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Time Value of Money Concepts

1.) The IF for the future value of an annuity is 4.5 at 10% for 4 years. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be?

A. $2,500
B. $2,000
C. $1,778
D. none of the above

2.) Mr. Blochirt is creating a college investment fund for his daughter. He will put in $850 per year for the next 15 years and expects to earn an 8% annual rate of return. How much money will his daughter have when she starts college?

A. $11,250
B. $12,263
C. $24,003
D. $23,079

3.) Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period?

A. $2,915
B. $3,570
C. $6,254
D. $8,570

4.) Sharon Smith will receive $1 million in 50 years. The discount rate is 14. As an alternative, she can receive $2,000 today. Which should she choose?

A. the $1 million dollars in 50 years
B. $2,000 today
C. She should be indifferent.
D. need more information

5.) Dr. J. wants to buy a Dell computer which will cost $2,788 four years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside?

A. $627.93
B. $697.00
C. $823.15
D. $531.81

6.) Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?

A. Between 11% and 12%
B. Between 8% and 9%
C. 17%
D. none of the above

7.) The shorter the length of time between a present value and its corresponding future value:

A. the lower the present value, relative to the future value.
B. the higher the present value, relative to the future value.
C. the higher the interest rate used in the present-valuation.
D. none of the above

8.) A dollar today is worth more than a dollar to be received in the future because:

A. the dollar can be invested today and earn interest.
B. of the risk of nonpayment in the future.
C. inflation will reduce purchasing power of a future dollar.
D. none of the above

9.) The higher the rate used in determining the future value of a $1 annuity:

A. the smaller the future value at the end of the period.
B. the greater the future value at the end of a period.
C. the greater the present value at the beginning of a period.
D. None of the above : the interest has no effect on the future value of an annuity.

10.) Mr. Darden is selling his house for $165,000. He bought it for $55,000 nine years ago. What is the annual return on his investment?

A. 3%
B. Between 14% and 16%
C. 13%
D. none of the above

11.) Increasing the number of periods will increase all of the following EXCEPT:

A. the present value of an annuity.
B. the present value of $1.
C. the future value of $1.
D. the future value of an annuity.

Solution Preview

1.) The IF for the future value of an annuity is 4.5 at 10% for 4 years. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be?

Annual Payments=FV/IF=8000/4.5=1777.778

Correct option is:
C. $1,778

2.) Mr. Blochirt is creating a college investment fund for his daughter. He will put in $850 per year for the next 15 years and expects to earn an 8% annual rate of return. How much money will his daughter have when she starts college?

Interest rate=i=8%
Periodic deposit=R=$850
Number of periods=n=15
FV=R*(((1+i)^n-1)/i)=850*(((1+8%)^15-1)/8%)=23079.3

Correct option is:
D. $23,079

3.) Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period? ...

Solution Summary

There are 11 basic problems related to time value of money concepts. Solutions are provided with suitable working if needed.

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