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Appendix B The Time Value of Money: Future Amounts and Present
Values Answer Key
True / False Questions
1.
Future value is the amount that must be invested today at a specific interest rate to receive
a particular amount at some future date.
2.
The present value of an ordinary annuity is the amount that equal payments made at the
end of successive equal periods is worth today.
3.
The future value of an investment gradually increases toward the present amount.
4.
Compounding interest assumes the interest on an investment is reinvested.
5.
Discounting a future amount of a cash receipt will determine the present value of that
receipt.
6.
The lower the discount rate of an investment, the lower the present value of the
investment.
7.
Annuities may provide equal amounts to an investor at fixed periods of time over the life of
an investment.
8.
The market price of a bond is equal to its present value.
9.
An annuity due assumes the cash flow will occur at the beginning of the period.
10.
The rate of interest is usually expressed as an annual rate.
11.
An interest rate of 12% a year is the same as 6% for 2 months.
12.
The obligation for deferred income taxes is the only long-term liability that is not reported
at its present value.
13.
As the discount rate required by an investor increases, the present value of an investment
decreases.
14.
The present value of a single amount can only be calculated through the application of
complex calculations.
15.
The future amount of an annuity is calculated by multiplying the present value of the
annuity by its applicable factor from a table.
16.
The future amount of an annuity is calculated by multiplying the periodic payment amount
by the discounted factor from the future value of an annuity table.
17.
The present value of a single amount is calculated by multiplying the future amount by the
present value of $1 table.
18.
The present value of an annuity is calculated by multiplying the periodic cash flows by the
discounted factor from the future value of an annuity table.
Multiple Choice Questions
19.
If you invested $10,000 at 6% on your 20th birthday how much would you have on your 40th
birthday?
20.
If I invest $20,000 at 2.5% today, how long will it take to reach a minimum of $50,000
compounded semi-annually?
21.
If I invest $50,000 today for 5 years and it grows to $84,253, what rate of interest have I
received?
22.
How much must I invest today in order to have $25,000 in 5 years assuming 12% interest
compounded annually?
23.
Your wealthy aunt wishes to give you a trip to Paris when you graduate from college in
three years. She estimates the trip will cost $4,000. How much must she invest now at 4%
to accumulate enough for you to take this trip?
24.
A scholarship fund has $75,000 to invest now to provide scholarships to high school
students. They want to have at least $150,000 in 8 years. What rate of interest must they
invest this money at to reach their goal?
25.
If I invest $100 at the end of each year for four years at 6% how much will I have at the end
of the fourth year?
26.
The difference between the present value and the future value of a sum of money depends
upon:
27.
The future value of an annuity is:
28.
The present value of an investment is:
