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Exam 13: Time Value of Money

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Question 41

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The time value of money is a concept which means that the value of $1 increases over time.

A) True
B) False

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Question 42

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The value of $1 today is worth more than $1 one year from now.

A) True
B) False

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Question 43

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The concept that interest causes the value of money received today to be greater than the value of that same amount of money received in the future is referred to as the:

The future value of $1,000 invested today for three years that earns 10% compounded annually is greater than the future value of a $500 annuity with the same interest rate over the same period.

How much will $25,000 grow to in seven years,assuming an interest rate of 12% compounded annually?

At the end of the next four years,a new machine is expected to generate net cash flows of $8,000,$12,000,$10,000,and $15,000,respectively.What are the cash flows worth today if a 3% interest rate properly reflects the time value of money in this situation?

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the best term placing the letter designating the term in the space provided.

Two banks each have stated CD rates of 12%.Bank A compounds quarterly and Bank B compounds semiannually.Explain which bank offers the better CD.

Sandra won $5,000,000 in the state lottery which she has elected to receive at the end of each month over the next thirty years.She will receive 7% interest on unpaid amounts.To determine the amount of her monthly check,she should use a table for the:

An annuity is a series of equal cash payments over equal time intervals.

Anthony would like to have $18,000 to buy a new car in three years.Currently,he has saved $15,000.If he puts $15,000 in an account that earns 6% interest,compounded annually,will he be able to buy the car in three years?

Below are excerpts from interest tables for 8% interest. $\begin{array} { c c c c c } & \underline { 1 } & \underline { 2 } & \underline { 3 } & \underline { 4 } \\1 & 1.0000 & 0.92593 & 1.08000 & 0.92593 \\2 & 2.0800 & 0.85734 & 1.16640 & 1.78326 \\3 & 3.2464 & 0.793833 & 1.25971 & 2.57710 \\4 & 4.5061 & 0.73503 & 1.36049 & 3.31213\end{array}$ Column 2 is an interest table for the:

The discount rate is the rate at which someone is willing to give up current dollars for future dollars.

What is the value today of receiving five annual payments of $500,000,beginning one year from now,assuming an 11% discount rate?