# Multiple Choice questions on Time Value of Money

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

#### Solution Preview

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.