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CHAPTER 5

Introduction to Valuation: The Time Value of Money


1.
a.
b.
c.
d.
e.
2.
a.
b.
c.
d.
e.
3.
a.
b.
c.
d.
e.
4.

The amount an investment will worth after one or more periods of time is the _____
value.
future
present
principal
discounted
simple
The process of accumulating interest on an investment over time to earn more interest
is called:
growth.
compounding.
aggregation.
accumulation.
discounting.
Interest earned on the reinvestment of previous interest payments is called _____
interest.
free
annual
simple
interest on
compound

a.
b.
c.
d.
e.

Interest earned on both the initial principal and the interest reinvested from prior
periods is called _____ interest.
free
annual
simple
interest on
compound

5.
a.
b.
c.
d.
e.

Interest earned only on the original principal amount invested is called _____ interest.
free
annual
simple
interest on
compound

6.
a.
b.
c.
d.
e.

The future value interest factor is calculated as:


(1 + r)t.
(1 + rt).
(1 + r) t.
1 + r t.
(1+r) x rt.

7.

The current value of future cash flows discounted at the appropriate discount rate to
current time is called the _____ value.
principal
future

a.
b.

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c.
d.
e.

present
simple
compound

8.
a.
b.
c.
d.
e.

The process of finding the present value of some future amount is often called:
growth.
discounting.
accumulation.
compounding.
reduction.

9.
a.
b.
c.
d.
e.

The present value interest factor is calculated as:


1 (1 + r t).
1 (1 + rt).
1 (1 + r) (t).
1 (1 + r)t.
1 + r + t.

10. The interest rate used to calculate the present value of future cash flows is called the
_____ rate.
a. free
b. annual
c. compound
d. simple
e. discount
11. As the discount rate increases, the present value of $500 to be received six years from
now:
a. remains constant.
b. also increases.
c. decreases.
d. becomes negative.
e. will vary but the direction of the change is unknown.
12. Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000
five years from now. Which one of the following statements is correct if both Katie
and Wilt apply a 5 percent discount rate to these amounts?
a. The present value of Katie and Wilts money is equal.
b. The value of Wilts money will be greater than the value of Katies money six years
from now.
c. In todays dollars, Wilts money is worth more than Katies.
d. In five years, the value of Katies money will be equal to the value of Wilts money.
e. Katies money is worth more than Wilts money today.
13. Jamie deposits $1,000 into an account that pays 4 percent interest compounded
annually. Chris deposits $1,000 into an account that pays 4 percent simple interest.
Both deposits were made today. Which of the following statements are true concerning
these two accounts?
I.
At the end of one year, both Jamie and Chris will have the same amount in their
accounts.

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II.

At the end of five years, Chris will have more money in his account than Jamie has in
hers.
III. Chris will never earn any interest on interest.
IV. All else equal, Jamie made the better investment.
a. I and II only
b. III and IV only
c. I, II, and IV only
d. I, III, and IV only
e. II, III, and IV only
14. Nadine invests $1,000 at 8 percent when she is 25 years old. Neal invests $1,000 at 8
percent when he is 40 years old. Both investments compound interest annually. Both
Nadine and Neal retire at age 60. Which one of the following statements is
correct?
a. Nadine will have less money when she retires than Neal.
b. Neal will earn more interest on interest than Nadine.
c. Neal will earn more compound interest than Nadine.
d. If Neal waits to age 70 to retire, then he will have just as much money as Nadine.
e. Nadine will have more money when she retires than Neal.
15. Sun Lee has $500 today. Which one of the following statements is correct if she
invests this money at a positive rate of interest for five years?
a. The higher the interest rate she earns, the less money she will have in the future.
b. The higher the interest rate, the longer she has to wait for her money to grow to $1,000
in value.
c. If Sun Lee can earn 7 percent, she will have to wait about six years to have $1,000
total.
d. At the end of the five years Sun Lee will have less money if she invests at 5 percent
rather than at 7 percent.
e. At 10 percent interest Sun Lee should expect to have $1,000 in her account at the
end of the five years.
16. Thomas invests $100 in an account that pays 5 percent simple interest. How much
money will Thomas have at the end of five years?
a. $120.00
b. $123.68
c. $124.92
d. $125.00
e. $127.63
1 + (1*2*3)
17. Betty invests $500 in an account that pays 3 percent simple interest. How much money
will Betty have at the end of ten years?
a. $630.00
b. $633.33
c. $650.00
d. $671.96
e. $675.00
1+(1*2*3)

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18. Beatrice invests $1,000 in an account that pays 4 percent simple interest. How much
more could she have earned over a five-year period if the interest had
compounded
annually?
a. $15.45
b. $15.97
c. $16.65
d. $17.09
e. $21.67
1* (1+2)^3 - 1+(1*2*3)
19. Dale invests $500 in an account that pays 6 percent simple interest. How much more
could he have earned over a thirty year period if the interest had compounded
annually?
a. $1,471.75
b. $1,532.50
c. $1,621.25
d. $1,804.25
e. $2,371.75
1* (1+2)^3 - 1+(1*2*3)
20. What is the future value of $2,896 invested for twelve years at 6.5 percent
compounded annually?
a. $5,827.32
b. $6,023.44
c. $6,049.45
d. $6,165.86
e. $6,218.03
1* (1+3)^2
21. Today you earn a salary of $28,500. What will be your annual salary fifteen years from
now if you earn annual raises of 3.5 percent?
a. $47,035.35
b. $47,522.89
c. $47,747.44
d. $48,091.91
e. $48,201.60
1* (1+3)^2
22. You own a classic automobile that is currently valued at $39,500. If the value increases
by 6 percent annually, how much will the auto be worth ten years from now?
a. $64,341.34
b. $44,734.42
c. $69,843.06
d. $70,738.48

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e.

$74,146.93

1* (1+2)^3
23. You hope to buy your dream house six years from now. Today your dream house costs
$189,900. You expect housing prices to rise by an average of 4.5 percent per year over
the next six years. How much will your dream house cost by the time you are ready to
buy it?
a. $240,284.08
b. $246,019.67
c. $246,396.67
d. $246,831.94
e. $247,299.20
2* (1+3)^1
24. Your grandmother invested one lump sum 17 years ago at 4.25 percent interest.
Today, she gave you the proceeds of that investment which totaled $5,539.92. How
much did your grandmother originally invest?
a. $2,700.00
b. $2,730.30
c. $2,750.00
d. $2,768.40
e. $2,774.90
3* [1/ (1+2)^1]
25. What is the present value of $13,450 to be received four years from today if the
discount rate is 5.25 percent?
a. $10,854.20
b. $10,960.59
c. $10,974.21
d. $10,982.18
e. $11,003.14
1* [1/ (1+3)^2]
26. You would like to give your daughter $40,000 towards her college education thirteen
years from now. How much money must you set aside today for this purpose if you can
earn 6.3 percent on your funds?
a. $17,750.00
b. $17,989.28
c. $18,077.05
d. $18,213.69
e. $18,395.00
1* [1/ (1+3)^2]
27. One year ago, you invested $3,000. Today it is worth $3,142.50. What rate of interest
did you earn?
a. 4.63 percent

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b.
c.
d.
e.

4.68 percent
4.70 percent
4.73 percent
4.75 percent

2 = 1* (1+x)
28. Forty years ago, your father invested $2,500. Today that investment is worth $107,921.
What is the average rate of return your father earned on his investment?
a. 8.50 percent
b. 9.33 percent
c. 9.50 percent
d. 9.87 percent
e. 9.99 percent
3 = 2* (1+x)^1
29. Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today,
both Joe and Maries investments are each worth $8,500. Which one of the following
statements is correct concerning their investments?
a. Three years from today, Joes investment will be worth more than Maries.
b. Last year, Maries investment was worth more than Joes.
c. Joe has earned more interest on interest than Marie.
d. Marie earned an annual interest rate of 27.73 percent.
e. Joe earned an annual interest rate of 6.45 percent.
Joe: 5 = 2* (1+x)^1
Marie: 5 = 4* (1+x)^3
30. Alpha, Inc. is saving money to build a new factory. Six years ago they set aside
$250,000 for this purpose. Today, that account is worth $306,958. What rate of interest
is Alpha earning on this money?
a. 3.43 percent
b. 3.45 percent
c. 3.48 percent
d. 3.52 percent
e. 3.55 percent
3 = 2* (1+x)^1
31. Bob bought some land costing $14,990. Today that same land is valued at $55,000.
How long has Bob owned this land if the price of land has been increasing at 6 percent
per year?
a. 21.82 years
b. 21.98 years
c. 22.03 years
d. 22.31 years
e. 22.44 years
2 = 1* (1+3)^x

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32. On your tenth birthday, you received $100 which you invested at 4.5 percent interest,
compounded annually. That investment is now worth $3,000. How old are you today?
a. age 77
b. age 82
c. age 84
d. age 86
e. age 87
4 = 2* (1+3)^x
x+1=atsakymas
33. You want to have $10,000 saved ten years from now. How much less do you have to
deposit today to reach this goal if you can earn 6 percent rather than 5 percent on your
savings?
a. $555.18
b. $609.81
c. $615.48
d. $928.73
e. $1,046.22
1* [1/ (1+4)^2] - 1* [1/ (1+3)^2]
34. Your older sister deposited $5,000 today at 8 percent interest for five years. You would
like to have just as much money at the end of the next five years as your sister.
However, you can only earn 6 percent interest. How much more money must you
deposit today than your sister if you are to have the same amount at the end of five
years?
a. $201.80
b. $367.32
c. $399.05
d. $423.81
e. $489.84
[1* (1+2)^3] * [1/ (1+5)^3] - 1
35. When you retire forty years from now, you want to have $1 million. You think you can
earn an average of 8.5 percent on your money. To meet this goal, you are trying to
decide whether to deposit a lump sum today, or to wait and deposit a
lump sum five years from today. How much more will you have to deposit as a lump
sum if you wait for five years before making the deposit?
a. $18,001.06
b. $18,677.78
c. $18,998.03
d. $19,272.81
e. $21,036.83
2* [1/ (1+3)^(1-4)] - 2* [1/ (1+3)^1]
36. Antonette needs $20,000 as a down payment for a house five years from now. She
earns 4 percent on her savings. Antonette can either deposit one lump sum today
for

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a.
b.
c.
d.
e.

this purpose or she can wait a year and deposit a lump sum. How much additional
money must Antonette deposit if she waits for one year rather than making the deposit
today?
$639.19
$657.54
$658.23
$659.04
$800.00

1* [1/ (1+3)^(2-4)] - 1* [1/ (1+3)^2]


37. Alpo, Inc. invested $500,000 to help fund a company expansion project scheduled for
eight years from now. How much additional money will they have eight years from
now if they can earn 9 percent rather than 7 percent on this money?
a. $58,829.69
b. $86,991.91
c. $118,009.42
d. $126,745.19
e. $137,188.23
1* (1+4)^2 - 1* (1+5)^2
38. You will be receiving $5,000 from your family as a graduation present. You have
decided to save this money for your retirement. You plan to retire thirty-five years
after graduating. How much additional money will you have at that time if you can
earn an average of 8.5 percent on your investment instead of just 8 percent?
a. $12,971.49
b. $13,008.47
c. $13,123.93
d. $13,234.44
e. $13,309.85
1* (1+3)^2 - 1* (1+4)^2
39. You deposit $3,000 in a retirement account today at 5.5 percent interest. How much
more money will you have if you leave the money invested for forty-five years rather
than forty years?
a. $7,714.91
b. $7,799.08
c. $7,839.73
d. $7,846.52
e. $7,858.19
1* (1+2)^3 - 1* (1+2)^4
40. You collect model cars. One particular model increases in value at a rate of 5
percent per year. Today, the model is worth $29.50. How much additional money can
you make if you wait ten years to sell the model rather than selling it five years from
now?
a. $9.98
b. $10.40

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c.
d.
e.

$10.86
$11.03
$11.24

2* (1+1)^3 - 2* (1+1)^4