Chapter 05 - Introduction to Valuation: The Time Value of Money

Chapter 05
Introduction to Valuation: The Time Value of Money

True / False Questions

1. 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.
FALSE

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

2. The future value will increase the longer the period of time.
TRUE

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

3. The present value will increase the higher the rate of interest.
FALSE

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

4. The present value will increase the lower the rate of interest.
TRUE

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

5. Discount rate is the interest rate used to calculate the present value of future cash flows.
TRUE

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

6. Present value is the value today of future cash flows discounted at the appropriate discount
rate.
TRUE

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

7. As the discount rate increases, the future value of $500 to be received four years from now
will decrease:
FALSE

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

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

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

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

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

10. Discounting is the process of finding the present value of some future amount.
TRUE

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

Multiple Choice Questions

11. The value today of future cash flows discounted at the appropriate discount rate is called
the _____ value.
A. Principal
B. Future
C. Present
D. Simple
E. Compound

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Definitions

12. The amount an investment is worth after one or more periods of time is the ___________.
A. Future value.
B. Present value.
C. Principal value.
D. Compound interest rate.
E. Simple interest rate.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

13. The process of accumulating interest on an investment over time to earn more interest is
called:
A. Growth.
B. Compounding.
C. Aggregation.
D. Accumulation.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

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

_____________.
A. Free interest.
B. Annual interest.
C. Simple interest.
D. Interest on interest.
E. Compound interest.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

15. Interest earned on both the initial principal and the interest reinvested from prior periods is
called ____________.
A. Free interest.
B. Annual interest.
C. Simple interest.
D. Interest on interest.
E. Compound interest.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

16. Interest earned only on the original principal amount invested is called
_______________.
A. Free interest.
B. Annual interest.
C. Simple interest.
D. Interest on interest.
E. Compound interest.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

17. The future value interest factor is calculated as:

A. (1 + r)t
B. (1 + rt)
C. (1 + r)(t)
D. 1 + r - t
E. (1 + r)(2)

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Definitions

18. The current value of future cash flows discounted at the appropriate discount rate is called
the:
A. Principal value.
B. Future value.
C. Present value.
D. Simple interest rate.
E. Compound interest rate.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

19. The process of finding the present value of some future amount is often called
_____________.
A. Growth.
B. Discounting.
C. Accumulation.
D. Compounding.
E. Reduction.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

20. The present value interest factor is calculated as:

A. 1/(1 + r - t)
B. 1/(1 + rt)
C. 1/(1 + r)(t)
D. 1/(1 + r)t
E. 1 + r + t

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

21. The interest rate used to calculate the present value of future cash flows is called the
____________ rate.
A. Free interest.
B. Annual interest.
C. Compound interest.
D. Simple interest.
E. Discount.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

22. The concept that a dollar received today is worth more than a dollar received tomorrow is
referred to as the:
A. Present value.
B. Simple interest value.
C. Compound value.
D. Time value of money.
E. Future value of money.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Definitions

23. The factor (1 + r)t is called the:

A. Simple rate of interest.
B. Current factor.
C. Future value interest factor.
D. Present value interest factor.
E. Discount factor.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Definitions

24. The value computed using the factor 1/(1 + r)t is called the:
A. Present value.
B. Interest rate.
C. Number of periods.
D. Future value.
E. Compound value.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

25. Compound interest means that you earn:

A. Interest only on the initial amount invested.
B. Interest on the initial principal only.
C. Interest on both the principal and prior reinvested interest.
D. A decreasing amount of interest each year.
E. The same amount of interest each year.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

26. Calculating the present value of a future cash flow to determine its value today is called:
A. Discounted cash flow valuation.
B. The discount rate.
C. Future value compounding.
D. Present value compounding.
E. Timing the cash flow.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

27. The rate used to find the present value of a future payment is called the:
A. Simple rate.
B. Discount rate.
C. Compound rate.
D. Future value rate.
E. Loan rate.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

28. The discounted value of money is called the:

A. Compound value.
B. Simple value.
C. Future value.
D. Complex value.
E. Present value.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

29. The rate of return used when computing a present value is referred to as the ______ rate
while the rate used when computing a future value is referred to as the _____ rate.
A. Compound; discount.
B. Compound; simple.
C. Compound; compound.
D. Discount; discount.
E. Discount; compound.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

30. On a financial calculator, the symbol "N" represents the:

A. Current value.
B. Time periods.
C. Future value.
D. Rate of simple interest.
E. Rate of compound interest.

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

31. The present value equation is:

A. PV = FVt + (1 + r)t.
B. PV = FVt - (1 + r)t.
C. PV = FVt/[1/(1 + r)t].
D. PV = FVt/(1 + r)t.
E. PV = FVt * (1 + r)t.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

32. The amount an investment will worth after one or more periods of time is the _____
value.
A. Future.
B. Present.
C. Principal.
D. Discounted.
E. Simple.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Definitions

33. The process of accumulating interest on an investment over time to earn more interest is
called:
A. Growth.
B. Compounding.
C. Aggregation.
D. Accumulation.
E. Discounting.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

34. Interest earned on the reinvestment of previous interest payments is called _____ interest.
A. Free.
B. Annual.
C. Simple.
D. Interest on.
E. Intermediary.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

35. Interest earned on both the initial principal and the interest reinvested from prior periods is
called _____ interest.
A. Free.
B. Annual.
C. Simple.
D. Internal.
E. Compound.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

36. Interest earned only on the original principal amount invested is called _____ interest.
A. Free.
B. Annual.
C. Simple.
D. Interest on.
E. Compound.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

37. The current value of future cash flows discounted at the appropriate discount rate to
current time is called the _____ value.
A. Principal.
B. Future.
C. Present.
D. Simple.
E. Compound.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

38. The process of finding the present value of some future amount is often called:
A. Growth.
B. Discounting.
C. Accumulation.
D. Compounding.
E. Reduction.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

39. The interest rate used to calculate the present value of future cash flows is called the
_____ rate.
A. Free.
B. Annual.
C. Compound.
D. Simple.
E. Discount.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

40. Future value is best defined as:

A. An amount of money received each period for a stated number of periods.
B. The amount an investment is worth in today's dollars.
C. The dollar amount invested today at a stated rate of interest for some period of time.
D. The amount an investment is worth at the end of some stated period of time.
E. The cash value of an investment in today's dollars based on a stated rate of interest.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Definitions

41. The term interest-on-interest refers to:

A. The payment of interest more than once per year.
B. The interest earned on previous interest earnings which were reinvested.
C. Earning interest on an investment for a period greater than one year.
D. Earning interest only on the principal amount invested.
E. The process of accumulating interest on an investment over time to earn more interest.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

42. Present value is defined as the:

A. Amount of money invested each time period for a stated number of periods.
B. Summation of the cash flows received within a specified period of time.
C. Value of future cash flows in today's dollars given a specific discount rate.
D. Compounded value of a principal amount given a specific rate of interest.
E. Value of an investment given simple interest for a specific period of time.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Definitions

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Chapter 05 - Introduction to Valuation: The Time Value of Money

43. Compound interest is best defined as the interest earned:

A. On prior year's interest which was reinvested.
B. On a simple basis for multiple years.
C. On the initial investment for a stated number of periods.
D. On both the interest reinvested from prior periods and the initial investment.
E. For the first year multiplied by the number of years in the investment period.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Definitions

44. 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:
A. Choose the simple interest option because both have the same basic interest rate.
B. Choose the compound interest option because it provides a higher return.
C. Choose the compound interest option only if the compounding is for monthly periods.
D. Choose the simple interest option only if compounding occurs more than once a year.
E. Choose the compound interest option only if you are investing less than $5,000.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

45. Suppose you are trying to find the present value of two different cash flows using the
same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven
years from now. Which of the following is true about the discount factors used in these
valuations?
A. The discount factor for the cash flow ten years away is always less than or equal to the
discount factor for the cash flow that is received seven years from now.
B. Both discount factors are greater than one.
C. Regardless of the interest rate, the discount factors are such that the present value of the
$1,000 will always be greater than the present value of the $800.
D. Since the payments are different, no statement can be made regarding the discount factors.
E. You should factor in the time differential and choose the payment that arrives the soonest.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

46. Given r and t greater than zero:

I. Present value interest factors are less than one.

II. Future value interest factors are less than one.
III. Present value interest factors are greater than future value interest factors.
IV. Present value interest factors grow as t grows, provided r is held constant.
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

47. Which of the following statements is/are accurate? All else the same, ______________.

I. present values increase as the discount rate increases

II. present values increase the further away in time the future value
III. present values are always smaller than future values when both r and t are positive
A. I only
B. I and II only
C. II only
D. III only
E. II and III only

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

5-15
Chapter 05 - Introduction to Valuation: The Time Value of Money

48. Fresh out of college, you are negotiating with your prospective new employer. They offer
you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years
from now. If you can earn 7% on your invested funds, which of the following is true?
A. Take the signing bonus because it has the lower present value.
B. Take the signing bonus because it has the higher future value.
C. Take the lump sum because it has the higher present value.
D. Take the lump sum because it has the lower future value.
E. Based on these numbers, you are indifferent between the two.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

49. Mary plans on saving $1,000 a year for ten years. She would like to know the value of
these savings today. Mary should solve for the:
A. Present value.
B. Present value factor.
C. Future value.
D. Future value factor.
E. Compounded value.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

50. As long as the interest rate is greater than zero, the present value of a single sum will
always:
A. Increase as the interest rate increases.
B. Be less than the future value.
C. Decrease as the period of time decreases.
D. Equal the future value if the time period is one year.
E. Increase as the number of periods increases.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

5-16
Chapter 05 - Introduction to Valuation: The Time Value of Money

51. Which of the following statements is (are) true concerning the present value of a single
sum?

I. The higher the discount rate, the higher the present value.
II. The longer the time period, the higher the present value.
III. The larger the future value, the larger the present value.
IV. The larger the present value factor, the larger the present value.
A. IV only
B. I and IV only
C. III and IV only
D. I, III, and IV only
E. I, II, III, and IV

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

52. The greater the number of years, the:

A. Smaller the future value of a single sum.
B. Larger the present value of a single sum.
C. Larger the present value factor.
D. Smaller the future value factor.
E. Greater the compounding effect.

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Concepts

53. Monika has $6,000 in her investment account. She wants to withdraw her funds when her
account reaches $10,000. A decrease in the rate of return she earns will:
A. Increase the value of her account faster.
B. Cause her to wait longer before withdrawing her money.
C. Cause the present value of her account to decrease.
D. Allow her to withdraw more money sooner.
E. Cause the compounding effect to increase.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

54. 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. Which of the following statements is(are) correct assuming that both
Antonio and Tom earn the same rate of interest?

I. Tom needs to deposit more money into his account today than does Antonio.
II. Tom will need to deposit twice the amount of money today as Antonio.
III. Antonio needs to deposit more money into his account today than does Tom.
IV. Antonio needs to deposit twice the amount of money today as Tom.
A. I only
B. III only
C. I and II only
D. III and IV only
E. II only

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

55. Isabelle wants to invest $1,000. She wants to withdraw her money three years from now.
Which bank should she use if she wishes to maximize her investment?
A. Bank A, which offers a simple rate of 4%.
B. Bank B, which offers a simple rate of 5%.
C. Bank C, which offers a rate of 4% compounded annually.
D. Bank D, which offers a rate of 5% compounded monthly.
E. Bank E, which offers a rate of 5% compounded annually.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

56. Neal wants to borrow $2,500 and has received the following 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?
A. Bank A, which offers a simple rate of 4%.
B. Bank B, which offers a simple rate of 5%.
C. Bank C, which offers a rate of 4% compounded annually.
D. Bank D, which offers a rate of 5% compounded annually.
E. Bank E, which offers a rate of 5% compounded monthly.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

57. The future value will increase:

I. The longer the period of time.

II. The shorter the period of time.
III. The higher the rate of interest.
IV The lower the rate of interest.
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. I and II only

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

58. At a 6% rate of interest you will double your money in approximately ___ years.
A. 3
B. 6
C. 12
D. 24
E. 48

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

59. At a 3% rate of interest, you will quadruple your money in approximately ____ years.
A. 3
B. 6
C. 12
D. 24
E. 48

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

60. The present value factor will decrease:

A. The longer the period of time.
B. The higher the future value.
C. The lower the interest rate.
D. The higher the present value.
E. The slower the rate of growth.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

61. The future value factor will decrease:

A. The longer the period of time.
B. The lower the present value factor.
C. The lower the interest rate.
D. The higher the present value.
E. The higher the future value.

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

62. The future value of a single sum will increase more rapidly when:

I. The interest rate increases.

II. The interest rate decreases.
III. The frequency of compounding increases.
IV. The frequency of compounding decreases.
A. I only
B. III only
C. I and III only
D. II and III only
E. I and IV only

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

63. Kurt invests $1,000 at a 10% rate of return for twenty years. The return is based on simple
interest that is paid at the end of each year. Which one of the following is correct?
A. Kurt will receive more interest in year twenty than in year one.
B. Kurt will receive the same amount of interest each year.
C. Kurt will not receive any interest for the first year.
D. Kurt will receive less interest in year twelve than in year eight.
E. Kurt will receive interest on both the principal and year one's interest in year two.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

64. Many financial calculators require that:

A. The interest rate be input as a decimal, such as .07.
B. Interest be compounded on an annual basis.
C. The present value be input as a negative number when solving for the interest rate.
D. Interest be computed on a monthly basis.
E. Either the present value or the future value be input as a negative number when solving for
the number of periods.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

65. When using a financial calculator, you should:

I. Check the mode for beginning or ending.

II. Clear the calculator before starting a problem.
III. Use a sufficient number of decimal places.
IV. Check the number of payments per year.
A. Do II and III only
B. Do I, II, and III only
C. Do I and II only
D. Do II, III, and IV only
E. Do I, II, III, and IV

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

66. The formula for a present value calculation using Excel is:
A. PV (rate, nper, pmt, pv).
B. PV (nper, pmt, fv).
C. PV (rate, pmt, pv, fv).
D. PV (rate, nper, pmt, fv).
E. PV (rate, nper, pmt).

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

67. The future value of C invested at r% for t periods is:

A. FV = C/(1 + r)t.
B. FV = (C)(1 + t)r.
C. FV = (C)(1 + r)t.
D. FV = [C][1/(1 + r)t].
E. FV = (C)(1 + r)(t).

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

68. As the discount rate increases, the present value of $500 to be received six years from
now:
A. Remains constant.
B. Also increases.
C. Decreases.
D. Becomes negative.
E. Will vary but the direction of the change is unknown.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

69. 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?
A. The present value of Katie and Wilt's money is equal.
B. The value of Wilt's money will be greater than the value of Katie's money six years from
now.
C. In today's dollars, Wilt's money is worth more than Katie's.
D. In five years, the value of Katie's money will be equal to the value of Wilt's money.
E. Katie's money is worth more than Wilt's money today.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

70. Jamie deposits $1,000 into an account that pays 4% interest compounded annually. Chris
deposits $1,000 into an account that pays 4% simple interest. Both deposits were made today.
Which of the following statements are true concerning these two accounts?

I. At the end of one year, both Jamie and Chris will have the same amount in their accounts.
II. At the end of five years, Chris will have more money in his account than Jamie has in hers.
III. Chris will never earn any interest on interest.
IV. All else equal, Jamie made the better investment.
A. I and II only
B. III and IV only
C. I, II, and IV only
D. I, III, and IV only
E. II, III, and IV only

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

71. Nadine invests $1,000 at 8% when she is 25 years old. Neal invests $1,000 at 8% when he
is 40 years old. Both investments compound interest annually. Both Nadine and Neal retire at
age 60. Which one of the following statements is correct?
A. Nadine will have less money when she retires than Neal.
B. Neal will earn more interest on interest than Nadine.
C. Neal will earn more compound interest than Nadine.
D. If Neal waits to age 70 to retire, then he will have just as much money as Nadine.
E. Nadine will have more money when she retires than Neal.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

72. 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?
A. The higher the interest rate she earns, the less money she will have in the future.
B. The higher the interest rate, the longer she has to wait for her money to grow to $1,000 in
value.
C. If Sun Lee can earn 7%, she will have to wait about six years to have $1,000 total.
D. At the end of the five years Sun Lee will have less money if she invests at 5% rather than
at 7%.
E. At 10% interest Sun Lee should expect to have $1,000 in her account at the end of the five
years.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

73. Fred and Max each want to have $10,000 saved five years from now. Fred can earn
4.35%, compounded annually, on his savings and Max can earn 4.50%, compounded
annually, on his savings. Both Fred and Max are going to deposit one lump sum today and
will not add any additional funds to their accounts. Given this, Max _____ deposit _____ Fred
to achieve the goal.
A. Must; more than
B. Must; at least as much as
C. Must; as much or more than
D. Can; less than
E. Can; the same amount as

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

74. To decrease the amount required today to fund a $10,000 debt due two years from now,
you could _____ on your savings.
A. Increase the rate of interest earned
B. Decrease the number of compounding periods per year
C. Earn simple interest rather than compound interest
D. Both decrease the rate of interest and the number of compounding periods per year
E. Either decrease the rate of interest or decrease the number of compounding periods per
year

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

75. Given a constant future value and discount rate, an increase in the number of time periods
will _____ the present value.
A. Decrease
B. Either not affect or decrease
C. Not affect
D. Either increase or not affect
E. Increase

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

76. To create the same future value given a stated discount rate, you can:
A. Decrease both the present value and the time period.
B. Increase both the present value and the time period.
C. Decrease the time period and hold the present value constant.
D. Increase the present value and hold the time period constant.
E. Increase the present value and decrease the time period.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

77. Which of the following statements are correct given a constant interest rate and constant
five year period of time?

I. An increase in the future value causes the present value to decline.

II. An increase in the future value causes the present value to increase.
III. There is an inverse relationship between the present value and the future value.
IV. There is a direct relationship between the present value and the future value.
A. I only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

78. Grandma Jenkins knows that she has between six and nine months left to live. She wants
to leave each of her grandchildren $1,000 when she dies. For this purpose, she has established
a trust fund and has deposited sufficient monies to provide for her twelve grandchildren.
Today, she just discovered that her daughter is going to have twins, increasing the number of
her grandchildren to thirteen. To ensure her final wish is fully funded, Grandma Jenkins needs
to:
A. Withdraw $1,000 from her trust account.
B. Withdraw less than $1,000 from her trust account.
C. See if the rate of interest on her account can be lowered.
D. Deposit at least $1,050 into her trust account.
E. Deposit a little less than $1,000 into her trust account.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

79. 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?
A. You will earn more interest than if you invested in an account which compounded the
interest.
B. For every $1 you earn in interest in the first year, you will earn ($1.04) interest in the
second year.
C. You will earn interest on interest for four of the five years.
D. 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.
E. The total interest you will earn over five years will be equal to $100 x (1 + .04)5.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

80. 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:
A. Remain constant.
B. Increase at an increasing rate.
C. Increase at a constant rate.
D. Increase at a decreasing rate.
E. Increase by a constant amount.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

81. Which one of the following statements is correct?

A. The future value decreases as the period of time increases, all else constant.
B. The future value of $100 invested at 6% simple interest increases at a constant rate as the
period of time increases.
C. There is an inverse relationship between the future value of a lump sum investment and the
length of the investment period.
D. The future value of $100 invested at 6%, compounded annually, increases over time in an
exponential manner.
E. Because time is the exponent in the future value formula, the length of an investment
period has minimal effect on the future value of the investment.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

82. Margaret invests at 6% simple interest for six years. Pete invests at 6%, compounded
annually, for eight years. Sylvia invests for eight years at 6% simple interest. Which one of
the following statements is correct if all three individuals invested the same amount of money
on the same day?
A. Margaret will have more money than Sylvia at the end of three years.
B. Pete will have more money than either Margaret or Sylvia at the end of four years.
C. Sylvia will have more money than either Margaret or Pete at the end of six years.
D. Margaret will have less money than Pete but more money than Sylvia at the end of five
years.
E. Sylvia and Margaret will have more money than Pete at the end of six years.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

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Chapter 05 - Introduction to Valuation: The Time Value of Money

83. 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?
A. 5.5%, compounded annually
B. 5.5%, simple interest
C. 6.0%, simple interest
D. 6.0%, compounded annually
E. 6.0%, compounded semi-annually

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

84. Stephen has $2,400 to invest. Which one of the following investment options will produce
the largest future value for him?
A. 7% simple interest for 10 years
B. 7%, compounded annually for 10 years
C. 7%, compounded monthly for 12 years
D. 7%, compounded annually for 12 years
E. 7, simple interest for 12 years

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

85. You received a $1 savings account earning 5% on your 1st birthday. How much will you
have in the account on your 40th birthday if you don't withdraw any money before then?
A. $5.89
B. $6.34
C. $6.70
D. $7.00
E. $7.04

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

86. What is the future value of $25,000 received today if it is invested at 6.5% compounded
annually for six years?
A. $17,133.35
B. $27,476.42
C. $36,478.56
D. $39,521.75
E. $41,374.89

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

87. 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?
A. $7,260
B. $11,948
C. $12,000
D. $13,250
E. $14,520

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

88. 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?
A. $41,405
B. $48,000
C. $54,024
D. $55,200
E. $55,645

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

89. 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 over the same time period?
A. $86.20
B. $92.47
C. $413.80
D. $436.29
E. $500.00

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

90. 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?
A. $36.97
B. $40.41
C. $40.75
D. $41.38
E. $50.00

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

91. 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?
A. Less than one more year.
B. Between one and two more years.
C. Between two and three more years.
D. Between three and four more years.
E. Between four and five more years.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

92. 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%?
A. $21.89
B. $23.49
C. $24.93
D. $25.88
E. $29.94

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

93. An account was opened with an investment of $1,000 ten years ago. The ending balance
in the account is $1,500. If interest was compounded annually, what rate was earned on the
account?
A. 1.0%
B. 2.2%
C. 2.9%
D. 3.8%
E. 4.1%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

94. An account was opened with $1,000 ten years ago. Today, the account balance is $1,500.
If the account paid interest compounded annually, how much interest on interest was earned?
A. $86.20
B. $93.10
C. $102.39
D. $130.28
E. $500.00

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

95. 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?
A. $18,267.26
B. $18,375.75
C. $19,147.25
D. $21,370.10
E. $22,149.57

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

96. 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?
A. $27,491.53
B. $29,767.15
C. $31,180.47
D. $35,492.34
E. $100,000.00

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

97. 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?
A. $9,828.18
B. $11,763.07
C. $13,690.82
D. $15,258.17
E. $16,266.19

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

98. You are supposed to receive $2,000 five years from now. At an interest rate of 6%, what is
that $2,000 worth today?
A. $1,491.97
B. $1,492.43
C. $1,494.52
D. $1,497.91
E. $1,499.01

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

99. 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?
A. $2,135.32
B. $2,784.19
C. $2,881.11
D. $3,012.88
E. $8,979.28

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

100. Your grandfather placed $2,000 in a trust fund for you. In 10 years the fund will be worth
$5,000. What is the rate of return on the trust fund?
A. 5.98%
B. 8.76%
C. 9.60%
D. 9.98%
E. 10.14%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

101. 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?
A. 2.4%
B. 5.5%
C. 6.1%
D. 6.7%
E. 7.2%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

102. 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?
A. 9.11%
B. 10.09%
C. 11.88%
D. 11.99%
E. 13.40%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

103. 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?
A. 6.58 years
B. 8.42 years
C. 14.58 years
D. 15.75 years
E. 18.78 years

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

104. Granny puts $35,000 into a bank account earning 4%. You can't withdraw the money
until the balance has doubled. How long will you have to leave the money in the account?
A. 16 years
B. 17 years
C. 18 years
D. 19 years
E. 20 years

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

105. 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.
A. 4.2%
B. 4.7%
C. 5.6%
D. 8.7%
E. 9.3%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

106. 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.

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Chapter 05 - Introduction to Valuation: The Time Value of Money
Between the end of year 2 and the end of year 3, the number of eating establishments grew at
a rate of _________ compounded annually.
A. 4.2%
B. 4.7%
C. 5.6%
D. 8.3%
E. 9.3%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

107. 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, over the next five years, eating establishments are expected to grow at the same rate as they
did during year 5, forecast the number of eating establishments at the end of year 10.
A. 172
B. 198
C. 202
D. 223
E. 225

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

108. 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.

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Chapter 05 - Introduction to Valuation: The Time Value of Money
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?
A. 5
B. 6
C. 7
D. 8
E. 9

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

109. If the town's population was 62,000 at the end of year 5, and the population grew at the
same annual rate as the number of eating establishments between the end of year 1 and the
end of year 5, what was the town's population at the end of year 1?
A. 49,809
B. 51,435
C. 53,230
D. 54,330
E. 56,730

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

110. If you leave the money in the account for another five years and the account earns 8%
compounded annually, what will the balance in the account grow to?
A. $1,341.05
B. $1,347.82
C. $1,395.86
D. $1,406.23
E. $1,491.15

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

111. During year 2, the account earned ________.

A. 1.3%
B. 2.8%
C. 4.6%
D. 5.5%
E. 7.5%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

112. During year 5, the account earned ________ compounded annually.

A. 11.6%
B. 12.8%
C. 14.6%
D. 15.6%
E. 23.1%

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

113. Over the first four years, the account earned ________ compounded annually.
A. 11.5%
B. 12.8%
C. 14.6%
D. 15.6%
E. 23.1%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

114. In which year did the account earn its highest annually compounded return?
A. Year 1 at 10%
B. Year 2 at 5.45%
C. Year 3 at 13.8%
D. Year 4 at 17.0%
E. Year 5 at 15.6%

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

115. If the account earned a total of $300 in simple interest over its life, how much was earned
in compound interest?
A. $25
B. $50
C. $75
D. $100
E. $125

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

116. During years 2 and 3 combined, the account earned $10 compound interest. How much
was in simple interest?
A. $30
B. $80
C. $105
D. $110
E. $120

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

117. Tishie invests $3,000 today at a 9% rate of return. She wants to have $24,000 to give to
her granddaughter Kathy for college 16 years from now. Which one of the following
statements is correct concerning Tishie's situation?
A. Tishie will have the $24,000 when she wants it.
B. Tishie would have to wait an additional ten years to have $24,000.
C. Tishie would have to earn a 10% rate of return to have $24,000 in 16 years.
D. Tishie will only have approximately $12,000 sixteen years from now.
E. Tishie should plan on only giving Kathy $10,000 in sixteen years.

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

118. What is the present value of $2,800 to be received three years from now if the discount
rate is 9.5%?
A. $2,114.48
B. $2,132.63
C. $2,361.48
D. $2,734.54
E. $3,676.21

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

119. The Blackwell Co. expects to receive $135,000 from an insurance settlement four years
from now. If the company can earn 11% on its investments, what is the value of the insurance
settlement worth today?
A. $85,368.94
B. $87,693.43
C. $88,928.68
D. $130,161.39
E. $140,018.48

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

120. Isaac and Faith both want to have $5,000 in three years. Isaac expects to earn 8% on his
investments and Faith expects a 7% rate of return. Which one of the following statements is
correct concerning the amount of money they each need to invest today?
A. Faith needs to deposit $112.33 more than Isaac today.
B. Faith needs to deposit $173.33 more than Isaac today.
C. Isaac needs to deposit $3,699.16 today.
D. Faith needs to deposit $3,081.49 today.
E. Both Faith and Isaac should deposit $3,969.16 today.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

121. Courtney invests $1,200 today. If she can earn a 13.25% rate of return for the next two
years, how much money will she have at the end of the two years?
A. $1,203.18
B. $1,232.01
C. $1,359.00
D. $1,539.07
E. $1,742.99

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

122. A customer makes two offers to settle a disputed account. He will either pay you $500
today or pay you $650 in three years. Which one of the following is correct if your company
earns 10.5% on its surplus funds?
A. The company should accept the $650 offer as it pays $150 more.
B. The company should accept the $650 offer as it is worth more today.
C. The company should accept the $650 offer as it is worth $12.42 more today.
D. The company should accept the $500 offer as it is worth $18.24 more today.
E. The company should accept the $500 offer as it is worth $512.42 today.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

123. What is the future value of $7,540 invested at 6.5% interest for seven years?
A. $10,330.45
B. $11,001.93
C. $11,041.26
D. $11,717.06
E. $11,337.37

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

124. 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?
A. $66,872.96
B. $68,249.79
C. $70,952.96
D. $72,329.79
E. $81,361.18

Difficulty: Challenge
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

125. Five friends all open investment accounts today. Which one will withdraw the largest
amount of money from their account assuming that they each withdraw their funds at the end
of their initial investment period?
A. John, who invests $1,000 for eight years at 6% simple interest.
B. Terry, who invests $1,000 for four years at 9% with interest compounded annually.
C. Alicia, who invests $800 for ten years at 11% with interest compounded annually.
D. Kristi, who invests $1,200 for six years at 8% simple interest.
E. Roger, who invests $900 for nine years at 9% with interest compounded annually.

Difficulty: Challenge
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

126. Alexander Industries just had a very profitable year. The owner has decided to invest
$225,000 of the profits in a venture that pays an 8% rate of return for fifteen years. How much
more would the investment have been worth if the owner could have made 9% on this
investment?
A. $52,910.25
B. $105,820.50
C. $211,641.00
D. $713,738.05
E. $819,558.55

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

127. Gretchen Enterprises borrowed $149,500 for two years from the bank. At the end of the
two years, they repaid the loan with one payment of $176,590. What was the interest rate on
the loan?
A. 8.68%
B. 9.06%
C. 10.00%
D. 10.42%
E. 18.12%

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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128. 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?
A. 12.86%
B. 13.30%
C. 15.96%
D. 18.58%
E. 19.20%

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

129. 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?
A. Maria earned a rate of interest that was 0.9% higher than Ito's rate.
B. Maria earned a rate of interest of 5.89%.
C. Ito earned a rate of interest that was 0.09% higher than Maria's rate.
D. Ito earned a rate of interest of 6.90%.
E. Both Ito and Maria earned the same rate of interest.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

130. 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?
A. 13 years
B. 14 years
C. 15 years
D. 16 years
E. 17 years

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

131. 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?
A. 2.69 years
B. 3.33 years
C. 5.17 years
D. 6.67 years
E. 10.31 years

Difficulty: Challenge
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

132. 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?
A. .98 year
B. 1.48 years
C. 1.98 years
D. 2.31 years
E. 3.50 years

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

133. Martha is going to receive $6,000 in two years from Tom. She will receive an additional
$4,000 in three years from Tom. She earns 7.15% on her investments. How much is this
money from Tom worth to Martha today?
A. $7,893.46
B. $8,477.47
C. $8,891.74
D. $9,225.97
E. $9,251.50

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

134. The I.C. James Co. invested $10,000 six years ago at 5% simple interest. The I.M. Smart
Co. invested $10,000 six years ago at 5% interest which is compounded annually. Which one
of the following statements is true concerning these two investments?

I. The I.C. James Co. has an account value of $13,400.96 today.

II. The I.C. James Co. will have an account value of $13,400.96 six years from now.
III. The I.M Smart Co. will earn $525 interest in the second year.
IV. Both the I.C. James Co. and the I.M. Smart Co. will earn $500 interest in the first year.
A. I and III only
B. I, III and IV only
C. II and IV only
D. II, III and IV only
E. III and IV only

Difficulty: Challenge
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

135. The Smith Co. has $450,000 to invest at 5.5% interest. How much more money will they
have if they invest these funds for eight years instead of five years?
A. $62,948.21
B. $68,851.36
C. $74,250.00
D. $78,408.62
E. $102,476.93

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

136. 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?
A. $2,543.77
B. $2,641.98
C. $2,678.81
D. $2,630.36
E. $2,714.99

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

138. Dale invests $500 in an account that pays 6% simple interest. How much more could he
have earned over a thirty year period if the interest had compounded annually?
A. $1,471.75
B. $1,532.50
C. $1,621.25
D. $1,804.25
E. $2,371.75

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

139. Today you earn a salary of $28,500. What will be your annual salary fifteen years from
now if you earn annual raises of 3.5%?
A. $47,035.35
B. $47,522.89
C. $47,747.44
D. $48,091.91
E. $48,201.60

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

140. You own a classic automobile that is currently valued at $39,500. If the value increases
by 6% annually, how much will the auto be worth ten years from now?
A. $64,341.34
B. $44,734.42
C. $69,843.06
D. $70,738.48
E. $74,146.93

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

141. 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?
A. $240,284.08
B. $246,019.67
C. $246,396.67
D. $246,831.94
E. $247,299.20

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

142. Your grandmother invested one lump sum 17 years ago at 4.25% interest. Today, she
gave you the proceeds of that investment which totaled $5,539.92. How much did your
grandmother originally invest?
A. $2,700.00
B. $2,730.30
C. $2,750.00
D. $2,768.40
E. $2,774.90

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

143. 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?
A. $17,750.00
B. $17,989.28
C. $18,077.05
D. $18,213.69
E. $18,395.00

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

144. Forty years ago, your father invested $2,500. Today that investment is worth $107,921.
What is the average rate of return your father earned on his investment?
A. 8.50%
B. 9.33%
C. 9.50%
D. 9.87%
E. 9.99%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

145. Ten years ago, Joe invested $5,000. Five years ago, Marie invested $2,500. Today, both
Joe and Marie's investments are each worth $8,500. Which one of the following statements is
correct concerning their investments?
A. Three years from today, Joe's investment will be worth more than Marie's.
B. Last year, Marie's investment was worth more than Joe's.
C. Joe has earned more interest on interest than Marie.
D. Marie earned an annual interest rate of 27.73%.
E. Joe earned an annual interest rate of 6.45%.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

146. 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?
A. 3.43%
B. 3.45%
C. 3.48%
D. 3.52%
E. 3.55%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

147. On your tenth birthday, you received $100 which you invested at 4.5% interest,
compounded annually. That investment is now worth $3,000. How old are you today?
A. age 77
B. age 82
C. age 84
D. age 86
E. age 87

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

148. 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?
A. $555.18
B. $609.81
C. $615.48
D. $928.73
E. $1,046.22

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

149. 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?
A. $201.80
B. $367.32
C. $399.05
D. $423.81
E. $489.84

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

150. 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?
A. $18,001.06
B. $18,677.78
C. $18,998.03
D. $19,272.81
E. $21,036.83

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

151. Antonette needs $20,000 as a down payment for a house five years from now. She earns
4% on her savings. Antonette can either deposit one lump sum today for this purpose or she
can wait a year and deposit a lump sum. How much additional money must Antonette deposit
if she waits for one year rather than making the deposit today?
A. $639.19
B. $657.54
C. $658.23
D. $659.04
E. $800.00

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

152. 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?
A. $58,829.69
B. $86,991.91
C. $118,009.42
D. $126,745.19
E. $137,188.23

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

153. You will be receiving $5,000 from your family as a graduation present. You have decided
to save this money for your retirement. You plan to retire thirty-five years after graduating.
How much additional money will you have at that time if you can earn an average of 8.5% on
your investment instead of just 8%?
A. $12,971.49
B. $13,008.47
C. $13,123.93
D. $13,234.44
E. $13,309.85

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

154. You deposit $3,000 in a retirement account today at 5.5% interest. How much more
money will you have if you leave the money invested for forty-five years rather than forty
years?
A. $7,714.91
B. $7,799.08
C. $7,839.73
D. $7,846.52
E. $7,858.19

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

155. You collect model cars. One particular model increases in value at a rate of 5% per year.
Today, the model is worth $29.50. How much additional money can you make if you wait ten
years to sell the model rather than selling it five years from now?
A. $9.98
B. $10.40
C. $10.86
D. $11.03
E. $11.24

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

156. Cooper invests $6,500 in a savings account at his local bank. The bank pays 2.75%
simple interest. Cooper does not make any additional withdrawals or deposits to this account.
How much will his account be worth after 12 years?
A. $2,145
B. $2,655
C. $6,679
D. $8,645
E. $9,001

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

158. 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?
A. $10.75
B. $12.50
C. $53.75
D. $62.50
E. $67.25

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

159. 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?
A. $28.10
B. $29.18
C. $31.50
D. $33.33
E. $34.67

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

160. 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?
A. $38,207.16
B. $38,414.14
C. $40,399.89
D. $48,414.14
E. $50,399.89

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

161. Alex and Courtney are each investing $1,200 today in a savings account. Alex will earn
4% interest compounded annually. Courtney will earn 4% simple interest. After five years
Alex will have ____ more than Courtney.
A. $19.98
B. $20.13
C. $20.17
D. $20.21
E. $20.28

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

162. What is the future value of $4,160 invested for eight years at 8.5% compounded
annually?
A. $6,988.80
B. $7,989.71
C. $8,122.20
D. $8,211.29
E. $8,404.12

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

163. 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%?
A. $55,981.03
B. $56,324.17
C. $56,907.08
D. $57,784.17
E. $58,213.46

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

164. 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?
A. $204,113.07
B. $204,981.16
C. $205,155.45
D. $206,666.67
E. $208,576.07

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

165. Your goal is to build your first home seven years from now. The home that you desire
currently costs $215,900. New home prices are increasing by 4.2% annually. If home prices
continue rising at that pace, how much will your home cost when you are ready to build seven
years from now?
A. $281,113.21
B. $284,109.67
C. $287,956.36
D. $292,001.06
E. $295,474.06

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

166. 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?
A. $9,192.45
B. $9,225.00
C. $9,350.00
D. $9,419.25
E. $9,504.55

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

167. What is the present value of $36,500 to be received five years from today if the discount
rate is 6.75%?
A. $26,330.16
B. $26,678.19
C. $26,911.47
D. $28,008.19
E. $28,123.76

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

168. You would like to give your daughter $50,000 towards her college education sixteen
years from now. How much money must you set aside today for this purpose if you can earn
7.8% on your funds?
A. $14,775.50
B. $15,033.84
C. $15,250.00
D. $16,245.33
E. $16,909.13

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

169. One year ago, you invested $5,000. Today, your investment is worth $6,178.40. What
rate of interest did you earn?
A. 16.23%
B. 16.45%
C. 22.18%
D. 23.57%
E. 24.09%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

170. 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?
A. 8.39%
B. 8.44%
C. 10.23%
D. 10.34%
E. 11.67%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

171. Twenty years ago, Max invested $10,000. Thirty years ago, Julie invested $5,000. Today,
both Max and Julie's investments are each worth $35,000. Which one of the following
statements is correct concerning their investments? Assume that they will continue earning the
same rate of return.
A. Two years from now, Max's investment will be worth more than Julie's.
B. Last year, Julie's investment was worth more than Max's.
C. Max has earned more interest on interest than Julie.
D. Julie has earned an average annual interest rate of 6.7%.
E. Max has earned an average annual interest rate of 6.41%.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

172. 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?
A. 5.87%
B. 5.92%
C. 6.26%
D. 6.30%
E. 6.35%

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

173. Kay purchased some land costing $124,600. Today, that same land is valued at $179,400.
How long has she owned this land if the price of land has been increasing at 6% per year?
A. 5.95 years
B. 6.26 years
C. 6.33 years
D. 6.50 years
E. 6.57 years

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

174. 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?
A. age 57
B. age 59
C. age 62
D. age 64
E. age 66

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

175. Your goal is to have $50,000 in cash to build a new home twelve years from now. Your
plan is to make one deposit today to fund this goal. How much more will you have to deposit
today to fund this goal if you can only earn 4% on your savings rather than 5%?
A. $3,104.11
B. $3,188.87
C. $3,218.07
D. $3,273.16
E. $3,387.98

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

176. Your goal is to have two separate investments that will be worth $10,000 each ten years
from today. Investment A will pay 6% interest. Investment B will pay 6.5% interest. You will
make a one-time deposit into each account today. What is the difference between the amount
you must invest today in Investment A as compared to the amount you must invest today in
Investment B if you are to reach your goal in ten years?
A. $241.92
B. $245.45
C. $256.69
D. $261.08
E. $263.47

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

177. Twenty years from now, you would like to purchase a cottage located on the shores of
your favourite lake. You expect that you will have $250,000 available at that time for this
purchase. You could afford a home that is currently selling for ____ if the homes increase in
value by 3% annually, but if the homes increase in value by 5% annually, you can only afford
a home priced at _____ today.
A. $127,023; $92,687
B. $138,419; $94,222
C. $138,419; $114,097
D. $144,676; $100,469
E. $144,676; $111,068

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

178. 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?
A. $18,145.45
B. $18,419.02
C. $18,623.18
D. $18,904.21
E. $19,281.85

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

179. 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 _____.
A. $9,568.24; $9,199.16
B. $9,596.05; $9,243.94
C. $9,608.14; $9,267.67
D. $9,633.33; $9,304.06
E. $9,652.18; $9,389.00

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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180. 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?
A. $28,788.03
B. $29,414.14
C. $30,447.53
D. $36,118.09
E. $38,278.27

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

181. Jeanette needs $15,000 as a down payment for a house six years from now. She earns
3.5% on her savings. Jeanette can either deposit one lump sum today for this purpose or she
can wait a year and deposit a lump sum. How much additional money must Jeanette deposit if
she waits for one year rather than making the deposit today?
A. $121.03
B. $166.67
C. $307.00
D. $333.33
E. $427.09

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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182. 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?
A. $466.44
B. $469.15
C. $470.23
D. $471.08
E. $471.54

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

183. Moe and Joe are twins. Moe invested $1,000, earned 9% annually, and now has
$1,992.56. Joe invested $1,000, earned 6.47%, and now has $1,992.97. Joe invested his
money _____ years before Moe.
A. 2.5 years
B. 2.8 years
C. 3.0 years
D. 3.2 years
E. 3.5 years

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

184. Sue invested $5,000 eleven years ago at 12%. Terri has the same amount saved today as
Sue has. Terri also earns 12% but she only invested $2,500. How long ago did Terri invest her
money?
A. 17.1 years
B. 17.4 years
C. 17.9 years
D. 21.5 years
E. 22.0 years

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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185. You have just been awarded a $200,000 insurance settlement. The insurance company
has offered to invest this amount at a guaranteed interest rate of 4.5% for ten years. You think
you can invest this money yourself and earn an average return of 8%. If you are able to do
that, how much more will your settlement be worth ten years from now than if you had left
the funds with the insurance company?
A. $78,829.69
B. $86,991.91
C. $118,009.42
D. $121,191.12
E. $137,188.23

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

186. You have just landed your first job. Part of the offer includes a $4,000 new employee
bonus which is intended to cover your relocation costs. You have determined that you can
move yourself for $1,000. Thus, you have decided to open an Individual Retirement Account
with the remaining $3,000. How much more will this investment be worth 35 years from now
if you can earn an average rate of return of 9.5% rather than 9%?
A. $10,639.32
B. $10,676.16
C. $11,207.91
D. $11,341.41
E. $11,454.54

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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187. You deposit $3,000 in a retirement account today at 5.5% interest. How much more
money will you have if you leave the money invested for forty-five years rather than forty
years?
A. $7,834.91
B. $7,838.08
C. $7,839.73
D. $7,840.52
E. $7,841.19

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

188. You collect model airplanes. One particular model is currently valued at $275. If this
model increases in value by 5% annually, it will be worth ____ six years from now and _____
twelve years from now.
A. $368.01; $442.89
B. $368.01; $461.34
C. $368.53; $442.89
D. $368.53; $467.08
E. $368.53; $493.86

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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

Ending value = $2,500 + ($2,500  .06  4) = $3,100.00

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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190. Faith invests $4,500 in an account that pays 4% simple interest. How much money will
she have at the end of eight years?
A. $4,680
B. $5,367
C. $5,940
D. $6,122
E. $6,159

Ending value = $4,500 + ($4,500  .04  8) = $5,940.00

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

191. 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?
A. $122.20
B. $129.20
C. $147.80
D. $171.30
E. $221.30

Ending value at 5% simple interest = $3,000 + ($3,000  .05  7) = $4,050.00;

Ending value at 5% compounded annually = $3,000  (1 + .05)7 = $4,221.30;
Difference = $4,221.30 - $4,050.00 = $171.30

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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192. 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?
A. $2,840.00
B. $3,212.12
C. $3,778.54
D. $4,087.18
E. $4,409.05

Ending value at 7% simple interest = $3,000 + ($3,000  .07  20) = $7,200.00;

Ending value at 7% compounded annually = $3,000  (1 + .07)20 = $11,609.05;
Difference = $11,609.05 - $7,200.00 = $4,409.05
Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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193. What is the future value of $3,497 invested for 15 years at 7.5% compounded annually?
A. $7,431.13
B. $10,347.19
C. $14,289.16
D. $14,911.08
E. $15,267.21

Future value = $3,497  (1 + .075)15 = $10,347.19

Using a Calculator

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

194. Today, you earn a salary of $42,500. What will be your annual salary 10 years from now
if you earn annual raises of 3.2%?
A. $56,100.00
B. $57,414.06
C. $58,235.24
D. $59,122.08
E. $59,360.45

Future value = $42,500  (1 + .032)10 = $58,235.24

Using a Calculator

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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195. 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?
A. $199,801.33
B. $212,524.67
C. $214,740.01
D. $215,390.28
E. $218,887.79

Future value = $67,900  (1 + .08)15 = $215,390.28

Using a Calculator

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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196. You hope to buy your dream house 3 years from now. Today, your dream house costs
$247,900. You expect housing prices to rise by an average of 7.5% per year over the next 3
years. How much will your dream house cost by the time you are ready to buy it?
A. $292,063.48
B. $294,882.01
C. $298,600.00
D. $307,965.40
E. $309,425.45

Future value = $247,900  (1 + .075)3 = $307,965.40

Using a Calculator

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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197. Your grandmother invested one lump sum 42 years ago at 3.5% interest. Today, she gave
you the proceeds of that investment which totaled $28,204.37. How much did your
grandmother originally invest?
A. $4,500
B. $6,650
C. $7,200
D. $7,500
E. $9,000

Present value = $28,204.37  [1/(1 + .035)42] = $6,650.00

Using a Calculator

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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198. What is the present value of $36,800 to be received 6 years from today if the discount
rate is 12%?
A. $18,644.03
B. $19,407.18
C. $19,414.14
D. $20,211.08
E. $20,390.14

Present value = $36,800  [1/(1 + .12)6] = $18,644.03

Using a Calculator

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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199. 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?
A. $12,250.00
B. $12,989.47
C. $13,726.90
D. $14,008.50
E. $14,211.11

Present value = $50,000  [1/(1 + .09)15] = $13,726.90

Using a Calculator

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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200. One year ago, you invested $2,500. Today it is worth $2,789.50. What rate of interest did
you earn?
A. 8.67%
B. 9.89%
C. 10.67%
D. 11.42%
E. 11.58%

$2,789.50 = $2,500  (1 + r)1; r = 11.58%

Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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201. Thirty years ago, your father invested $11,000. Today, that investment is worth
$287,047.
What is the average annual rate of return your father earned on his investment?
A. 11.14%
B. 11.27%
C. 11.38%
D. 11.49%
E. 12.07%

$287,047 = $11,000  (1 + r)30; r = 11.49%

Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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202. 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?
A. Three years from today, Jake's investment will be worth more than Tami's.
B. One year ago, Tami's investment was worth more than Jake's.
C. Jake has earned a higher rate of return than Tami.
D. Tami has earned an average annual interest rate of 15.91%.
E. Jake has earned an average annual interest rate of 15.47%.

Jake $9,700 = $2,000  (1 + r)12; r = 14.06%; Tami: $9,700 = $4,000  (1 + r)6; r = 15.91%;
The correct answer states that Tami earned 15.91% interest.
Using a Calculator
Jake:

Tami:

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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203. Tropical Tans is saving money to build a new salon. Three years ago, they set aside
$12,000 for this purpose. Today, that account is worth $16,418. What rate of interest is
Tropical Tans earning on this money?
A. 10.88%
B. 10.97%
C. 11.01%
D. 11.14%
E. 11.23%

$16,418 = $12,000  (1 + r)3; r = 11.01%.

Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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204. Five years ago, Precision Tool set aside $50,000 in case of a financial emergency. Today,
that account has increased in value to $64,397. What rate of interest is the firm earning on this
money?
A. 5.19%
B. 5.47%
C. 6.18%
D. 6.32%
E. 6.45%

$64,397 = $50,000  (1 + r)5; r = 5.19%

Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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205. 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?
A. 6.89%
B. 7.10%
C. 7.18%
D. 7.27%
E. 7.43%

$186,408 = $125,000  (1 + r)6; r = 6.89%.

Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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206. On your thirteenth birthday, you received $1,000 which you invested at 6.5% interest,
compounded annually. Your investment is now worth $5,476. How old are you today?
A. age 29
B. age 32
C. age 35
D. age 37
E. age 40

$5,476 = $1,000  (1 + .065)t; t = 27 years; Age today = 13 + 27 = 40

Using a Calculator

Note: You received the money when you were 13 years old. Thus, you will be 40 (13 + 27)
years old when the value reaches $5,476.

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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207. You want to have $260,000 saved 15 years from now. How much less do you have to
deposit today to reach this goal if you can earn 8% rather than 7% on your savings?
A. $8,728.44
B. $12,273.13
C. $16,602.12
D. $17,414.41
E. $20,019.2

Present value = $260,000  [1/(1 + .08)15] = $81,962.84; Present value = $260,000  [1/(1 + .
07)15] = $94,235.97; Difference = $94,235.97 - $81,962.84 = $12,273.13
Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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208. Your big brother deposited $10,000 today at 9% interest for 6 years. You would like to
have just as much money at the end of the next 6 years as your brother. However, you can
only earn 7.5% interest. How much more money must you deposit today than your brother did
if you are to have the same amount at the end of the 6 years?
A. $398.68
B. $487.63
C. $575.00
D. $648.21
E. $866.96

Future value = $10,000  (1 + .09)6 = $16,771.00; Present value = $16,771.00  [1/(1 + .

075)6] = $10,866.96; Difference = $10,866.96 - $10,000.00 = $866.96
Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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209. 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?
A. $1,218.46 less
B. $1,666.67 less
C. $2,408.28 less
D. $3,628.09 less
E. $4,331.30 less

Future value = $25,000  (1 + .075)41 = $484,938.92; Present value = $484,938.92  [1 (1

+ .08)41] = $20,668.70; Difference = $25,000.00 - $20,668.70 = $4,331.30
Using a Calculator

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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210. 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?
A. $15,344.14
B. $15,677.78
C. $16,208.11
D. $17,021.12
E. $19,407.78

Present value = $2,000,000  [1/(1 + .115)36] = $39,731.48; Present value = $2,000,000  [1/
(1 + .115)33] = $55,075.62; Difference = $55,075.62 - $39,731.48 = $15,344.14
Using a Calculator

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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211. Marie needs $26,000 as a down payment for a house 4 years from now. She earns 5.25%
on her savings. Marie can either deposit one lump sum today for this purpose or she can wait
a year and deposit a lump sum. How much additional money must Marie deposit if she waits
for one year rather than making the deposit today?
A. $878.98
B. $911.13
C. $1,112.36
D. $1,348.03
E. $1,420.18

Present value = $26,000  [1/(1 + .0525)4] = $21,187.75; Present value = $26,000  [1/(1 + .
0525)3] = $22,300.11; Difference = $22,300.11 - $21,187.75 = $1,112.36
Using a Calculator

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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212. Wexter and Daughter invested $165,000 to help fund a company expansion project
planned for 3 years from now. How much additional money will the firm have saved 3 years
from now if it can earn 7% rather than 5% on this money?
A. $7,940.09
B. $8,218.07
C. $11,123.97
D. $12,648.18
E. $13,211.21

Future value = $165,000  (1 + .07)3 = $202,132.10; Future value = $165,000  (1 + .05)3 =

$191,008.13; Difference = $202,132.10 - $191,008.13 = $11,123.97
Using a Calculator

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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213. 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%?
A. $794,014
B. $1,396,036
C. $1,611,408
D. $1,818,342
E. $2,033,333

Future value = $278,000  (1 + .095)38 = $8,745,433.15; Future value = $278,000  (1 + .09)38

= $7,349,397.17; Difference = $8,745,433.15 - $7,349,397.17 = $1,396,036
Using a Calculator

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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214. You will be receiving $2,500 from your family as a graduation present. You have decided
to save this money for your retirement. You plan to retire 40 years after graduation. How
much additional money will you have at that time if you can earn an average of 12.5% on
your investment instead of just 12%?
A. $45,370.08
B. $51,400.62
C. $53,018.97
D. $58,811.99
E. $64,367.48

Future value = $2,500  (1 + .125)40 = $277,997.51; Future value = $2,500  (1 + .12)40 =

$232,627.43; Difference = $277,997.51 - $232,627.43 = $45,370.08
Using a Calculator

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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215. 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?
A. $7,714.91
B. $7,799.08
C. $7,839.73
D. $7,846.52
E. $8,753.38

Future value = $1,000  (1 + .085)40 = $26,133.02; Future value = $1,000  (1 + .085)35 =

$17,379.64; Difference = $26,133.02 - $17,379.64 = $8,753.38
Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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216. 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?
A. $196.67
B. $208.04
C. $241.79
D. $254.24
E. $280.15

Future value = $1,670  (1 + .065)4 = $2,148.40; Future value = $1,670  (1 + .065)2 =

$1,894.16; Difference = $2,148.40 - $1,894.16 = $254.24
Using a Calculator

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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217. Some time ago, Richard purchased five acres of land costing $123,400. Today, that land
is valued at $189,700. How long has he owned this land if the price of land has been
increasing at 5.5% per year?
A. 6.01 years
B. 6.98 years
C. 7.42 years
D. 8.03 years
E. 8.67 years

$189,700 = $123,400  (1 + .055)t; t = 8.03 years.

Using a Calculator

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

218. Which of the following will result in a future value greater than $100?
A. $40 deposited now with an annual interest rate of 14% for 8 years.
B. $60 deposited now with an annual interest rate of 12% for 4 years.
C. $60 deposited now with an annual interest rate of 8% for 6 years.
D. $80 deposited now with an annual interest rate of 7% for 3 year.
E. $80 deposited now with an annual interest rate of 10% for 2 year.

$40 deposited now with an annual interest rate of 14% for 8 years results in a future value of
$114.10; all other values are below the $100

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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219. Seven years ago David deposited $10,000 into an account earning 5.25% compounded
monthly. Recently, David was quoted by a home improvement firm a price of $15,000 to
renovate his roof. Does David have enough cash on hand to pay for the roof?
A. Yes. David now has exactly $15,000 in his account.
B. No. David has only $14,430 in his account.
C. Yes. David now has $17,818 in his account.
D. No. David has $12,818 in his account
E. No. David has only $11,508 in his account

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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220. You setup an educational savings plan that will pay $15,000 to your newborn child in 18
years. If the plan uses a rate of 4.75% per year, what was contributed into this plan?
A. $4,459
B. $5,800
C. $6,506
D. $7,007
E. $8,576

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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221. Approximately 13,500 students enrolled at Kwantlen University five years ago. Today,
enrolment reached 18,800 students. Determine the annual growth rate in student enrolment.
A. 5.55%
B. 6.85%
C. 7.65%
D. 8.25%
E. 9.55%

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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222. Thirty years ago, an average house cost $120,000 in Vancouver. Now the average house
price is $950,000. Determine the annual rate of growth in Vancouver's housing prices.
A. 8.31%
B. 7.14%
C. 6.25%
D. 5.58%
E. 4.63%

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

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223. The price of gold has gone from $250 an ounce to approximately $1,600. Given an
annual growth rate of 8.04%, how long did it take gold to reach its highest value?
A. 27 years
B. 26 years
C. 25 years
D. 24 years
E. 23 years

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Problems

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224. The price of fuel has tripled over the past fifteen years. Determine the rate of growth
over this time period.
A. 7.6%
B. 8.7%
C. 9.6%
D. 10.5%
E. 11.3%

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Problems

225. The term to convert a future value amount into its present value is:
A. Annuitize
B. Compound
C. Discount
D. Multiply
E. Amortize

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Concepts

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226. 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?
A. $15,916
B. $14,916
C. $13,916
D. $12,916
E. $11,916

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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227. You are scheduled to receive $30,000 in three years. When you receive it, you will invest
it for seven more years at 5.5% per year. How much will you have at the end of this time?
What would be an equivalent Present Value?
A. $29,548
B. $28,548
C. $27,548
D. $26,548
E. $25,548

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Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Problems

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228. 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 balance at the end of
year two.
A. $665,202
B. $632,804
C. $636,549
D. $687,702
E. $693,303

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Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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229. 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.
A. $77,096
B. $78,806
C. $79,096
D. $80,806
E. $81,096

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Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money
230. A deposit of $10,000 increased to $12,500 in 5 years. Determine the annual rate of
interest used. Calculate the balance at the end of year four.
A. $11,954
B. $12,254
C. $13,954
D. $14,254
E. $15,954

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Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money
231. A deposit of $10,000 increased to $12,500 in 5 years. Determine the annual rate of
interest used. Calculate the interest earned at the end of year five.
A. $546
B. $556
C. $566
D. $586
E. $596

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Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Problems

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Chapter 05 - Introduction to Valuation: The Time Value of Money

Essay Questions

232. Draw a picture illustrating the future value of $1, using five different interest rates
(including 0%) and maturities ranging from today to 10 years from now. Plot time to maturity
on the horizontal axis and dollars on the vertical axis. (Note: you need not make any
calculations; draw the figure using your intuition.)

The student should basically replicate Figure 5.2.

Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Essay

233. Explain what compounding is and the relationship between compound interest earned
and the number of years over which an investment is compounded.

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

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Essay

234. Explain intuitively why it is that present values decrease as the discount rate increases.

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.

Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Essay

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

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.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Essay

236. At an interest rate of 10% and using the Rule of 72, how long will it take to 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?

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.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Essay

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237. Some financial advisors recommend you increase the amount of federal income 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.

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.

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Essay

238. 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?

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.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Type: Essay

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Chapter 05 - Introduction to Valuation: The Time Value of Money

239. 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.

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.

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Type: Essay

240. Present value is used extensively by managers who are reviewing proposed projects.
Why is this so and how does the present value of a cash flow assist management in making
these business decisions?

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.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Essay

241. Write a sentence explaining why present values decrease as the discount rate increases.

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.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Essay

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242. Explain what compounding is and the relationship between compound interest earned
and the number of years over which an investment is compounded.

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.

Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Type: Essay

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

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.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Type: Essay

244. State the future value formula and explain the effect that time has on the future value of
an investment.

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.

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Essay

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Chapter 05 - Introduction to Valuation: The Time Value of Money

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

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.

Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Type: Essay

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