CHAPTER 5 Introduction to Valuation: The Time Value of Money

1. 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

2. 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.

3. 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

4. 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.

5. 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.

6. 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
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7. Theo wants to have $40,000 for a down payment on a house five years from now. He can
either deposit one lump sum today or he can wait one year and deposit a lump sum.
Assume an annual interest rate of 3.5 percent. How much additional money must he
deposit if he waits for one year rather than making the deposit today?
A) $1,001.98
B) $986.13
C) $1,178.76
D) $948.03
E) $1,020.18

8. According to the Rule of 72, you can do which one of the following?
A) Approximately double your money in five years at 7.24 percent interest
B) Double your money in 7.2 years at 8 percent interest
C) Approximately double your money in 11 years at 6.55 percent interest
D) Triple your money in 7.2 years at 7.2 percent interest
E) Approximately triple your money in 7.2 years at 10 percent interest

9. Four years ago, Saul invested $500. Three years ago, Trek invested $600. Today, these
two investments are each worth $800. Assume each account continues to earn its
respective rate of return. Which one of the following statements is correct concerning
these investments?
A) Three years from today, Trek's investment will be worth more than Saul's.
B) One year ago, Saul's investment was worth less than Trek's investment.
C) Trek earns a higher rate of return than Saul.
D) Trek has earned an average annual interest rate of 9.86 percent.
E) Saul has earned an average annual interest rate of 12.64 percent.

10. 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?
= 595,51

11. 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?
47747,44

12. 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?
2730,30
13. 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?
9,87%
14. 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?
3,48%
15. 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?
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88 years old
16. 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?
555,18
17. 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?
503.656,69
18. 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?
137.188,23
19. 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?
920,88
20. At an interest rate of 10 percent and using the Rule of 72, how long will it take to
double the value of a lump sum invested today? How long will it take after that until
the account grows to four times the initial investment?
7,2 years to double
14,4 years to quadruple