Fundamentals Of Corporate Finance 9th Canadian Edition By Ross - Test Bank
digital downloadTest Bank

Fundamentals Of Corporate Finance 9th Canadian Edition By Ross - Test Bank

Fundamentals Of Corporate Finance 9th Canadian Edition By Ross - Test Bank   Instant Download - Complete Test Bank With Answers     Sample Questions Are Posted Below   Exam   Name___________________________________     MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.   1) You collect model airplanes. …

$19.99

Fundamentals Of Corporate Finance 9th Canadian Edition By Ross – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Exam

 

Name___________________________________

 

 

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.  
1) You collect model airplanes. One particular model is currently valued at $275. If this 1)

model increases in value by 5% annually, it will be worth ________ six years from now and ________ twelve years from now.

  1. A) $368.01; $461.34
  2. B) $368.53; $442.89
  3. C) $368.53; $493.86
  4. D) $368.01; $442.89
  5. E) $368.53; $467.08

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

2) The Smith Co. has $450,000 to invest at 5.5% interest. How much more money will they 2) have if they invest these funds for eight years instead of five years?

 

  1. $68,851.36

 

  1. $78,408.62

 

  1. $102,476.93

 

  1. $62,948.21

 

  1. $74,250.00

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

3) You deposit $500,000 in a higher risk investment. Three years later, you receive 3)
$711,900 and withdraw your funds. Given this information calculate the balance at the  
end of year two.        
A) $632,804 B) $636,549 C) $665,202 D) $687,702 E) $693,303  
Answer: A          
Explanation: A)        
  B)        
  C)        
  D)        
  E)        

 

 

 

 

 

 

 

1

 

  • Jennifer invested $2,000 in an account that pays 3% simple interest. How much more could she have earned over a six-year period if the interest had compounded annually?
  1. A) $28.10 B) $33.33 C) $29.18                   D) $34.67                    E) $31.50

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • What is the future value of $3,497 invested for 15 years at 7.5% compounded annually?

 

  1. $15,267.21

 

  1. $14,911.08

 

  1. $14,289.16

 

  1. $10,347.19

 

  1. $7,431.13

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • 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% on your funds?

 

  1. $17,989.28

 

  1. $18,213.69

 

  1. $18,077.05

 

  1. $18,395.00

 

  1. $17,750.00

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

4)

 

 

 

 

 

 

 

 

 

 

 

 

5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

7) All else being the same, which of the following statements is correct? 7)
  1. Present values increase the further away in time the future value.

 

  1. Present values increase as the discount rate increases I only.

 

  1. Present values are always smaller than future values when r is negative and t positive.

 

  1. Present values decrease as the discount rate decreases.

 

  1. Present values are always smaller than future values when both r and t are positive.

 

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Jessica invests $3,000 in an account that pays 5% simple interest. How much more could she have earned over a 7-year period if the interest had compounded annually?
  1. A) $221.30 B) $122.20 C) $171.30                 D) $129.20                 E) $147.80

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • The greater the number of years, the:

 

  1. Smaller the future value factor.

 

  1. Greater the compounding effect.

 

  1. Larger the present value factor.

 

  1. Larger the present value of a single sum.

 

  1. Smaller the future value of a single sum.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

8)

 

 

 

 

 

 

 

 

 

 

 

 

9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

  • Twelve years ago, Jake invested $2,000. Six years ago, Tami invested $4,000. Today, both Jake’s and Tami’s investments are each worth $9,700. Assume that both Jake and Tami continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments?

 

  1. Tami has earned an average annual interest rate of 15.91%.

 

  1. Jake has earned a higher rate of return than Tami.

 

  1. Three years from today, Jake’s investment will be worth more than Tami’s.

 

  1. One year ago, Tami’s investment was worth more than Jake’s.

 

  1. Jake has earned an average annual interest rate of 15.47%.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • Which one of the following interest rates will produce the largest value at the end of ten years given a lump sum investment of $5,000?
    1. 0%, compounded semi-annually

 

  1. 5%, compounded annually

 

  1. 0%, simple interest

 

  1. 0%, compounded annually

 

  1. 5%, simple interest

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • Frank invests $2,500 in an account that pays 6% simple interest. How much money will he have at the end of four years?
  1. A) $3,163 B) $2,650 C) $3,100                   D) $10,600                 E) $3,156

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

  • All County Insurance, Inc. promises to pay Ted $1 million on his 65th birthday in return for a one-time payment of $75,000 today. (Ted just turned 25) At what rate of interest would Ted be indifferent between accepting the company’s offer and investing the premium on his own?
  1. A) 1% B) 6.7% C) 7.2%                       D) 5.5%                       E) 2.4%

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • When you retire forty years from now, you want to have $1 million. You think you can earn an average of 8.5% 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?

 

  1. $18,677.78

 

  1. $21,036.83

 

  1. $19,272.81

 

  1. $18,001.06

 

  1. $18,998.03

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • The future value factor will decrease:

 

  1. The lower the present value factor.

 

  1. The higher the future value.

 

  1. The higher the present value.

 

  1. The longer the period of time.

 

  1. The lower the interest rate.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15)

 

 

 

 

 

 

 

 

 

 

 

5

 

  • One year ago, you invested $2,500. Today it is worth $2,789.50. What rate of interest did you earn?
  1. A) 89% B) 11.58% C) 10.67%                  D) 8.67%                     E) 11.42%

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • When you retire thirty years from now, you want to have $750,000. You think you can earn an average of 9% 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?

 

  1. $30,447.52

 

  1. $29,414.14

 

  1. $28,788.03

 

  1. $38,278.27

 

  1. $36,118.09

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • Theresa wants to save $10,000 so that she can surprise her husband with a vacation six years from now. She can earn 7% on her savings. How much more will she have to deposit if she waits one more year before investing versus if she deposits one lump sum today?
  1. A) $466.44 B) $471.08 C) $471.54                 D) $470.23                 E) $469.15

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

16)

 

 

 

 

 

 

 

 

 

 

 

 

17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

  • Sampson, Inc. invested $1.325 million in a project that earned an 8.25% rate of return. Sampson sold their investment for $3,713,459. How much sooner could Sampson have sold the company if they only wanted $3 million from the project?

 

  1. 33 years

 

  1. 69 years

 

  1. 17 years

 

  1. 67 years

 

  1. 31 years

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • The rate used to find the present value of a future payment is called the:

 

  1. Discount rate.

 

  1. Simple rate.

 

  1. Future value rate.

 

  1. Loan rate.

 

  1. Compound rate.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • At a 3% rate of interest, you will quadruple your money in approximately ________

 

years.

 

  1. A) 24 B) 47 C) 6                               D) 12                             E) 3

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

  • You invest $1,000 in an account paying 5% simple interest. You do not add nor withdraw any funds from this account. Every year, your account balance will:
    1. Increase at an increasing rate.

 

  1. Remain constant.

 

  1. Increase at a decreasing rate.

 

  1. Increase at a constant rate.

 

  1. Increase by a constant amount.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • You wish to have $200,000 at the end of twenty years. In the last five years, you withdraw $1,000 annually at a rate of 3.8% compounded quarterly. During the middle ten years, you contribute $500 monthly at a rate of 2.8% compounded semi-annually. Given this information, determine the initial deposit that has to be made at the start of the first five years at a rate of 4% compounded monthly.

 

  1. $12,056.65

 

  1. $10,056.65

 

  1. $11,056.65

 

  1. $9,056.65

 

  1. $13,056.65

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • 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% discount rate to these amounts?

 

  1. The present value of Katie and Wilt’s money is equal.

 

  1. The value of Wilt’s money will be greater than the value of Katie’s money six years from now.

 

  1. In today’s dollars, Wilt’s money is worth more than Katie’s.

 

  1. Katie’s money is worth more than Wilt’s money today.

 

  1. In five years, the value of Katie’s money will be less than the value of Wilt’s money.

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

22)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24)

 

 

 

 

8

 

  • Betty invests $500 in an account that pays 3% simple interest. How much money will Betty have at the end of ten years?
  1. A) $633.33 B) $675.00 C) $671.96                 D) $650.00                 E) $630.00

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • 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?
    1. If Sun Lee can earn 7%, she will have to wait about six years to have $1,000 total.

 

  1. At 10% interest Sun Lee should expect to have $1,000 in her account at the end of the five years.

 

  1. The higher the interest rate she earns, the less money she will have in the future.

 

  1. The higher the interest rate, the longer she has to wait for her money to grow to $1,000 in value.

 

  1. At the end of the five years Sun Lee will have less money if she invests at 5% rather than at 7%.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • You have $500 in an account which pays 5% compound interest. How much additional interest would you earn over four years if you moved the money to an account earning 6%?
  1. A) $21.89 B) $29.94 C) $24.93                   D) $23.49                    E) $25.88

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

25)

 

 

 

 

 

 

 

 

 

 

 

 

26)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

  • When you retire 36 years from now, you want to have $2 million. You think you can earn an average of 11.5% on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 3 years from today. How much more will you have to deposit as a lump sum if you wait for 3 years before making the deposit?

 

  1. $17,021.12

 

  1. $19,407.78

 

  1. $16,208.11

 

  1. $15,677.78

 

  1. $15,344.14

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Interest earned on the reinvestment of previous interest payments is called ________.

 

  1. Interest on interest.

 

  1. Free interest.

 

  1. Compound interest.

 

  1. Annual interest.

 

  1. Simple interest.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • The discounted value of money is called the:

 

  1. Simple value.

 

  1. Complex value.

 

  1. Future value.

 

  1. Present value.

 

  1. Compound value.

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

28)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30)

 

 

 

 

 

 

 

 

 

 

10

 

  • Andy promises Opie that he will give him $5,000 upon his graduation from college at Mayberry U. How much must Andy invest today to make good on his promise, if Opie is expected to graduate in 12 years and Andy can earn 5% on his money?

 

  1. $3,012.88

 

  1. $2,784.19

 

  1. $2,135.32

 

  1. $8,979.28

 

  1. $2,881.11

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Koji invested $3,300 at 7.75% interest. After a period of time he withdrew $9,383.31. How long did Koji have his money invested?
  1. A) 13 years B) 14 years C) 15 years                 D) 16 years                 E) 17 years

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Jeff invests $3,000 in an account that pays 7% simple interest. How much more could he have earned over a 20-year period if the interest had compounded annually?
    1. $4,087.18

 

  1. $4,409.05

 

  1. $3,778.54

 

  1. $3,212.12

 

  1. $2,840.00

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

31)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32)

 

 

 

 

 

 

 

 

 

 

 

 

33)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

  • 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% rather than 5% on your savings?
    1. $615.48

 

  1. $1,046.22

 

  1. $928.73

 

  1. $555.18

 

  1. $609.81

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You collect old model trains. One particular model increases in value at a rate of 6.5% per year. Today, the model is worth $1,670. How much additional money can you make if you wait 4 years to sell the model rather than selling it 2 years from now?
  1. A) $280.15 B) $208.04 C) $254.24                 D) $241.79                 E) $196.67

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • Lisa deposited $500 in a savings account this morning. The account pays 2.5% simple interest. If Lisa leaves this money in the account for five years, how much total interest will she earn?
  1. A) $12.50 B) $62.50 C) $67.25                   D) $10.75                    E) $53.75

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • At a 6% rate of interest you will double your money in approximately ________ years.

 

  1. A) 24 B) 12 C) 6                               D) 48                             E) 3

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

34)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35)

 

 

 

 

 

 

 

 

 

 

 

 

 

36)

 

 

 

 

 

 

 

 

 

 

 

 

 

37)

 

 

 

 

 

 

 

 

12

 

  • You deposit $1,000 in a retirement account today at 8.5% interest. How much more money will you have if you leave the money invested for 40 years rather than 35 years?
    1. $7,714.91

 

  1. $7,846.52

 

  1. $7,839.73

 

  1. $8,753.37

 

  1. $7,799.08

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • New Metals, Inc. is planning on expanding their operations when the economy strengthens in a few years. At that time they will need to purchase additional equipment. Four years ago, they set aside $300,000 in a special account for this purpose. Today, that account is worth $383,048.98. What rate of interest is New Metals earning on this money?
  1. A) 35% B) 5.92% C) 6.30%                    D) 6.26%                     E) 5.87%

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • Neal wants to borrow $2,500 and has received the offers from his local banks. Which offer should Neal accept if he wants to repay the loan in one single payment two years from now?

 

  1. Bank A, which offers a simple rate of 4%.

 

  1. Bank B, which offers a simple rate of 5%.

 

  1. Bank C, which offers a rate of 4% compounded annually.

 

  1. Bank D, which offers a rate of 5% compounded annually.

 

  1. Bank E, which offers a rate of 5% compounded monthly.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

38)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40)

 

 

 

 

 

 

 

 

 

 

 

13

 

  • Compound interest means that you earn:

 

  1. The same amount of interest each year.

 

  1. Interest only on the initial amount invested.

 

  1. Interest on the initial principal only.

 

  1. A decreasing amount of interest each year.

 

  1. Interest on both the principal and prior reinvested interest.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • An investor deposited $10,500 in an account. At the end of year four, the account had accumulated $5,728.88. Over the first four years, the account earned ________

 

compounded annually.

 

  1. A) 1% B) 11.5% C) 15.6%                    D) 12.8%                     E) 14.6%

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • The formula for a present value calculation using Excel is:

 

  1. PV (rate, nper, pmt, fv).

 

  1. PV (nper, pmt, fv).

 

  1. PV (rate, nper, pmt).

 

  1. PV (rate, pmt, pv, fv).

 

  1. PV (rate, nper, pmt, pv).

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

41)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42)

 

 

 

 

 

 

 

 

 

 

 

 

 

43)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

  • An account was opened with $1,000 three years ago. Today, the account balance is

 

$1,157.63. If the account earns simple interest, how long will it take until the account has earned a total of $225 in interest?

 

  1. Less than one more year.

 

  1. Between one and two more years.

 

  1. Between two and three more years.

 

  1. Between three and four more years.

 

  1. Between four and five more years.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Robin invested $10,000 in an account that pays 5% simple interest. How much more could she have earned over a 40-year period if the interest had compounded annually?
    1. $50,399.89

 

  1. $48,414.14

 

  1. $38,207.16

 

  1. $38,414.14

 

  1. $40,399.89

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • You wish to have $400,000 at the end of twenty-five years. In the last ten years, you contribute $1,000 semi-annually at a rate of 5.8% compounded monthly. During the middle ten years, you withdraw $750 quarterly at a rate of 4.5% compounded annually. Given this information, determine the initial deposit that has to be made at the start of the first five years at a rate of 4% compounded monthly.

 

  1. $135,150.00

 

  1. $125,150.00

 

  1. $130,150.00

 

  1. $115,150.00

 

  1. $120,150.00

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

44)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46)

 

 

 

 

 

15

 

  • 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?
  1. A) 55% B) 3.43% C) 3.48%                    D) 3.52%                     E) 3.45%

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • Last year, you deposited $25,000 into a retirement savings account at a fixed rate of

 

7.5%. Today, you could earn a fixed rate of 8% on a similar type account. However, your rate is fixed and cannot be adjusted. How much less could you have deposited last year if you could have earned a fixed rate of 8% and still have the same amount as you currently will when you retire 40 years from today?

 

  1. $1,666.67 less

 

  1. $3,628.09 less

 

  1. $2,408.28 less

 

  1. $1,218.46 less

 

  1. $4,331.30 less

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • You would like to invest some money today such that your investment will be worth $100,000 fifteen years from now. Your broker gives you two options. First, you can invest at a guaranteed annual rate of 4%. Or, you can invest in stocks and hopefully earn an average of 7% per year. How much more will you have to invest today if you opt for the fixed rate rather than the stocks?

 

  1. $18,623.18

 

  1. $19,281.85

 

  1. $18,419.02

 

  1. $18,145.45

 

  1. $18,904.21

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

47)

 

 

 

 

 

 

 

 

 

 

 

 

 

48)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49)

 

 

 

 

 

 

 

16

 

  • A deposit of $10,000 increased to $12,500 in 5 years. Determine the annual rate of interest used and calculate the balance at the end of year four.
  1. A) $15,954 B) $11,954 C) $12,254                 D) $14,254                 E) $13,954

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $6,000 to invest today and can earn 10% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?
  1. A) $12,000 B) $11,948 C) $13,250                 D) $14,520                 E) $7,260

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • The amount an investment is worth after one or more periods of time is the ________.

 

  1. Principal value.

 

  1. Compound interest rate.

 

  1. Present value.

 

  1. Simple interest rate.

 

  1. Future value.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Your older sister deposited $5,000 today at 8% 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% 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?
  1. A) $201.80 B) $489.84 C) $399.05                 D) $367.32                 E) $423.81

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

50)

 

 

 

 

 

 

 

 

 

 

 

 

51)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53)

 

 

 

 

 

17

 

  • The present value factor will decrease:

 

  1. The slower the rate of growth.

 

  1. The longer the period of time.

 

  1. The lower the interest rate.

 

  1. The higher the present value.

 

  1. The higher the future value.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Many economists view a 3% annual inflation rate as “acceptable”. Assuming a 3% annual increase in the price of automobiles, how much will a new Suburban cost you five years from now, if today’s price is $48,000?
  1. A) $55,200 B) $54,024 C) $48,000                 D) $55,645                 E) $41,405

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Omar has an investment valued at $12,345 today. He made a one-time investment at

 

6.5% four years ago. Leon has an investment that is also valued at $12,345 today. Leon invested four years ago at 7.5%. Omar originally invested ________ and Leon invested

 

________.

 

  1. $9,633.33; $9,304.06

 

  1. $9,652.18; $9,389.00

 

  1. $9,568.24; $9,199.16

 

  1. $9,596.05; $9,243.94

 

  1. $9,608.14; $9,267.67

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

54)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55)

 

 

 

 

 

 

 

 

 

 

 

 

 

56)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

  • As the discount rate increases, the present value of $500 to be received six years from now:
    1. Remains constant.

 

  1. Becomes negative.

 

 

  1. Also increases.

 

  1. Will vary but the direction of the change is unknown.

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • Which one of the following statements is correct if you invest $100 in an account at a simple interest rate of 4% for five years?
    1. The amount of interest you earn in year five will equal the interest you earn in year one, whether or not you reinvest your earnings.
    2. For every $1 you earn in interest in the first year, you will earn ($1.04) interest in the second year.
    3. You will earn more interest than if you invested in an account which compounded the interest.
    4. The total interest you will earn over five years will be equal to $100 x (1 + .04)
    5. You will earn interest on interest for four of the five years.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • An account paying annual compound interest was opened with $1,000 ten years ago. Today, the account balance is $1,500. If the same interest rate is offered on an account paying simple interest, how much income would be earned each year over the same time period?
  1. A) $50.00 B) $36.97 C) $40.75                   D) $40.41                    E) $41.38

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

57)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59)

 

 

 

 

 

 

 

 

 

 

19

 

  • Thirty years ago, your father invested $6,000. Today that investment is worth

 

$67,270.98. What is the average rate of return your father earned on this investment?

 

  1. A) 44% B) 10.23% C) 11.67%                  D) 10.34%                  E) 8.39%

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Calculating the present value of a future cash flow to determine its value today is called:

 

  1. Present value compounding.

 

  1. Discounted cash flow valuation.

 

  1. The discount rate.

 

  1. Future value compounding.

 

  1. Timing the cash flow.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • The future value interest factor is calculated as:
  1. A) (1 + rt) B) (1 + r)t C) (1 + r)(2)               D) 1 + r – t                   E) (1 + r)(t)

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • You own a stamp collection that is currently valued at $24,500. If the value increases by 5.5% annually, how much will the collection be worth when you retire 40 years from now?

 

  1. $204,981.16

 

  1. $205,155.45

 

  1. $208,576.07

 

  1. $206,666.67

 

  1. $204,113.07

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

60)

 

 

 

 

 

 

 

 

 

 

 

 

61)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62)

 

 

 

 

 

 

 

 

 

 

 

63)

 

 

 

 

 

20

 

  • 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% rather than 7% on this money?

 

  1. $86,991.91

 

  1. $58,829.69

 

  1. $118,009.42

 

  1. $137,188.23

 

  1. $126,745.19

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Today Richard is investing $1,000 at 5% interest for five years. One year ago, Richard invested $1,000 at 6.25% for six years. How much money will Richard have saved in total five years from now if both investments compound interest annually?

 

  1. $2,678.81

 

  1. $2,543.77

 

  1. $2,630.36

 

  1. $2,714.99

 

  1. $2,641.98

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Lakeside Inc. invested $735,000 at an 11.25% rate of return. The company sold their investment for $1,067,425. How much longer would Lakeside have had to wait if they had wanted to sell their investment for $1.25 million?

 

  1. .98 year

 

  1. 31 years

 

  1. 98 years

 

  1. 48 years

 

  1. 50 years

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

64)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66)

 

 

 

 

 

 

 

21

 

  • How much would you have to invest today at 8% compounded annually to have $25,000 available for the purchase of a car four years from now?
    1. $19,147.25

 

  1. $21,370.10

 

  1. $22,149.57

 

  1. $18,375.75

 

  1. $18,267.26

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • As long as the interest rate is greater than zero, the present value of a single sum will always:
    1. Increase as the number of periods increases.

 

  1. Decrease as the period of time decreases.

 

  1. Increase as the interest rate increases.

 

  1. Be less than the future value.

 

  1. Equal the future value if the time period is one year.

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • What is the present value of $2,800 to be received three years from now if the discount rate is 9.5%?
    1. $2,361.48

 

  1. $3,676.21

 

  1. $2,734.54

 

  1. $2,132.63

 

  1. $2,114.48

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

67)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69)

 

 

 

 

 

 

 

 

 

 

 

22

 

  • Chia Burgers began operations by opening 115 restaurants in Western Canada at the end of its first year of operations. By the end of year 2, an additional 5 restaurants were opened. By the end of year 3, there were 130 restaurants operational. At the end of year 5, there were 138 total restaurants.

 

Between the end of year 2 and the end of year 3, the number of eating establishments grew at a rate of ________ compounded annually.

  1. A) 2% B) 4.7% C) 9.3%                       D) 8.3%                       E) 5.6%

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You just received $278,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 38 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 9.5% rather than just 9.0%?

 

  1. $794,014

 

  1. $2,033,333

 

  1. $1,396,036

 

  1. $1,818,342

 

  1. $1,611,408

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • You just won the lottery and want to put some money away for your child’s college education. College will cost $65,000 in 18 years. You can earn 8% compounded annually. How much do you need to invest today?

 

  1. $11,763.07

 

  1. $13,690.82

 

  1. $16,266.19

 

  1. $15,258.17

 

  1. $9,828.18

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

70)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72)

 

 

 

 

 

23

 

  • Chia Burgers began operations by opening 115 restaurants in Western Canada at the end of its first year of operations. By the end of year 2, an additional 5 restaurants were opened. By the end of year 3, there were 130 restaurants operational. At the end of year 5, there were 138 total restaurants.

 

If the number of eating establishments is expected to grow in year 6 at the same rate as the percentage increase in year 5, how many new eating establishments will be added in year 6?

  1. A) 5 B) 6 C) 7                               D) 8                                E) 9

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using compound interest. You should:

 

  1. Choose the compound interest option because it provides a higher return.

 

  1. Choose the simple interest option only if compounding occurs more than once a year.

 

  1. Choose the compound interest option only if the compounding is for monthly periods.
  2. Choose the compound interest option only if you are investing less than $5,000.

 

  1. Choose the simple interest option because both have the same basic interest rate.

73)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74)

 

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

75) The term to convert a future value amount into its present value is: 75)
  1. A) Multiply
  2. B) Annuitize
  3. C) Amortize
  4. D) Compound
  5. E) Discount

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

 

 

 

 

24

 

  • The term “interest-on-interest” refers to:

 

  1. Earning interest on an investment for a period greater than one year.

 

  1. The process of accumulating interest on an investment over time to earn more interest.

 

  1. Earning interest only on the principal amount invested.

 

  1. The payment of interest more than once per year.

 

  1. The interest earned on previous interest earnings which were reinvested.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Six years ago, Marti invested $3,500 in an account. No other investments or withdrawals have been made. Today the account is worth $7,403.16. What rate of return has Marti earned thus far?
  1. A) 86% B) 19.20% C) 15.96%                  D) 13.30%                  E) 18.58%

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Stephen invests $2,500 in an account that pays 6% simple interest. How much money will Stephen have at the end of three years?
  1. A) $3,000 B) $2,650 C) $2,978                   D) $2,809                    E) $2,950

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

76)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

77)

 

 

 

 

 

 

 

 

 

 

 

 

 

78)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

  • Ito invested $4,350. After seven years he had an account value of $6,980.58. Maria invested $5,920. After six years she had an account value of $8,834.62. Which one of the following statements is correct?

 

  1. Both Ito and Maria earned the same rate of interest.

 

  1. Ito earned a rate of interest that was 0.09% higher than Maria’s rate.

 

  1. Maria earned a rate of interest that was 0.9% higher than Ito’s rate.

 

  1. Ito earned a rate of interest of 6.90%.

 

  1. Maria earned a rate of interest of 5.89%.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Interest earned only on the original principal amount invested is called ________.

 

  1. Annual interest.

 

  1. Interest on interest.

 

  1. Free interest.

 

  1. Simple interest.

 

  1. Compound interest.

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You will receive a $100,000 inheritance in 20 years. You can invest that money today at 6% compounded annually. What is the present value of your inheritance?
    1. $35,492.34

 

  1. $100,000.00

 

  1. $27,491.53

 

  1. $31,180.47

 

  1. $29,767.15

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

79)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81)

 

 

 

 

 

 

 

 

 

 

 

26

 

  • In which year did the account earn its highest annually compounded return?

 

  1. Year 1 at 10%

 

  1. Year 2 at 5.45%

 

  1. Year 3 at 13.8%

 

  1. Year 4 at 17.0%

 

  1. Year 5 at 15.6%

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You are scheduled to receive $18,000 in five years. When you receive it, you will invest it for five more years at 8.6% per year. How much will you have at the end of this time? What would be an equivalent Present Value?
  1. A) $12,916 B) $14,916 C) $11,916                 D) $13,916                 E) $15,916

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • The James Co. plans on saving money to buy some new equipment. The company is opening an account today with a deposit of $15,000 and expects to earn 4% interest. After 3 years, the firm wants to add an additional $50,000 to the account. If the account continues to earn 4%, how much money will the James Co. have in their account five years from now?

 

  1. $70,952.96

 

  1. $81,361.18

 

  1. $68,249.79

 

  1. $72,329.79

 

  1. $66,872.96

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

82)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

83)

 

 

 

 

 

 

 

 

 

 

 

 

 

84)

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

  • You deposit $500,000 in a higher risk investment. Three years later, you receive

 

$711,900 and withdraw your funds. Given this information, calculate the interest earned at the end of year 3.

  1. A) $81,096 B) $80,806 C) $78,806                 D) $79,096                 E) $77,096

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Interest earned on both the initial principal and the interest reinvested from prior periods is called ________.
    1. Compound interest.

 

  1. Free interest.

 

  1. Interest on interest.

 

  1. Annual interest.

 

  1. Simple interest.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • Six years ago, Home Health Industries (HHI) adopted a plan to expand its services next year. At the time the plan was adopted, HHI set aside $125,000 in excess funds to be held for this purpose. As of today, that money has increased in value to $186,408. What rate of interest is the firm earning on these funds?
  1. A) 27% B) 6.89% C) 7.43%                    D) 7.10%                     E) 7.18%

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

85)

 

 

 

 

 

 

 

 

 

 

 

 

 

86)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

87)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

  • When you were 26 years old, you received an inheritance of $1,500 from your grandfather. You invested that amount in Nu-Wave stock and have not touched the investment since then. Today, this investment is worth $109,533.59. Nu-Wave stock has earned an average rate of return of 11.3% per year over this time period. How old are you today?
  1. A) age 57 B) age 59 C) age 62                    D) age 64                     E) age 66

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • One year ago, you invested $5,000. Today, your investment is worth $6,178.40. What rate of interest did you earn?
  1. A) 45% B) 23.57% C) 16.23%                  D) 24.09%                  E) 22.18%

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • You own a classic automobile that is currently valued at $67,900. If the value increases by 8% annually, how much will the automobile be worth 15 years from now?
    1. $214,740.01

 

  1. $215,390.28

 

  1. $212,524.67

 

  1. $199,801.33

 

  1. $218,887.79

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

88)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

89)

 

 

 

 

 

 

 

 

 

 

 

 

90)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

  • Today, your grandmother gave you a gift of $25,000 to help pay for your college education. She told you that this amount was the result of a one-time investment at 8% interest 13 years ago. How much did your grandmother originally invest?

 

  1. $9,225.00

 

  1. $9,419.25

 

  1. $9,350.00

 

  1. $9,504.55

 

  1. $9,192.45

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • In 1889, Vincent Van Gogh’s painting, “Sunflowers,” sold for $125. One hundred years later it sold for $36 million. Had the painting been purchased by your great-grandfather and passed on to you, what annual return on investment would your family have earned on the painting?
  1. A) 40% B) 11.88% C) 9.11%                    D) 11.99%                  E) 10.09%

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • Chia Burgers began operations by opening 115 restaurants in Western Canada at the end of its first year of operations. By the end of year 2, an additional 5 restaurants were opened. By the end of year 3, there were 130 restaurants operational. At the end of year 5, there were 138 total restaurants.

 

From the end of year 1 to the end of year 5, the number of eating establishments grew at a rate of ________ compounded annually.

  1. A) 2% B) 5.6% C) 4.7%                       D) 9.3%                       E) 8.7%

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

91)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

92)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

93)

 

 

 

 

 

 

 

 

 

 

 

30

 

  • The interest rate used to calculate the present value of future cash flows is called the

 

________ rate.

 

 

 

 

 

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • 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% per year over the next six years. How much will your dream house cost by the time you are ready to buy it?

 

  1. $246,396.67

 

  1. $246,019.67

 

  1. $240,284.08

 

  1. $247,299.20

 

  1. $246,831.94

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You would like to give your daughter $50,000 towards her college education 15 years from now. How much money must you set aside today for this purpose if you can earn 9% on your investments?

 

  1. $12,250.00

 

  1. $12,989.47

 

  1. $14,211.11

 

  1. $14,008.50

 

  1. $13,726.90

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

94)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96)

 

 

 

 

 

 

 

 

31

 

  • The value today of future cash flows discounted at the appropriate discount rate is called the ________ value.
    1. Future

 

  1. Principal

 

  1. Compound

 

  1. Present

 

  1. Simple

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded annually, how long will you have to wait to buy the stereo?
    1. 58 years

 

  1. 78 years

 

  1. 58 years

 

  1. 75 years

 

  1. 42 years

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Today, you earn a salary of $37,800. What will your annual salary be twelve years from now if you receive annual raises of 3.6%?
    1. $56,324.17

 

  1. $56,907.08

 

  1. $57,784.17

 

  1. $55,981.03

 

  1. $58,213.46

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

97)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

98)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99)

 

 

 

 

 

 

 

 

 

 

 

32

 

100) You just won the lottery and want to put some money away for your child’s college 100)

education. College will cost $65,000 in 18 years. You can earn 8% compounded annually. How much do you need to invest today?

  1. A) $15,258.17
  2. B) $9,828.18
  3. C) $13,690.82
  4. D) $11,763.07
  5. E) $16,266.19

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

 

 

  • Provide a definition of “simple interest.”

 

Answer: Interest earned only on the original principal amount invested.

 

Explanation:

 

  • Present value is used extensively by managers who are reviewing proposed projects. How does the present value of a cash flow assist management in making these business decisions?

 

Answer: By converting cash flows into present values, management can compare and contrast various alternative opportunities and determine which course of action is best for the firm. The present value allows management to view projects on an equivalent basis. Also, by knowing the present value of the future cash flows of a project, management can determine if those cash inflows are sufficient to offset the required investment in the project. While students may have various answers, this question starts them thinking about financial decision-making, which is covered later in the text.

101)

 

 

 

 

102)

 

Explanation:

 

  • Provide a definition of “present value” (PV).

 

Answer: The current value of future cash flows discounted at the appropriate

 

discount rate.

 

Explanation:

 

  • How long will it take for money to double at a rate of 6% compounded monthly?

 

Answer: At the given rate, money will double in 11 years and 7 months.

 

Explanation:

 

103)

 

 

 

 

 

 

104)

 

 

 

 

 

 

 

 

 

33

 

105) Write a sentence explaining why present values decrease as the discount rate 105)
  increases.  
  Answer: Student answers will vary. Here is one example. When you can earn more  
  interest, you need less of your own money to reach the same future dollar  
  amount.  
  Explanation:  
106) Explain what compounding is and the relationship between compound interest 106)
  earned and the number of years over which an investment is compounded.  
  Answer: Compounding is earning interest on interest. Compounding is not very  
  significant over short time periods, but greatly increases in importance over  
  a longer time period.  
  Explanation:  
107) State the future value formula and explain the effect that time has on the future 107)
  value of an investment.  

Answer: FV = PV(1 + r)t

 

Time is the exponential function. Thus, time has a significant bearing on the future value of an investment because the future value rises exponentially in response to time. The longer the time period, the greater this effect will be.

Explanation:

 

 

  • Provide a definition of “discount.”

 

Answer: To calculate the present value of some future amount.

 

Explanation:

 

  • An investor is considering depositing $10,000 and making $400 semi-annual contributions for the next five years. If one investment provides 5% compounded monthly and another investment provides 5.2% compounded semi-annually, determine the difference between the two investments.

 

Answer: The investment earning 5% will have a future value of $17,320.33, while the investment earning 5.2% will have a future value of $17,428.25, for a

difference of $107.92.

 

Explanation:

108)

 

 

 

 

109)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

110) At an interest rate of 10% and using the Rule of 72, how long will it take to 110)

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? Given the power of compounding, shouldn’t it take less time for the money to double the second time?

Answer: It will take 7.2 years to double the initial investment, then another 7.2 years to double it again. That is, it takes 14.4 years for the value to reach four times the initial investment. Compounding doesn’t affect the amount of time it takes for an investment to double the second time, but note that during the first 7.2 years, the interest earned is equal to 100% of the initial investment. During the second 7.2 years, the interest earned is equal to 200% of the initial investment. That is the power of compounding.

 

Explanation:

 

111) What is the rate needed (compounded monthly) for $10,000 to mature to $25,000 111) in 15 years?

 

Answer: The required rate of return is 6.12% compounded quarterly.

 

Explanation:

 

112) You wish to have $200,000 at the end of twenty years. In the last five years, you 112)
withdraw $1,000 annually at a rate of 3.8% compounded quarterly. During the  
middle ten years, you contribute $500 monthly at a rate of 2.8% compounded  
semi-annually. Given this information, determine the initial deposit that has to be  
made at the start of the first five years at a rate of 4% compounded monthly.  

 

Answer: The initial deposit will be $9,056.50.

 

Explanation:

 

113) An investor is considering depositing $20,000 in an account earning 5% 113)
compounded quarterly for the next three years. Afterwards, he will take this  
amount and contribute $200 quarterly for the next four years at a rate of 4%  
compounded semi-annually. Finally, over the next two years, he will withdraw  
$1,000 annually at a rate of 3.5% compounded monthly. Determine the future  
value at the end of this time period.  

 

Answer: The future value will be $30,833.94.

 

Explanation:

 

114) Provide a definition of “compounding.” 114)

 

Answer: The process of reinvesting interest earned on the investment such that it accumulates interest.

Explanation:

 

 

 

 

 

 

 

 

 

 

35

 

  • If $10,000 was invested at 4% over ten years, determine the difference if this investment was based on simple interest versus interest that was compounded annually.

 

Answer: Simple interest provides a future value of $14,800, while compounded

 

annually provides $14,802.44.

 

Explanation:

 

  • Define and explain the relationship between the present value and the discount rate. Graphically illustrate this relationship.

 

Answer: The present value is inversely related to the discount rate. If you can earn

 

more interest, then it takes less of an initial investment to reach a predetermined future value. Students should draw a graph depicting an inverse relationship.

115)

 

 

 

 

 

 

 

 

 

116)

 

Explanation:  
117) Explain intuitively why it is that present values decrease as the discount rate 117)
increases.  

 

Answer: Intuitively, a dollar today is worth more than a dollar tomorrow. As a practical matter, the discount rate is an opportunity cost, and the higher the rate, the higher the cost.

 

Explanation:

 

  • How long will it take for money to tripe at a rate of 4.5% compounded quarterly?

 

Answer: At the given rate, money will triple in 24.55 years.

 

Explanation:

 

  • Why do you think the concept known as the “time value of money” plays such a critical role in finance?

Answer: Student answers will vary. However, each response should demonstrate (1) an understanding that $1 today is worth more than $1 tomorrow and (2) that all investment decisions should consider the impact of this concept.

 

118)

 

 

 

 

119)

 

Explanation:

 

  • Provide a definition of “future value” (FV).

 

Answer: The amount an investment is worth after one or more periods. Also

 

compound value.

 

Explanation:

 

  • Provide a definition of “time value of money.”

 

Answer: Refers to the fact that a dollar today is worth more than a dollar at a future

 

point in time, given positive rates of interest.

 

Explanation:

 

120)

 

 

 

 

 

 

121)

 

 

 

 

 

 

 

36

 

122) What is the difference in future value if $40,000 is invested at 5% over twenty 122)

years, with one option compounding interest annually, while the other is based on monthly compounding?

Answer: Annual compounding provides a return of $106,131.91, while monthly compounding provides a return of $108,505.61 for a difference of $2,373.70.

 

Explanation:

 

  • An investor is considering depositing $10,000 in an account earning 3% compounded monthly for the next two years. Afterwards, he will take this amount and contribute $500 monthly for the next three years at a rate of 5% compounded annually. Finally, over the next three years, he will withdraw $500 annually at a rate of 4.5% compounded semi-annually. Determine the future value at the end of this time period.

 

Answer: The future value will be $34,584.92

 

Explanation:

 

  • The notion that money has “time-value” is based on the existence of a nonzero “opportunity rate”, i.e., a rate of return at which it is possible to invest. Why is the opportunity rate so important?

 

Answer: We have found that, while they are able to perform compounding and discounting computations successfully, some students never really grasp the “why” of the computation. This question is designed to probe the issue of “why time value procedures work” more deeply. An adequate answer will indicate that the opportunity rate is the rate of return that equates two different dollar values at two different points in time. That is, a rational investor will be indifferent to $.9091 today and $1.00 in one year.

 

123)

 

 

 

 

 

 

 

 

 

 

 

 

124)

 

Explanation:

 

  • An investor is considering depositing $20,000 and making monthly contributions of $250 per month into investment. If the investor wants to have a future value of $50,000, what will be the rate of interest if he wishes to have this amount in 5 years? Assume interest is compounded monthly.

 

Answer: The rate of interest will have to be 8.92%.

 

Explanation:

 

  • If $20,000 was invested at 5% over five years, determine the difference if this investment was based on simple interest versus interest that was compounded annually.

 

Answer: Simple interest provides a future value of $25,000, while compounded annually provides $25,525.63.

 

125)

 

 

 

 

 

 

 

 

 

126)

 

 

Explanation:

 

 

 

 

 

 

 

37

 

127) You are considering two lottery payment streams. Choice A pays $1,000 today 127)

and choice B pays $1,750 at the end of five years from now. Using a discount rate of 5%, based on present values, which would you choose? Using the same discount rate of 5%, based on future values, which would you choose? What do your results suggest as a general rule for approaching such problems? (Make your choices based purely on the time value of money.)

Answer: PV of A = $1,000; PV of B = $1,371; FV of A = $1,276; FV of B = $1,500. Based on both present values and future values, B is the better choice. The student should recognize that finding present values and finding future values are simply reverse processes of one another, and that choosing between two lump sums based on PV will always give the same result as choosing between the same two lump sums based on FV.

 

Explanation:

 

  • Provide a definition of “discount rate.”

 

Answer: The rate used to calculate the present value of future cash flows.

 

Explanation:

 

  • Susie and Tim are twins. Susie invests $5,000 at age 20 and earns 5% compound interest. Tim invests $10,000 at age 40 and earns 5% compound interest. No matter how long they live, Tim will never have as much money as Susie. Explain why.

 

Answer: By age 40, Susie’s funds had grown to $13,266.49, which is more than the amount of money Tim is investing at that point in time. The key here is time. Time is the exponential function and therefore has a tremendous impact on the value of money. Even though Tim invests twice as much money, he will always have less than Susie.

 

128)

 

 

 

 

129)

 

Explanation:  
130) Explain what compounding is and the relationship between compound interest 130)

earned and the number of years over which an investment is compounded.

 

Answer: Compounding is earning interest on interest. Compounding is not significant over short time periods, but increases in importance the longer the time period considered.

Explanation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38

 

131) Some financial advisors recommend you increase the amount of federal income 131)

taxes withheld from your paycheque each month so that you will get a larger refund come April. That is, you take home less today but get a bigger lump sum when you get your refund. Based on your knowledge of the time value of money, what do you think of this idea? Explain.

Answer: Some students may slip in a discussion about the benefits of forced savings, etc., but these issues are based on preferences, not the time value of money. Based on the time value of money, the students should recommend the opposite tack, that is, withhold as little as possible and pay the tax bill when it comes the following year. This is the usual dollar today versus a dollar tomorrow argument. Of course, the astute student will note the potential tax complications of this strategy, namely the CRA penalty for insufficient withholding, but the basic argument still applies.

 

 

Explanation:

 

  • $15,000 is invested into a plan earning 5% compounded quarterly for the first ten years. What will the rate of interest have to be for the next ten years (compounded monthly) for the value to reach $40,000?

 

Answer: The rate of interest will have to be 4.85%.

 

Explanation:

 

  • Provide a definition of “interest on interest.”

 

Answer: Interest earned on the reinvestment of previous interest payments.

 

Explanation:

 

132)

 

 

 

 

 

 

 

133)

 

 

134) Provide a graphical illustration of present value over a twenty year time span 134)

given rates of return of 0%, 5%, 10%, 15% and 20%.

 

Answer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Explanation:

 

 

39

 

135) Provide a definition of “compound interest.” 135)

 

Answer: Interest earned on both the initial principal and the interest reinvested from prior periods.

Explanation:  
136) You wish to have $400,000 at the end of twenty-five years. In the last ten years, 136)
you contribute $1,000 semi-annually at a rate of 5.8% compounded monthly.  
During the middle ten years, you withdraw $750 quarterly at a rate of 4.5%  
compounded annually. Given this information, determine the initial deposit that  
has to be made at the start of the first five years at a rate of 4% compounded  
monthly.  
Answer: The initial deposit will be $130,150.00.  
Explanation:  
137) What is the rate needed (compounded annually) for $95,000 to mature to 137)
$250,000 in 25 years?  

 

Answer: The required rate of return is 3.95% compounded monthly.

 

Explanation:

 

138) What is the difference in future value if $20,000 is invested at 5% over ten years, 138) with one option compounding interest semi-annually, while the other is based on quarterly compounding?

 

Answer: Semi-annual compounding provides a return of $32,772.33, while quarterly compounding provides a return of $32,872.39, for a difference of $100.06.

Explanation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 

139) Provide a graphical illustration of future value over a ten year time span given 139)

rates of return of 0%, 5%, 10%, 15% and 20%.

 

Answer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Explanation:    
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.  
140) Tom and Antonio both want to open savings accounts today. Tom wants to have $1,000 140)
in his savings account six years from now. Antonio wants to have $1,000 in his savings  
account three years from now. Antonio needs to deposit twice the amount of money  
today as Tom.    
Answer: True False  
Explanation:    
141) The I.C. James Co. invested $10,000 six years ago at 5% simple interest. The I.M. Smart 141)
Co. invested $10,000 six years ago at 5% interest which is compounded annually. The  
I.M Smart Co. will earn $525 interest in the second year.  
Answer: True False  
Explanation:    
142) The future value of a single sum will increase more rapidly when the frequency of 142)
compounding increases.  
Answer: True False  

Explanation:

 

 

 

 

 

 

 

 

 

 

 

41

 

143) Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris              143)

 

deposits $1,000 into an account that pays 4% simple interest. Both deposits were made

 

today. At the end of one year, both Jamie and Chris will have the same amount in their

 

accounts.

 

Answer:   True               False

Explanation:

 

144) The future value will increase the higher the rate of interest. 144)
  Answer: True False  
  Explanation:    
145) Discount rate is the interest rate used to calculate the present value of future cash flows. 145)
  Answer: True False  
  Explanation:    
146) The I.C. James Co. invested $10,000 six years ago at 5% simple interest. The I.M. Smart 146)
  Co. invested $10,000 six years ago at 5% interest which is compounded annually. The  
  I.C. James Co. will have an account value of $13,400.96 six years from now.  
  Answer: True False  
  Explanation:    
147) Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris 147)
  deposits $1,000 into an account that pays 4% simple interest. Both deposits were made  
  today. All else equal, Jamie made the better investment.  
  Answer: True False  
  Explanation:    
148) The present value will increase the higher the rate of interest. 148)
  Answer: True False  
  Explanation:    
149) Present value is the value today of future cash flows discounted at the appropriate 149)
  discount rate.    
  Answer: True False  
  Explanation:    
150) The future value of a single sum will increase more rapidly when the frequency of 150)
  compounding decreases.  
  Answer: True False  
  Explanation:    
151) The present value will increase the lower the rate of interest. 151)
  Answer: True False  

Explanation:

 

 

 

 

 

 

42

 

  • Future value can be lower than present value.

 

Answer:   True               False

Explanation:

 

  • Present values are always smaller than future values when both r and t are positive.

 

Answer:   True               False

Explanation:

 

  • The future value of a single sum will increase more rapidly when the interest rate decreases.

 

Answer:       True       False

Explanation:

 

  • If the rate at which you can invest is 0%, the value today of $1 to be received in the future is less than $1.

 

Answer:       True       False

Explanation:

 

  • Present values increase as the discount rate increases.

 

Answer:       True       False

Explanation:

 

  • The larger the present value factor, the larger the present value.

 

Answer:   True               False

Explanation:

152)

 

 

 

 

153)

 

 

 

 

154)

 

 

 

 

 

155)

 

 

 

 

 

156)

 

 

 

 

157)

 

 

158) The I.C. James Co. invested $10,000 six years ago at 5% simple interest. The I.M. Smart               158)

 

Co. invested $10,000 six years ago at 5% interest which is compounded annually. Both

 

the I.C. James Co. and the I.M. Smart Co. will earn $500 interest in the first year.

 

Answer:   True               False

Explanation:

 

159) The future value will increase the longer the period of time. 159)
  Answer: True False  
  Explanation:    
160) Present values increase the further away in time the future value. 160)
  Answer: True False  
  Explanation:    
161) Tom and Antonio both want to open savings accounts today. Tom wants to have $1,000 161)
  in his savings account six years from now. Antonio wants to have $1,000 in his savings  
  account three years from now. Tom needs to deposit more money into his account today  
  than does Antonio.    
  Answer: True False  

Explanation:

 

 

 

 

43

 

  • The larger the future value, the larger the present value.

 

Answer:       True       False

Explanation:

 

  • The future value will increase the shorter the period of time.

 

Answer:       True       False

Explanation:

 

  • Future value is always higher than present value.

 

Answer:       True       False

Explanation:

162)

 

 

 

 

163)

 

 

 

 

164)

 

 

165) Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris              165)

 

deposits $1,000 into an account that pays 4% simple interest. Both deposits were made

 

today. Chris will never earn any interest on interest.

 

Answer:   True               False

Explanation:

 

166) As the discount rate increases, the future value of $500 to be received four years from 166)
now will decrease.    
Answer:True False  
Explanation:    

 

167) Discounting is the process of finding the present value of some future amount. 167)
  Answer: True False  
  Explanation:    
168) Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris 168)
  deposits $1,000 into an account that pays 4% simple interest. Both deposits were made  
  today. At the end of five years, Chris will have more money in his account than Jamie  
  has in hers.    
  Answer: True False  

Explanation:

 

 

  • Tom and Antonio both want to open savings accounts today. Tom wants to have $1,000 in his savings account six years from now. Antonio wants to have $1,000 in his savings account three years from now. Antonio needs to deposit more money into his account today than does Tom.

 

Answer:   True               False

Explanation:

 

  • Compounding is the process of finding the present value of some future amount.

 

Answer:       True       False

Explanation:

169)

 

 

 

 

 

 

 

 

170)

 

 

 

 

 

 

44

 

  • The longer the time period, the higher the present value.

 

Answer:       True       False

Explanation:

 

  • Interest earned on the reinvestment of previous interest payments is called simple interest.

 

Answer:       True       False

Explanation:

 

  • The higher the discount rate, the higher the present value.

 

Answer:   True              False

Explanation:

 

  • The future value will increase the lower the rate of interest.

 

Answer:       True       False

Explanation:

 

  • The future value will increase the longer the period of time.

 

Answer:   True              False

Explanation:

 

  • The future value of a single sum will increase more rapidly when the interest rate increases.

 

Answer:   True              False

Explanation:

 

  • Tom and Antonio both want to open savings accounts today. Tom wants to have $1,000 in his savings account six years from now. Antonio wants to have $1,000 in his savings account three years from now. Tom will need to deposit twice the amount of money today as Antonio.

 

Answer:       True       False

Explanation:

171)

 

 

 

 

172)

 

 

 

 

 

173)

 

 

 

 

174)

 

 

 

 

175)

 

 

 

 

176)

 

 

 

 

 

177)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

Answer Key

 

Testname: C5

 

 

 

  • C
  • C
  • A
  • A
  • D
  • C
  • E
  • C
  • B
  • A
  • A
  • C
  • B
  • C
  • E
  • B
  • A
  • A
  • B
  • A
  • B
  • E
  • D
  • D
  • D
  • E
  • D
  • E
  • A
  • D
  • B
  • B
  • B
  • D
  • C
  • B
  • B
  • D
  • C
  • A
  • E
  • B
  • A
  • B
  • E
  • C
  • C
  • E
  • B
  • B

 

 

46

 

Answer Key

 

Testname: C5

 

 

 

  • D
  • E
  • B
  • B
  • D
  • D
  • C
  • A
  • E
  • E
  • B
  • B
  • C
  • D
  • D
  • D
  • D
  • D
  • D
  • D
  • C
  • C
  • B
  • A
  • E
  • E
  • D
  • E
  • B
  • D
  • D
  • D
  • C
  • D
  • D
  • A
  • B
  • E
  • B
  • B
  • E
  • A
  • C
  • B
  • D
  • E
  • D
  • B
  • C
  • E

 

 

47

 

Answer Key

 

Testname: C5

 

 

 

  • Interest earned only on the original principal amount invested.

 

  • By converting cash flows into present values, management can compare and contrast various alternative opportunities and determine which course of action is best for the firm. The present value allows management to view projects on an equivalent basis. Also, by knowing the present value of the future cash flows of a project, management can determine if those cash inflows are sufficient to offset the required investment in the project. While students may have various answers, this question starts them thinking about financial decision-making, which is covered later in the text.

 

  • The current value of future cash flows discounted at the appropriate discount rate.

 

  • At the given rate, money will double in 11 years and 7 months.

 

  • Student answers will vary. Here is one example. When you can earn more interest, you need less of your own money to reach the same future dollar amount.

 

  • Compounding is earning interest on interest. Compounding is not very significant over short time periods, but greatly increases in importance over a longer time period.
  • FV = PV(1 + r)t

 

Time is the exponential function. Thus, time has a significant bearing on the future value of an investment because the future value rises exponentially in response to time. The longer the time period, the greater this effect will be.

 

  • To calculate the present value of some future amount.

 

  • The investment earning 5% will have a future value of $17,320.33, while the investment earning 5.2% will have a future value of $17,428.25, for a difference of $107.92.

 

  • It will take 7.2 years to double the initial investment, then another 7.2 years to double it again. That is, it takes 14.4 years for the value to reach four times the initial investment. Compounding doesn’t affect the amount of time it takes for an investment to double the second time, but note that during the first 7.2 years, the interest earned is equal to 100% of the initial investment. During the second 7.2 years, the interest earned is equal to 200% of the initial investment. That is the power of compounding.
  • The required rate of return is 6.12% compounded quarterly.

 

  • The initial deposit will be $9,056.50.

 

  • The future value will be $30,833.94.

 

  • The process of reinvesting interest earned on the investment such that it accumulates interest.

 

  • Simple interest provides a future value of $14,800, while compounded annually provides $14,802.44.

 

  • The present value is inversely related to the discount rate. If you can earn more interest, then it takes less of an initial investment to reach a predetermined future value. Students should draw a graph depicting an inverse relationship.

 

  • Intuitively, a dollar today is worth more than a dollar tomorrow. As a practical matter, the discount rate is an opportunity cost, and the higher the rate, the higher the cost.
  • At the given rate, money will triple in 24.55 years.

 

  • Student answers will vary. However, each response should demonstrate (1) an understanding that $1 today is worth more than $1 tomorrow and (2) that all investment decisions should consider the impact of this concept.

 

  • The amount an investment is worth after one or more periods. Also compound value.

 

  • Refers to the fact that a dollar today is worth more than a dollar at a future point in time, given positive rates of interest.

 

 

48

 

Answer Key

 

Testname: C5

 

 

 

  • Annual compounding provides a return of $106,131.91, while monthly compounding provides a return of $108,505.61 for a difference of $2,373.70.
  • The future value will be $34,584.92

 

  • We have found that, while they are able to perform compounding and discounting computations successfully, some students never really grasp the “why” of the computation. This question is designed to probe the issue of “why time value procedures work” more deeply. An adequate answer will indicate that the opportunity rate is the rate of return that equates two different dollar values at two different points in time. That is, a rational investor will be indifferent to $.9091 today and $1.00 in one year.

 

  • The rate of interest will have to be 8.92%.

 

  • Simple interest provides a future value of $25,000, while compounded annually provides $25,525.63.

 

  • PV of A = $1,000; PV of B = $1,371; FV of A = $1,276; FV of B = $1,500. Based on both present values and future values, B is the better choice. The student should recognize that finding present values and finding future values are simply reverse processes of one another, and that choosing between two lump sums based on PV will always give the same result as choosing between the same two lump sums based on FV.

 

  • The rate used to calculate the present value of future cash flows.

 

  • By age 40, Susie’s funds had grown to $13,266.49, which is more than the amount of money Tim is investing at that point in time. The key here is time. Time is the exponential function and therefore has a tremendous impact on the value of money. Even though Tim invests twice as much money, he will always have less than Susie.
  • Compounding is earning interest on interest. Compounding is not significant over short time periods, but increases in importance the longer the time period considered.

 

  • Some students may slip in a discussion about the benefits of forced savings, etc., but these issues are based on preferences, not the time value of money. Based on the time value of money, the students should recommend the opposite tack, that is, withhold as little as possible and pay the tax bill when it comes the following year. This is the usual dollar today versus a dollar tomorrow argument. Of course, the astute student will note the potential tax complications of this strategy, namely the CRA penalty for insufficient withholding, but the basic argument still applies.

 

  • The rate of interest will have to be 4.85%.

 

  • Interest earned on the reinvestment of previous interest payments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

Answer Key

 

Testname: C5

 

 

 

134)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • Interest earned on both the initial principal and the interest reinvested from prior periods.

 

  • The initial deposit will be $130,150.00.

 

  • The required rate of return is 3.95% compounded monthly.

 

  • Semi-annual compounding provides a return of $32,772.33, while quarterly compounding provides a return of $32,872.39, for a difference of $100.06.

139)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  • FALSE
  • TRUE
  • TRUE
  • TRUE

 

 

50

 

Answer Key

 

Testname: C5

 

 

 

  • TRUE
  • TRUE
  • FALSE
  • TRUE
  • FALSE
  • TRUE
  • FALSE
  • TRUE
  • TRUE
  • TRUE
  • FALSE
  • FALSE
  • FALSE
  • TRUE
  • TRUE
  • TRUE
  • FALSE
  • FALSE
  • FALSE
  • FALSE
  • FALSE
  • TRUE
  • FALSE
  • TRUE
  • FALSE
  • TRUE
  • FALSE
  • FALSE
  • FALSE
  • TRUE
  • FALSE
  • TRUE
  • TRUE
  • FALSE

 

Additional information

Add Review

Your email address will not be published. Required fields are marked *

Related Products

Quick Links
Contact Information

511 SW 10th Ave 1206, Portland, OR, United States

Pinterest

Nurse Guide Hub

©2026 – All Rights Reserved