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    Multiple Choice Questions on Time Value of Money and Rate of Return

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    2. Present Value
    What is the present value of:
    1. $9,000 in 7 years at 8 percent?
    2. $20,000 in 5 years at 10 percent?
    3. $10,000 in 25 years at 6 percent?
    4. $1,000 in 50 years at 16 percent?

    3. Future Value
    If you invest $9,000 today, how much will you have:
    a. In 2 years at 9 percent?
    b. In 7 years at 12 percent?
    c. In 25 years at 14 percent?
    d. In 25 years at 14 percent (compounded semiannually)?

    5. Present Value
    How much would you have to invest today to receive:
    a. $15,000 in 8 years at 10 percent?
    b. $20,000 in 12 years at 13 percent?
    c. $6,000 each year for 10 years at 9 percent?
    d. $50,000 each year for 50 years at 7 percent?

    6. Future Value
    If you invest $2,000 in a year in a retirement account, how much will you have:
    a. In 5 years at 6 percent?
    b. In 20 years at 10 percent?
    c. In 40 years at 12 percent?
    8. Present Value
    Jean Splicing will receive $ 8,500 a year for the next 15 years from her trust. If a 7 percent interest rate is applied, what is the current value of the future payments.

    22. Alternative Present Values
    Your rich Grandfather has offered you a choice of one of the three following alternatives: $10,000.00 now; $2,000 a year for eight years; or $24,000 at the end of eight years, assuming you could earn 11 percent annually, which alternative should you choose? If you could earn 12 percent annually, would you still choose the same alternative.

    23. Payments required

    You need $28,974 at the end of 10 years, and your only investment outlet is an 8 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial investment at the beginning of the first year.

    a. What single payment could be made at the beginning of the first year to achieve this objective?
    b. What amount could you pay at the end of each year annually for 10 years to achieve this same objective?

    24. Quarterly compounding

    Sue Sussman started a paper route on January 1, 1998. Every three months, she deposits $500.00 in her bank account, which earns 4 percent annually but is compounded quaterly. On December 31, 2001, she used the entire balance in her bank account to invest in a contract that pays 9 annually. How much will she have on December 31, 2004?

    26. Yield

    Dr. I. N. Stein has just invested $6,250 for his son (age one). The money will be used for his son's education 17 years from now. He calculates that he will need $50,000.00 for his son's education by the time the boy goes to school. What rate of return will Dr. Stein need to achieve this goal?

    28. Solving for an annuity
    Betty Bronson has just retired after 25 years with the electric company. Her total pension funds have an accumulated value of $180,000, and her life expectancy is 15 more years. Her pension fund manager assumes he can earn a 9 percent return on her assets. What will be her yearly annuity for the next 15 years?

    37. Annuity consideration

    Larry Davis borrows $80,000 at 14 percent interest toward the purchase of a home. His mortgage is for 25 years .

    a. How much will his annual payments be? (Although home payments are usually on a monthly basis, we shall do our analysis on an annual basis for ease of computation. We will get a reasonably accurate answer.)
    b. How much interest will he pay over the life of the loan?
    c. How much should he be willing to pay to get out of a 14 percent mortgage and into a 10 percent mortgage with 25 years remaining on the mortgage? Assume current interest rates are 10 percent. Carefully consider the time value of money. Disregard taxes.

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    Solution Summary

    The solution explains and answers Multiple Choice Questions on Time Value of Money (TVM)- present value, future value, annuity, rate of return.