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    Multiple Choice questions on Time Value of Money

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    Identify the letter of the choice that best completes the statement or answers the question.

    ____ 1. How much must be invested today to have $1,000 in two years if the interest rate is 5%?
    a. $909.09
    b. $900.00
    c. $907.00
    d. $950.00

    ____ 2. Find the present value of $100 to be received at the end of two years if the discount rate is 12% compounded monthly.
    a. $66.50
    b. $78.76
    c. $68.80
    d. $91.80
    e. $79.75

    ____ 3. What is the most you should pay to receive the following cash flows if you require a return of 12 percent?

    Year 1 $5,000
    Year 2 $8,000
    Year 3 $12,000
    Year 4-10 $15,000

    a. $58,580
    b. $104,135
    c. $68,105
    d. none of the above

    ____ 4. Find the future value in two years of $100 that is deposited in an account, which pays 12%, compounded monthly.
    a. $160.00
    b. $112.70
    c. $118.80
    d. $125.40
    e. $126.97

    ____ 5. You have borrowed $180,000 to buy a new home. You plan to make monthly payments over a 25-year period. The bank has offered you a 10% interest rate compounded monthly. Calculate the total amount of interest you will pay the bank over the life of the loan.
    a. $301,499
    b. $307,541
    c. $310,545
    d. $319,766

    ____ 6. You have borrowed $130,000 to buy a new motor home. Your loan is to be repaid over 15 years at 8% compounded monthly If you pay an extra $200 per month on the motor home, how many years will it take to pay off the loan?
    a. 10.3 years
    b. 11. 5 years
    c. 12.8 years
    d. 13.3 years

    ____ 7. A perpetuity has a cash flow of $20 and a discount rate of 10%. What is the value of the perpetuity?
    a. $22
    b. $500
    c. $200
    d. none of the above

    ____ 8. Keith Stone has a 10-year-old daughter, Kate, who will be entering college in 8 years. Keith estimates college costs to be $16,000, $17,000, $18,000 and $19,000 payable at the beginning of each of Kate's four years in college. How much must Keith save each year (assume end of year payments) for each of the next 8 years to have enough savings to pay for Kate's education when she starts college? Assume Keith can earn 9% on his savings.
    a. $5,569
    b. $7,720
    c. $5,108
    d. $7,677

    ____ 9. Calculate the amount to be received at the end of year 1 that is equivalent to $150 at the end of year 1, $450 at the end of year 2, and $300 at the end of year 3, given a discount rate of 10%.
    a. $807
    b. $817
    c. $887
    d. $975
    e. $1,331

    ____ 10. You are considering an investment that will pay you $100 in Year 1, $500 in Year 2, $0 in Year 3 and $600 in Year 4. If you require a 12% return, what is the most you should pay for this investment today? (Round to nearest $)
    a. $915
    b. $869
    c. $734
    d. $698

    © BrainMass Inc. brainmass.com October 9, 2019, 8:07 pm ad1c9bdddf
    https://brainmass.com/business/annuity/multiple-choice-questions-on-time-value-of-money-140238

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    Note: the abbreviations have the following meanings

    PVIF= Present Value Interest Factor
    PVIFA= Present Value Interest Factor for an Annuity
    FVIF= Future Value Interest Factor
    FVIFA= Future Value Interest Factor for an Annuity

    They can be read from tables or calculated using the following equations
    PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
    PVIF( n, r%)= =1/(1+r%)^n
    FVIF( n, r%)= =(1+r%)^n
    FVIFA( n, r%)= =[(1+r%)^n -1]/r%

    ^ stands for raised to the power of

    Multiple Choice
    Identify the letter of the choice that best completes the statement or answers the question.

    c. 1 How much must be invested today to have $1,000 in two years if the interest rate is 5%?
    a. $909.09
    b. $900.00
    c. $907.00
    d. $950.00

    Answer c. $907.00

    Frequency= A Annual
    No of years= 2
    No of Periods= 2
    Discount rate annually= 5.00% annual
    Discount rate per period= 5.0000% Annual
    n= 2
    r= 5.00%
    PVIF (2 periods, 5.% rate ) = 0.907029

    Future value= 1,000
    Therefore, present value= 907.03 =1000x0.907029

    b. 2 Find the present value of $100 to be received at the end of two years if the discount rate is 12% compounded monthly.
    a. $66.50
    b. $78.76
    c. $68.80
    d. $91.80
    e. $79.75

    Answer: b. $78.76

    Frequency= m Monthly
    No of years= 2
    No of Periods= 24
    Discount rate annually= 12.00% annual
    Discount rate per period= 1.0000% Monthly
    n= 24
    r= 1.00%
    PVIF (24 periods, 1.% rate ) = 0.787566

    Future value= 100
    Therefore, present value= 78.76 =100x0.787566

    c.
    ____ 3 What is the most you should pay to receive the following cash flows if you require a return of 12 percent?

    Year 1 $5,000
    Year 2 $8,000
    Year 3 $12,000
    Year 4-10 $15,000

    a. $58,580
    b. $104,135
    c. $68,105
    d. none of the above

    Answer: c. $68,105
    (the closest value)

    First find the PV of cash flows for ...

    Solution Summary

    Answers to 10 Multiple Choice questions on Time Value of Money.

    $2.19