple receipts of an equal amount at fixed year-end intervals over the investment's duration.
C)When using the Present Value of Ordinary Annuity of $1 table,multiply the factor times the amount that will be received at the end of each year times the number of years the amount will be received.
D)The present value of a bond is the present value of the principal amount at maturity plus the present value of the stated interest payments.

Accepted Answer

When using the Present Value of Ordinary Annuity of $1 table, the factor should be multiplied by the amount that will be received at the end of each year, not the total amount received over the investment's duration.

Quiz 14: Time Value of Money

To calculate the future value of an investment,you need ________ inputs.

The future value of an investment that pays interest will always be:

What is the future value of a single $4,800 investment today that pays interest of 6% compounded annually for the next 3 years? (Round all intermediary calculations and final calculations to the nearest whole dollar. )

You are calculating the present value of $10,000 that you will receive five years from now. Which table will you use to calculate the present value of that $10,000?

In present value calculations,the process of determining the present value of a single sum of money is called:

Which of the following discount rates will produce the smallest present value of a single sum of money?

You are calculating the present value of $15,000 that you will receive at the end of every year for the next ten years.Which table will you use to obtain the present value of those $15,000 payments you will be receiving?

Which of the following statements regarding the concept of present value is INCORRECT?