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Exam 5: The Time Value of Money

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Question 21

Multiple Choice

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As per the rule of 72, the time to double your money (TDM) approximately equals:

A) 72/n.
B) 72/i.
C) 72/Initial investment.
D) 72/Future value.

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Question 22

Multiple Choice

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Which of the following equations is used to calculate the present value of a sum to be received in future?

A) PV = FV_n ÷ (1 + i) ⁿ
B) PV = FV_n × (1 + i) ⁿ
C) PV = (1 + i) ⁿ + FV_n
D) PV = (1 + i) ⁿ ÷ FV_n

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Question 23

Multiple Choice

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Omniva Inc. just generated earnings per share of $3.75 for the fiscal year ending September 30, 2014. The firm is expected to achieve earnings per share of $8.76 in 5-years. At what rate will Omniva Inc.'s earnings per share be growing over this 5-year period? (Round off to the nearest 1/10 percent)

Michael Peterson is seeking to accumulate $25,000 in six years to invest in a real estate venture. He can earn 6.35 percent annual interest with monthly compounding in a private investment. How much will he have to invest today to reach his goal? (Round to the nearest dollar.)

Which of the following equations is used to compute the future value for continuous compounding?

Celesta Frank wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she were to deposit the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.)

Steve Fisher is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)

The value of a dollar invested at a positive interest rate grows over time but at a slower rate further into the future.

Your brother has asked you to help him to choose an investment. He has $6,000 to invest today for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with the interest being paid quarterly. What will be the value of the investment in two years?

To calculate the present value of a future amount, we divide the future amount by the future value factor.

The time value of money is based on the belief that people have a positive time preference for consumption.

Your aunt is looking to invest a certain amount today. Which of the following choices will give the maximum interest?

Genor Peterson Electrical Supplies has generated a net income of $161,424 this year. The firm expects to see an annual growth of 30 percent for the next five years, followed by a growth rate of 15 percent for each of the next three years. What will be the firm's expected net income in eight years? (Round to the nearest dollar.)

If you had a choice of choosing a payment of $5,000 to be received in five years being discounted at 8 percent or at 10 percent, you should always choose the higher rate because it gives you the higher present value.

The higher the interest rate on an investment, the more money that is accumulated for any time period.

Future value measures:

Compounding accelerates the growth of the total interest earned.

The Rule of 72 allows one to calculate the return earned on an investment over six years.

Joseph Harris is considering an investment that pays 6.5 percent annually. How much must he invest today such that he will have $25,000 in seven years? (Round to the nearest dollar.)

Joyce Thomas wants to buy a house in six years. She hopes to have $25,000 at that time. If the bank CD she wants to invest in will pay 7.5 percent annually, how much will she have to invest today? (Round to the nearest dollar.)