Fundamentals of Corporate Finance, 12e (Ross)
Chapter 5 Introduction to Valuation: The Time Value of Money
1) Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded
annually. Barb also deposited $3,000 this morning at 5 percent interest, compounded annually.
Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her
interest earnings into her account. Given this, which one of the following statements is true?
A) Barb will earn more interest in Year 1 than Andy will.
B) Andy will earn more interest in Year 3 than Barb will.
C) Barb will earn more interest in Year 2 than Andy.
D) After five years, Andy and Barb will both have earned the same amount of interest.
E) Andy will earn compound interest.
2) Nan and Neal are twins. Nan invests $5,000 at 7 percent at age 25. Neal invests $5,000 at 7
percent at age 30. Both investments compound interest annually. Both twins retire at age 60 and
neither adds nor withdraws funds prior to retirement. Which statement is correct?
A) Nan will have less money when she retires than Neal.
B) Neal will earn more interest on interest than Nan.
C) Neal will earn more compound interest than Nan.
D) If both Nan and Neal wait to age 70 to retire they will have equal amounts of savings.
E) Nan will have more money than Neal at any age.
3) You are investing $100 today in a savings account. Which one of the following terms refers to
the total value of this investment one year from now?
A) Future value
B) Present value
C) Principal amount
D) Discounted value
E) Invested principal
4) Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her
interest earnings in her account, she increases the amount of interest she earns each year. The
way she is handling her interest income is referred to as:
A) simplifying.
B) compounding.
C) aggregating.
D) accumulating.
E) discounting.
5) Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on
his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108
investment. The extra $.64 he earned in interest the second year is referred to as:
A) free interest.
B) bonus income.
C) simple interest.
D) interest on interest.
E) present value interest.
6) The interest earned on both the initial principal and the interest reinvested from prior periods
is called:
A) free interest.
B) dual interest.
C) simple interest.
D) interest on interest.
E) compound interest.
7) Renee invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest
earnings immediately so she only receives interest on her initial $2,000 investment. Which type
of interest is she earning?
A) Free interest
B) Complex interest
C) Simple interest
D) Interest on interest
E) Compound interest
8) Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of
these winnings is called the:
A) single amount.
B) future value.
C) present value.
D) simple amount.
E) compounded value.
9) Terry is calculating the present value of a bonus he will receive next year. The process he is
using is called:
A) growth analysis.
B) discounting.
C) accumulating.
D) compounding.
E) reducing.
10) Steve just computed the present value of a $10,000 bonus he will receive next year. The
interest rate he used in his computation is referred to as the:
A) current yield.
B) effective rate.
C) compound rate.
D) simple rate.
E) discount rate.
11) The process of determining the present value of future cash flows in order to know their
value today is referred to as:
A) compound interest valuation.
B) interest on interest valuation.
C) discounted cash flow valuation.
D) future value interest factoring.
E) complex factoring.
12) Sam just opened a savings account paying 3.5 percent interest, compounded annually. After
four years, the savings account will be worth $5,000. Assume there are no additional deposits or
withdrawals. Given this, Sam:
A) will earn the same amount of interest each year for four years.
B) will earn simple interest on his savings every year for four years.
C) could have deposited less money today and still had $5,000 in four years if the account paid a
higher rate of interest.
D) has an account currently valued at $5,000.
E) could earn more interest on this account if the interest earnings were withdrawn annually.
13) This afternoon, you deposited $1,000 into a retirement savings account. The account will
compound interest at 6 percent annually. You will not withdraw any principal or interest until
you retire in 40 years. Which one of the following statements is correct?
A) The interest you earn in Year 6 will equal the interest you earn in Year 10.
B) The interest amount you earn will double in value every year.
C) The total amount of interest you will earn will equal $1,000 × .06 × 40.
D) The present value of this investment is equal to $1,000.
E) The future value of this amount is equal to $1,000 × (1 + 40).06.
14) Your grandmother has promised to give you $10,000 when you graduate from college. If you
speed up your graduation by one year and graduate two years from now rather than the expected
three years, the present value of this gift will:
A) remain constant.
B) increase.
C) decrease.
D) equal $10,000.
E) be less than $10,000.
15) Chang Lee is going to receive $20,000 six years from now. Soo Lee is going to receive
$20,000 nine years from now. Which one of the following statements is correct if both
individuals apply a discount rate of 7 percent?
A) The present values of Chang Lee’s and Soo Lee’s money are equal.
B) In future dollars, Soo Lee’s money is worth more than Chang Lee’s money.
C) In today’s dollars, Chang Lee’s money is worth more than Soo Lee’s.
D) Twenty years from now, the value of Chang Lee’s money will equal the value of Soo Lee’s
money.
E) Soo Lee’s money is worth more than Chang Lee’s money given the 7 percent discount rate.
16) Which one of the following variables is the exponent in the present value formula?
A) Present value
B) Future value
C) Interest rate
D) Number of time periods
E) There is no exponent in the present value formula.
17) Your goal is to have $1 million in your retirement savings on the day you retire. To fund this
goal, you will make one lump sum deposit today. If you plan to retire ________ rather than
________ and earn a ________ rate of interest, then you can deposit a smaller lump sum today.
A) sooner; later; low
B) sooner; later; high
C) later; sooner; high
D) later; sooner; low
E) today; later; high
18) Which one of the following will produce the lowest present value interest factor?
A) 6 percent interest for 5 years
B) 6 percent interest for 8 years
C) 6 percent interest for 10 years
D) 8 percent interest for 5 years
E) 8 percent interest for 10 years
19) Which one of these will increase the present value of a set amount to be received sometime
in the future?
A) Increase in the time until the amount is received
B) Increase in the discount rate
C) Decrease in the future value
D) Decrease in the interest rate
E) Decrease in both the future value and the number of time periods
20) What is the relationship between the present value and future value interest factors?
A) The present value and future value factors are equal to each other.
B) The present value factor is the exponent of the future value factor.
C) The future value factor is the exponent of the present value factor.
D) The factors are reciprocals of each other.
E) There is no relationship between these two factors.
21) Phillippe invested $1,000 ten years ago and expected to have $1,800 today He has neither
added nor withdrawn any money since his initial investment. All interest was reinvested and
compounded annually. As it turns out, he only has $1,680 in his account today. Which one of the
following must be true?
A) He earned simple interest rather than compound interest.
B) He earned a lower interest rate than he expected.
C) He did not earn any interest on interest as he expected.
D) He ignored the Rule of 72 which caused his account to decrease in value.
E) The future value interest factor turned out to be higher than he expected.
22) Al invested $3,630 in an account that pays 6 percent simple interest. How much money will
he have at the end of five years?
A) $4,910
B) $5,056
C) $4,719
D) $4,678
E) $5,299
23) Alex invested $2,550 in an account that pays 5 percent simple interest. How much money
will he have at the end of four years?
A) $2,650.00
B) $3,100.26
C) $3,060.00
D) $3,250.00
E) $3,099.54
24) Marti’s coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at
their face value in 1948. These coins have appreciated by 7.6 percent annually. How much will
the collection be worth in 2025?
A) $13,611.18
B) $18,987.56
C) $14,122.01
D) $11,218.27
E) $14,077.16
25) You invested $6,500 at 6 percent simple interest. How much more could you have earned
over a 10-year period if the interest had compounded annually?
A) $1,049.22
B) $930.11
C) $1,182.19
D) $1,201.15
E) $1,240.51
26) Travis invested $8,000 in an account that pays 4 percent simple interest. How much more
could he have earned over a 7-year period if the interest had compounded annually?
A) $291.41
B) $287.45
C) $302.16
D) $266.67
E) $258.09
27) What is the future value of $11,600 invested for 17 years at 7.25 percent compounded
annually?
A) $32,483.60
B) $27,890.87
C) $38,991.07
D) $41,009.13
E) $38,125.20
28) Today, you earn a salary of $31,000. What will be your annual salary ten years from now if
you receive annual raises of 2.2 percent?
A) $38,536.36
B) $37,414.06
C) $38,235.24
D) $37,122.08
E) $36,736.00
29) You own a classic car currently valued at $64,000. If the value increases by 2.5 percent
annually, how much will the car be worth 15 years from now?
A) $94,035.00
B) $86,008.17
C) $80,013.38
D) $92,691.08
E) $91,480.18
30) You hope to buy your dream car five years from now. Today, that car costs $62,500. You
expect the price to increase by an average of 2.9 percent per year. How much will your dream car
cost by the time you are ready to buy it?
A) $73,340.00
B) $68,666.67
C) $72,103.59
D) $66,818.02
E) $69,023.16
31) This morning, DJ’s invested $225,000 to help fund future projects. How much additional
money will the firm have three years from now if it can earn an annual interest rate of 4 percent
rather than 3.5 percent?
A) $3,391.90
B) $3,632.88
C) $3,008.17
D) $4,219.68
E) $3,711.08
32) You just invested $49,000 that you received as an insurance settlement. How much more will
this account be worth in 40 years if you earn an average return of 7.6 percent rather than just 7.1
percent?
A) $59,818.92
B) $98,509.16
C) $140,423.33
D) $155,986.70
E) $138,342.91
33) You have a savings account valued at $1,500 today that earns an annual interest rate of 8.7
percent. How much more would this account be worth if you wait to spend the entire balance in
25 years rather than in 20 years?
A) $6,306.16
B) $4,658.77
C) $3,311.18
D) $6,907.17
E) $4,117.64
34) You will receive $15,000 in two years when you graduate. You plan to invest this at an
annual interest rate of 6.5 percent. How much money will you have 8 years from now?
A) $24,824.94
B) $19,381.16
C) $21,887.13
D) $23,209.19
E) $20,414.73