Name:
Class:
Date:
Chapter 05: The Time Value of Money
a.
$909,090
b.
$930,510
c.
$783,879
d.
$510,285
64. Five years after an accident, you received $100,000 to pay the medical expenses incurred at the time of the accident.
What is the present value (at the time of the accident) of the payment? Assume interest rates are 9%.
a.
$153,900
b.
$68,100
c.
$65,000
d.
$70,800
c
65. You purchased a piece of property for $30,000 nine years ago and sold it today for $83,190. What was the rate of
return on your investment?
a.
12%
b.
11%
c.
10%
d.
9%
a
66. What is the most you should pay to receive the following cash flows if your required rate of return is 12 percent?
Year 1
$5,000
Year 2
$8,000
Year 3
$12,000
Years 4-10
$15,000
a.
$58,580
b.
$104,135
c.
$68,105
d.
$40,000
c
67. Seebee makes quarterly (end–of-period) payments of $30,000 into a pension fund earning 12 percent per year
compounded quarterly for 10 years. How much interest will it have earned in 10 years?
a.
$2,262,030
b.
$2,105,880
c.
$905,880
d.
$1,062,030
68. John borrowed $20,000 to finance his college education. If the finance charge on the loan is 6 percent, and he will pay
off the loan in 10 equal, annual, end-of-year payments, how much total interest will he pay?
a.
$7,173.90
Name:
Class:
Date:
Chapter 05: The Time Value of Money
b.
$2,717.39
c.
$12,000.00
d.
$25,924.23
a
69. Your brother, who is 6 years old, just received a trust fund that will be worth $25,000 when he is 21 years old. If the
fund earns 10 percent interest compounded annually, what is the value of the fund today?
a.
$104,602
b.
$6,575
c.
$5,975
d.
$6,875
c
70. When using a financial calculator, PV stands for the ____.
a.
interest rate per period
b.
number of periods
c.
present value amount
d.
future value amount
c
71. Jackie plans to open her own bookstore in 10 years. To raise the “seed” money, she has committed the $10,000 she
now has in a mutual fund. In addition, she plans to save $2,000 per year (end of year) for the next 5 years and $3,000 per
year (end of year) for the following 5 years. How much “seed” money will Jackie have in 10 years if the investments earn
10 percent per year compounded annually?
a.
$76,129
b.
$63,925
c.
$44,255
d.
$159,370
72. You just purchased a new $25,000 car and agreed to pay for the car in 50 monthly payments. If the monthly interest
rate is 1 percent, what is your total financing cost?
a.
$637.82
b.
$12,500
c.
$574.25
d.
$6,891
73. When using a financial calculator, FV stands for the ____.
a.
interest rate per period
b.
number of periods
c.
present value amount
d.
future value amount
Name:
Class:
Date:
Chapter 05: The Time Value of Money
74. Roy, who has just turned 40, would like to have an annual annuity of $20,000 paid over a 20-year period, the first
payment occurring on his 66th birthday. How much must Roy save each year (end of year) for the next 25 years to have
this annuity, if the investment will earn 12 percent compounded annually?
a.
$16,000
b.
$19,046
c.
$1,120
d.
$944.10
c
75. Your local bank offers 4-year certificates of deposit (CD) at a 12 percent annual nominal interest rate compounded
quarterly. Determine how much additional interest you will earn over 4 years on a $10,000 CD that is compounded
quarterly compared with one that is compounded annually.
a.
$6,050
b.
$0
c.
$310
d.
$220
c
76. How much will you have at the end of 5 years in a European vacation account if you deposit $200 a month in an
account that is paying a nominal 12 percent per year, compounded monthly?
a.
$16,334
b.
$15,247
c.
$16,497
d.
$15,817
a
77. You wish to save $500,000 in the next 25 years. You put your savings into a corporate bond fund that earns about 11
percent per year. How much must you save each year to obtain your goal?
a.
$20,000.00
b.
$3,749.98
c.
$4,370.13
d.
$2,000.00
c
78. When using a financial calculator, i stands for the ____.
a.
interest rate per period
b.
number of periods
c.
present value amount
d.
future value amount
a
79. Calculate the present value of the following net cash flows if the discount rate is 12%.
Year
Cash Flow
1-5
$10,000 each year
Name:
Class:
Date:
Chapter 05: The Time Value of Money
6-10
$15,000 each year
11–15
$17,000 each year
a.
$151,400
b.
$86,462
c.
$144,037
d.
$79,252
b
80. If the discount rate is 12%, what is the present value of the following cash flows?
Year
Cash Flow
1
$10,000
2
$11,000
3
$12,000
4
$13,000
5
$14,000
6-15
$15,000 each year
a.
$144,618
b.
$127,923
c.
$127,197
d.
$90,537
d
81. You wish to have $10,000 per year as a retirement supplement for 20 years (from age 65-85). You are now 40 years
old. How much must you save each year for the next 25 years if you assume your savings will earn 12% annually?
a.
$560.17
b.
$1,499.99
c.
$5,403.87
d.
None of these are correct
a
82. What is the present value of the following net cash flows if the discount rate is 10%?
Year
Net Cash Flow
1-10
$20,000 each year
11–15
$15,000 each year
16–20
$10,000 each year
a.
$217,675
b.
$153,895
c.
$322,130
d.
$167,515
b
83. The Summer Breeze Hotel borrowed $100,000 from the Meadowlands Bank to pay for a new air conditioning system.
The loan is for a period of 5 years at an interest rate of 10% and requires 5 equal end-of-year payments that include both
principal and interest on the outstanding balance. What will be the outstanding balance after the third payment?
Name:
Class:
Date:
Chapter 05: The Time Value of Money
a.
$60,000
b.
$20,865
c.
$45,788
d.
$50,866
c
84. Keith Stone has a 10-year-old daughter, Kate, who will be entering college in 8 years. Keith estimates college costs to
be $16,000, $17,000, $18,000, and $19,000 payable at the beginning of each of Kate’s four years in college. How much
must Keith save each year (assume end-of-year payments) for each of the next 8 years to have enough savings to pay for
Kate’s education? Assume Keith can earn 9% on his savings.
a.
$5,569
b.
$7,720
c.
$5,108
d.
$7,677
a
85. 1st Bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest
rate is the bank charging you?
a.
10.38%
b.
10.42%
c.
10.45%
d.
10.47%
86. Your monthly statement from your bank credit card shows that the monthly rate of interest is 1.5%. What is the annual
effective rate of interest you are being charged on your credit card?
a.
18.00%
b.
18.64%
c.
19.56%
d.
29.74%
c
87. What monthly rate of interest will yield an annual effective rate of interest of 14%?
a.
1.17%
b.
1.10%
c.
1.08%
d.
1.14%
88. What is the present value of $1,000 received 2 years from today if the nominal interest rate is 9% and compounded
monthly?
a.
$842
b.
$914
c.
$833
Name:
Class:
Date:
Chapter 05: The Time Value of Money
d.
$836
89. Cosmos Touring wishes to replace its luxury bus in 10 years by accumulating funds in a special account. The new bus
is expected to cost $180,000. How much must Cosmos put into the fund in equal, end-of-year amounts if earnings are
expected to be 8% for the first 4 years and 10% thereafter?
a.
$12,107
b.
$11,465
c.
$9,901
d.
$14,727
90. Al Corbin is 25 years old today and wishes to accumulate enough money over the next 35 years to provide for a 20–
year retirement annuity of $100,000 at the beginning of each year, starting with his 60th birthday. He can save $2,000 at
the end of each of the next 10 years and $3,000 each year for the following 10 years. How much must he save each year at
the end of years 21 through 35 to obtain his goal? Assume that the average rate of return over the entire period will be
10%.
a.
$9,642
b.
$26,969
c.
$12,321
d.
$24,289
c
91. If a 16-year-old high school student put $2,000 at the end of each year for 4 years into an IRA that earned a rate of
9%, how much would she have accumulated by age 65? Assume funds are left to accumulate for 45 years (age 20–65) at
9%.
a.
$442,014
b.
$386,616
c.
$1,767,995
d.
$9,146
a
92. If your parents put $2,000 a year into an IRA account for you in each of your last 4 teenage years (ages 16, 17, 18, and
19), how much would the IRA account have in it at your retirement 45 years later if the account earned 12% each year?
(Assume end-of-year payments.)
a.
$1,569,758
b.
$ 68,613
c.
$3,457,169
d.
$1,148,958
a
93. What is the value in 10 years of $10,000 deposited in an account earning 8% compounded monthly?
a.
$33,004
b.
$22,285
c.
$102,530
Name:
Class:
Date:
Chapter 05: The Time Value of Money
d.
$21,589
b
94. Assume you purchased a home and borrowed $100,000 at a rate of 8% compounded monthly over 30 years. What is
your monthly payment?
a.
$917.77
b.
$733.76
c.
$666.67
d.
$878.14
b
95. Inco purchased a computer for $200,000, and this machine is expected to generate annual cash flows of $48,271 over
the next 5 years. What is the expected rate of return on this investment?
a.
8.84%
b.
26.58%
c.
6.61%
d.
None of these are correct
c
96. When you purchased a car, you borrowed $20,000 from the bank and agreed to make monthly payments of $423.17
for 5 years. What rate of interest is the bank charging you?
a.
9.82%
b.
5.00%
c.
25.39%
d.
10.00%
a
97. When you purchased a car, you borrowed $20,000 from the bank at 9.20% and agreed to make monthly payments for
3 years. What is your monthly payment?
a.
$153.33
b.
$637.86
c.
$584.12
d.
$559.78
b
98. What is the present value of the following mixed cash flow stream if interest is 6% (rounded)?
YEAR
CASH FLOW
1
$5,000
2
$8,000
3
$9,500
a.
$25,370
b.
$19,813
c.
$21,225
d.
$18,750
Name:
Class:
Date:
Chapter 05: The Time Value of Money
99. Which of the following statements is (are) correct?
I. At 6% interest, the present value of $400 for the first year, $600 for the second year, and $800 for the third year is
$1,603.
II. The future value of the following mixed cash flow stream (if it is from an annuity due at 6% interest) $400 for the first
year, $600 for the second year, and $800 for the third year is $1,999 (rounded).
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements I and II are correct.
d.
Neither statement I nor II is correct.
100. Based on the Rule of 72, what interest rate do you need to earn to double your money in 6 years?
a.
8%
b.
12%
c.
7%
d.
6%
101. Approximately how long would it take to double my money if I invest it now at 18%?
a.
6 years
b.
4 years
c.
12 years
d.
Cannot be determined
102. Jenny Genius wants to purchase a new car. She knows that she can afford to pay $250 per month and that her bank
will charge her 8% interest on the car loan. She intends to pay off the car in five years. Interest will be compounded
monthly. Of the following, which is the most expensive vehicle in her price range that she could consider?
a.
A Taurus selling for $11,900
b.
A Malibu selling for $12,320
c.
A Civic selling for $14,670
d.
A Celica selling for $17,500
103. Bill Swill decides to try his luck at Powerball where the projected winnings are $12,000,000. If he wins, he can
choose the annuity option (to be paid over 20 years) or a lump sum settlement that he can invest at 8% interest. How much
must the lump sum option be to make the lump sum option equal to the annuity option (rounded)?
a.
$2,574,578
b.
$1,743,620
c.
$1,130,668
d.
$1,200,000
a
Name:
Class:
Date:
Chapter 05: The Time Value of Money
104. Nukin’ Gnats Pest Control wants to offer a contract to its customers that would protect the property of their existing
customers against termite infestation. Should termites invade a customer’s home, Nukin’ Gnats will pay for the repairs to
the home provided the customer has maintained service with Nukin’ Gnats. The corporation must develop an account with
a value of $500,000. They will accumulate this account over three years, after which they will offer this new contract
provision. How much must be deposited annually (rounded amount) to accumulate the needed funds if they can get 5%
interest at their local bank?
a.
$275,026
b.
$158,604
c.
$80,255
d.
$97,985
105. Sherry Smart is buying a $350,000 home and will pay the mortgage monthly for 30 years. She has a good credit
score and has qualified for a 5.125% loan interest. How much will she be paying monthly for the home?
a.
$2,013.67
b.
$1,572.72
c.
$1,318.69
d.
$975.88
c
Essay
106. What is (are) the difference(s) between simple interest and compound interest?
107. What is the difference between the nominal interest rate and the effective interest rate?
108. Why does an annuity due have a greater future value than a regular annuity, all things being equal?
109. Explain the concept of interest and compare it to rate of interest.
110. Identify the five basic keys of a financial calculator and note the guidelines for effective financial calculator usage.
Name:
Class:
Date:
Chapter 05: The Time Value of Money
111. Explain a perpetuity, and list some investment vehicles that can be perpetuities.
112. Explain the sinking fund problem.
113. What is the net present value rule?