9) Why should you approach every problem by drawing a timeline?
A) A timeline allows you to quickly sum cash lows over time.
B) A timeline eliminates the majority of lawed inancial decisions.
C) A timeline can be used to schedule events which are yet to occur.
D) A timeline identiies events in a transaction or investment which might otherwise be
easily overlooked.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) Which of the following statements is INCORRECT based on the time value of money?
A) In general, money today is worth more than money in one year.
B) We deine the risk-free interest rate (rf) for a given period as the interest rate at which
money can be borrowed or lent without risk over that period.
C) We refer to (1 – rf) as the interest rate factor for risk-free cash lows.
D) For most inancial decisions, costs and beneits occur at diferent points in time.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
11) If the rate of interest (r) is 9%, then you should be indiferent about receiving $750 in
one year or ________.
A) $688.07 today
B) $750 today
C) $825.68 today
D) None of the above
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
31
12) If the rate of interest (r) is 8%, then you should be indiferent about receiving $500.00
today or ________.
A) $462.96 in one year
B) $500.00 in one year
C) $540.00 in one year
D) None of the above
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13) Why is it usually necessary to use the time value of money when performing a cost-
beneit analysis?
A) For an investment project to be considered, costs must have a higher dollar value than
beneits.
B) In most investment projects, costs are incurred up front, but beneits are received in the
future.
C) For practical purposes, a dollar today may be considered to be equal to a dollar at some
future time.
D) Although costs and beneits generally occur concurrently, the beneits will accrue value
over time, due to interest.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) An investor has the opportunity to buy a $10,000 government bond which is
guaranteed to yield 6.5% interest in one year’s time. The investor decides to make the
investment as there is a net diference between the absolute cost and beneit. Which of the
following is NOT a reason that the investor’s decision may be lawed?
A) It does not consider the current market interest rate.
B) It does not consider the fact that though costs are incurred today, the beneits occur in
one year’s time.
C) It does not consider the value of the $10,000 in one year’s time if invested elsewhere.
D) It does not consider whether the $10,000 will be needed elsewhere.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
32
15) How can we convert the value of money from one point in time to another?
A) using the current exchange rate
B) using a cost-beneit analysis
C) using the valuation principle
D) using the current interest rate
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16) Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank
loans money at an interest rate of 8.2%, how much money can he borrow from the bank on
the basis of this information?
A) $2460
B) $13,863
C) $27,726
D) $32,460
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
17) Stella deposits $4500 in a savings account at a bank that ofers interest of 4.7% on
such accounts. What is the value of the money in her savings account in one year’s time?
A) $4298
B) $212
C) $4712
D) $6597
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
33
18) An investment will pay $289,940 at the end of next year for an investment of $190,000
at the start of the year. If the market interest rate is 9% over the same period, should this
investment be made?
A) No, because the investment will yield $82,840 less than putting the money in a bank.
B) Yes, because the investment will yield $66,272 more than putting the money in a bank.
C) Yes, because the investment will yield $74,556 more than putting the money in a bank.
D) Yes, because the investment will yield $82,840 more than putting the money in a bank.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
19) If $432 invested today yields $450 in a year’s time, what is the discount factor?
A) 0.10
B) 0.96
C) 1.96
D) 1.92
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
20) A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and
released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it
will be worth 15% more, though there will be additional costs of $528,000 incurred at the
end of the year. If the interest rate is 7%, what is the diference in the beneit the vintner
will realize if he releases the wine after barrel aging it for one year or if he releases the
wine now?
A) He will earn $1,980,000 less if he releases the wine now.
B) He will earn $328,972 more if he releases the wine now.
C) He will earn $328,972 less if he releases the wine now.
D) He will earn $356,400 more if he releases the wine now.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
21) Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars
per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the
next year. If the interest rate is 12%, should she sell the platinum today?
A) Yes, as the diference between the present value of selling now and selling in one year is
$12,300 dollars today.
B) Yes, as the diference between the present value of selling now and selling in one year is
34
$10,982 dollars today.
C) Yes, as the diference between the present value of selling now and selling in one year is
$9840 dollars today.
D) No, as the diference between the present value of selling now and selling in one year is
-$8786 dollars today.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
22) You are scheduled to receive $10,000 in one year. What will be the efect of an increase
in the interest rate on the present value of this cash low?
A) It will cause the present value to fall.
B) It will cause the present value to rise.
C) It will have no efect on the present value.
D) The efect cannot be determined with the information provided.
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
23) You are scheduled to receive $10,000 in one year. What will be the efect of an increase
in the interest rate on the future value of this cash low?
A) It will cause the future value to fall.
B) It will cause the future value to rise.
C) It will have no efect on the future value.
D) The efect cannot be determined with the information provided.
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
35
24) If the interest rate is 9%, the one-year discount factor is equal to ________.
A) 0.090
B) 1.090
C) 0.917
D) 0.981
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
25) If the one-year discount factor is equal to 0.94340, the interest must be equal to
________,
A) 3.0%
B) 4.8%
C) 5.5%
D) 6.0%
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
26) Explain why a dollar today is worth more than a dollar tomorrow.
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
36
27) How can we make a inancial decision with cash lows occurring at diferent points in
time?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
28) Is there a need to distinguish between cash inlows and outlows on a timeline?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
3.4 Valuing Cash Flows at Diferent Points in Time
1) A dollar today and a dollar in one year may be considered to be equivalent.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) The rule of 72 tells you approximately how long it takes for money invested at a given
rate of compound interest to double in value.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) To calculate a cash low’s present value (PV), you must compound it.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
37
4) What is the present value (PV) of $100,000 received six years from now, assuming the
interest rate is 8% per year?
A) $60,000.00
B) $63,016.96
C) $78,771.20
D) $110,279.68
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) What is the present value (PV) of $90,000 received six years from now, assuming the
interest rate is 5% per year?
A) $58,500.00
B) $57,085.48
C) $67,159.39
D) $117,528.93
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) What is the present value (PV) of $50,000 received twenty years from now, assuming the
interest rate is 6% per year?
A) $32,500.00
B) $13,251.70
C) $15,590.24
D) $27,282.92
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
38