Question 1

Claudine Corporation will deposit $5,000 into a money market account at the end of each year for the next five years. How much will accumulate by the end of the fifth and final payment if the account earns 9% interest?

Accepted Answer

FVA = $5,000 F1F1F1S1F1F1F10 5.9847 (Table 3; n = 5; i = 9%) = $29,924.

Question 2

Tammy wants to buy a car that costs $10,000 and wishes to know the amount of the monthly payments, which will be made at the end of the month, with interest of 12% on the unpaid balance. She should use a table for the:

Accepted Answer

Tammy wants to know the amount of the monthly payments, which suggests that she will be paying in installments, making it an annuity. Also, she wants to know the amount of payments that need to be made to pay off the entire car loan, making it a present value calculation. Hence, she should use the table for the Present value of an annuity of $1.

Question 3

At the end of each quarter, Patti deposits $500 into an account that pays 12% interest compounded quarterly. How much will Patti have in the account in three years?

Accepted Answer

FVA = $500 F1F1F1S1F1F1F10 14.1920 (Table 3; n = 12; i = 3%) = $7,096.

Question 4

The value today of receiving a series of payments in the future is referred to as the:

Accepted Answer

The value today of receiving a series of payments in the future is referred to as the present value of an annuity. This is because an annuity is a series of equal payments made at equal intervals of time, and the present value represents the value of these payments today.

Question 5

A series of equal periodic payments is referred to as:

Accepted Answer

An annuity refers to equal periodic payments made over a set period of time. The other options are related concepts but do not specifically refer to a series of equal payments.

Question 6

Below are excerpts from interest tables for 8% interest. $\begin{array}{ccccc} 
& \underline{1} & \underline{2} & \underline{3} & \underline{4} \
1 & 1.0000 & 0.92593 & 1.08000 & 0.92593 \
2 & 2.0800 & 0.85734 & 1.16640 & 1.78326 \
3 & 3.2464 & 0.793833 & 1.25971 & 2.57710 \
4 & 4.5061 & 0.73503 & 1.36049 & 3.31213
\end{array}$ Column 1 is an interest table for the:

Accepted Answer

Column 1 shows the future value of an annuity of $1, as it represents the accumulated value of a series of $1 payments at 8% interest over multiple periods.

Question 7

The time value of money is a concept which means that the value of $1 increases over time.

Accepted Answer

Time value of money means that interest causes the value of money received today to be greater than the value of that same amount of money received in the future.

Question 8

The value of $1 today is worth more than $1 one year from now.

Accepted Answer

This is due to the concept of time value of money, where money has a greater value in the present compared to the future due to earning potential through interest or investments, as well as inflation which reduces the purchasing power of money over time.

Question 9

George Jones is planning on a cruise for his 70^th birthday party. He wants to know how much he should set aside at the end of each month at 6% interest to accumulate the sum of $4,800 in five years. He should use a table for the:

Accepted Answer

George needs to determine how much to save monthly to reach a future sum, which requires using the future value of an annuity table.

Question 10

Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting at the end of the first year. The value of this signing bonus is:

Accepted Answer

The value of the signing bonus is an annuity, which means a constant stream of payments made at equal intervals. Since the CEO will receive $2 million per year for 10 years, we can calculate the present value of this annuity using a present value formula. Therefore, the correct choice is A, the present value of the annuity.

Question 11

What is the value today of receiving $5,000 at the end of each year for the next 10 years, assuming an interest rate of 12% compounded annually?

Accepted Answer

PVA = $5,000 F1F1F1S1F1F1F10 5.65022 (Table 4; n = 10; i = 12%) = $28,251.

Question 12

Quaker State Inc. offers a new employee a lump-sum signing bonus at the date of employment. Alternatively, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump-sum at employment date would make him indifferent between the two options?

Accepted Answer

The lump-sum equivalent would be $8,000 + the present value of a $20,000 annuity where n=3, and i=10%. That is, $8,000 + ($20,000 F1F1F1S1F1F1F10 2.48685 from Table 4) = $57,737.

Question 13

How much will $5,000 invested at the end of each year grow to in six years, assuming an interest rate of 7% compounded annually?

Accepted Answer

FVA = $5,000 F1F1F1S1F1F1F10 7.1533 (Table 3; n = 6; i = 7%) = $35,766.

Question 14

Below are excerpts from interest tables for 8% interest. $$\begin{array} { c c c c c } 
& \underline { 1 } & \underline { 2 } & \underline { 3 } & \underline { 4 } \
1 & 1.0000 & 0.92593 & 1.08000 & 0.92593 \
2 & 2.0800 & 0.85734 & 1.16640 & 1.78326 \
3 & 3.2464 & 0.793833 & 1.25971 & 2.57710 \
4 & 4.5061 & 0.73503 & 1.36049 & 3.31213
\end{array}$$ Column 4 is an interest table for the:

Accepted Answer

The answer of Below are excerpts from interest tables for...

Question 15

What is the value today of receiving $3,000 at the end of each year for the next three years, assuming an interest rate of 3% compounded annually?

Accepted Answer

PVA = $3,000 F1F1F1S1F1F1F10 2.82861 (Table 4; n = 3; i = 3%) = $8,486.

Question 16

What is the value today of receiving five annual payments of $500,000, beginning one year from now, assuming an 11% discount rate?

Accepted Answer

PVA = $500,000 F1F1F1S1F1F1F10 3.69590 (Table 4; n = 5; i = 11%) = $1,847,950.

Question 17

Miller borrows $300,000 to be paid off in three years. The loan payments are semiannual with the first payment due in six months, and interest is at 6%. What is the amount of each payment?

Accepted Answer

$300,000/5.41719 (Table 4; n = 6; i = 3%) = $55,379.

Question 18

The value that a series of payments will grow to in the future is referred to as the:

Accepted Answer

The future value of an annuity is the value that a series of payments will grow to in the future, assuming a certain interest rate. This is different from the future value of a single amount, which is the value that a single lump sum will grow to in the future. The present value of a single amount is the current value of a future lump sum, and the present value of an annuity is the current value of a series of future cash flows. Therefore, the correct choice is C, as it pertains specifically to a series of payments.

Question 19

Sandra won $5,000,000 in the state lottery which she has elected to receive at the end of each month over the next thirty years. She will receive 7% interest on unpaid amounts. To determine the amount of her monthly check, she should use a table for the:

Accepted Answer

Since Sandra is receiving the lottery winnings in monthly installments over a period of thirty years, she is receiving an annuity. Therefore, she should use a table for the present value of an annuity of $1 to determine the amount of her monthly check. This will help her calculate the present value of the total amount of money she will receive over the thirty-year period, which takes into account the time value of money and the interest rate she will receive.

Question 20

How much will $1,000 invested at the end of each year grow to in 20 years, assuming an interest rate of 10% compounded annually?

Accepted Answer

FVA = $1,000 F1F1F1S1F1F1F10 57.2750 (Table 3; n = 20; i = 10%) = $57,275.

Quiz 13: Time Value of Money