Chapter 05 Introduction to Valuation: The Time Value of Money

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.

True False

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

time.

True False

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

interest.

True False

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

interest.

True False

5. Discount rate is the interest rate used to calculate the

present value of future cash flows.

True False

6. Present value is the value today of future cash flows

discounted at the appropriate discount rate.

True False

7. As the discount rate increases, the future value of $500

to be received four years from now will decrease:

True False

8. Interest earned on the reinvestment of previous interest

payments is called simple interest.

True False

9. Compounding is the process of finding the present

value of some future amount.

True False

10. Discounting is the process of finding the present value

of some future amount.

True False
11. The value today of future cash flows discounted at the
appropriate discount rate is called the _____ value.

A.
B.
C.
D.
E.

12. The amount an investment is worth after one or more

periods of time is the ___________.

A.
B.
C.
D.
E.

13. The process of accumulating interest on an investment

over time to earn more interest is called:

A.
B.
C.
D.

14. Interest earned on the reinvestment of previous interest

payments is called _____________.

A.
B.
C.
D.
E.

15. Interest earned on both the initial principal and the

interest reinvested from prior periods is called
____________.

A.
B.
C.
D.
E.
16. Interest earned only on the original principal amount
invested is called _______________.

A.
B.
C.
D.
E.

17. The future value interest factor is calculated as:

A.
B.
C.
D.
E.

18. The current value of future cash flows discounted at the

appropriate discount rate is called the:

A.
B.
C.
D.
E.

19. The process of finding the present value of some future

amount is often called _____________.

A.
B.
C.
D.
E.

20. The present value interest factor is calculated as:

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

A.
B.
C.
D.
E.

22. The concept that a dollar received today is worth more

than a dollar received tomorrow is referred to as the:

A.
B.
C.
D.
E.

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

A.
B.
C.
D.
E.

24. The value computed using the factor 1/(1 + r)t is called
the:

A.
B.
C.
D.
E.

25. Compound interest means that you earn:

A.
B.
C.
D.
E.
26. Calculating the present value of a future cash flow to
determine its value today is called:

A.
B.
C.
D.
E.

27. The rate used to find the present value of a future

payment is called the:

A.
B.
C.
D.
E.

28. The discounted value of money is called the:

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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

the:

A.
B.
C.
D.
E.
31. The present value equation is:

A.
B.
C.
D.
E.

32. The amount an investment will worth after one or more

periods of time is the _____ value.

A.
B.
C.
D.
E.

33. The process of accumulating interest on an investment

over time to earn more interest is called:

A.
B.
C.
D.
E.

34. Interest earned on the reinvestment of previous interest

payments is called _____ interest.

A.
B.
C.
D.
E.

35. Interest earned on both the initial principal and the

interest reinvested from prior periods is called _____
interest.

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

A.
B.
C.
D.
E.

37. The current value of future cash flows discounted at the

appropriate discount rate to current time is called the
_____ value.

A.
B.
C.
D.
E.

38. The process of finding the present value of some future

amount is often called:

A.
B.
C.
D.
E.

39. The interest rate used to calculate the present value of

future cash flows is called the _____ rate.

A.
B.
C.
D.
E.

40. Future value is best defined as:

A.
B.
C.
D.
E.
41. The term interest-on-interest refers to:

A.
B.
C.
D.
E.

42. Present value is defined as the:

A.
B.
C.
D.
E.

43. Compound interest is best defined as the interest

earned:

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

50. As long as the interest rate is greater than zero, the

present value of a single sum will always:

A.
B.
C.
D.
E.
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.
B.
C.
D.
E.

52. The greater the number of years, the:

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

58. At a 6% rate of interest you will double your money in

approximately ___ years.

A.
B.
C.
D.
E.

59. At a 3% rate of interest, you will quadruple your money

in approximately ____ years.

A.
B.
C.
D.
E.

60. The present value factor will decrease:

A.
B.
C.
D.
E.
61. The future value factor will decrease:

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

64. Many financial calculators require that:

A.
B.
C.
D.
E.
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.
B.
C.
D.
E.

66. The formula for a present value calculation using Excel

is:

A.
B.
C.
D.
E.

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

A.
B.
C.
D.
E.

68. As the discount rate increases, the present value of $500

to be received six years from now:

A.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

74. To decrease the amount required today to fund a

$10,000 debt due two years from now, you could _____
on your savings.

A.
B.
C.
D.
E.

75. Given a constant future value and discount rate, an

increase in the number of time periods will _____ the
present value.

A.
B.
C.
D.
E.
76. To create the same future value given a stated discount
rate, you can:

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

81. Which one of the following statements is correct?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

84. Stephen has $2,400 to invest. Which one of the

following investment options will produce the largest
future value for him?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

86. What is the future value of $25,000 received today if it

is invested at 6.5% compounded annually for six
years?

A.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

111. During year 2, the account earned ________.

A.
B.
C.
D.
E.

112. During year 5, the account earned ________

compounded annually.

A.
B.
C.
D.
E.

113. Over the first four years, the account earned ________
compounded annually.

A.
B.
C.
D.
E.

114. In which year did the account earn its highest annually
compounded return?

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

A.
B.
C.
D.
E.

116. During years 2 and 3 combined, the account earned $10

compound interest. How much was in simple interest?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

118. What is the present value of $2,800 to be received three

years from now if the discount rate is 9.5%?

A.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
123. What is the future value of $7,540 invested at 6.5%
interest for seven years?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

162. What is the future value of $4,160 invested for eight

years at 8.5% compounded annually?

A.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
167. What is the present value of $36,500 to be received five
years from today if the discount rate is 6.75%?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

169. One year ago, you invested $5,000. Today, your

investment is worth $6,178.40. What rate of interest did
you earn?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
193. What is the future value of $3,497 invested for 15 years
at 7.5% compounded annually?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

198. What is the present value of $36,800 to be received 6

years from today if the discount rate is 12%?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

200. One year ago, you invested $2,500. Today it is worth

$2,789.50. What rate of interest did you earn?

A.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
218. Which of the following will result in a future value
greater than $100?

A.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

224. The price of fuel has tripled over the past fifteen years.
Determine the rate of growth over this time period.

A.
B.
C.
D.
E.

225. The term to convert a future value amount into its

present value is:

A.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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.
B.
C.
D.
E.
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.
B.
C.
D.
E.

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.
B.
C.
D.
E.

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

234. Explain intuitively why it is that present values

decrease as the discount rate increases.

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.)
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?

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.

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?
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.

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?

241. Write a sentence explaining why present values

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

243. Define and explain the relationship between the present

value and the discount rate. Graphically illustrate this
relationship.

244. State the future value formula and explain the effect
that time has on the future value of an investment.
245. Why do you think the concept known as the time value
of money plays such a critical role in finance?
 Chapter 05 Introduction to Valuation: The Time Value of Money
Key
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.
Ross - Chapter 05 #1
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.
Ross - Chapter 05 #2
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.
Ross - Chapter 05 #3
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.
Ross - Chapter 05 #4
Type: Concepts

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.
Ross - Chapter 05 #5
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.
Ross - Chapter 05 #6
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.
Ross - Chapter 05 #7
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.
Ross - Chapter 05 #8
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.
Ross - Chapter 05 #9
Type: Concepts

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.
Ross - Chapter 05 #10
Type: Concepts

11. The value today of future cash flows discounted at the

appropriate discount rate is called the _____ value.

A.
B.
C.
D.
E.
Difficulty: Basic
 Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #11
Type: Definitions

12. The amount an investment is worth after one or more

periods of time is the ___________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #12
Type: Definitions

13. The process of accumulating interest on an investment

over time to earn more interest is called:

A.
B.
C.
D.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #13
Type: Definitions

14. Interest earned on the reinvestment of previous interest

payments is called _____________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #14
Type: Definitions
15. Interest earned on both the initial principal and the
interest reinvested from prior periods is called
____________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #15
Type: Definitions

16. Interest earned only on the original principal amount

invested is called _______________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #16
Type: Definitions

17. The future value interest factor is calculated as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #17
Type: Definitions

18. The current value of future cash flows discounted at the

appropriate discount rate is called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
 Ross - Chapter 05 #18
Type: Definitions

19. The process of finding the present value of some future

amount is often called _____________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #19
Type: Definitions

20. The present value interest factor is calculated as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #20
Type: Definitions

21. The interest rate used to calculate the present value of

future cash flows is called the ____________ rate.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #21
Type: Definitions
22. The concept that a dollar received today is worth more
than a dollar received tomorrow is referred to as the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #22
Type: Definitions

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

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #23
Type: Definitions

24. The value computed using the factor 1/(1 + r)t is called
the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #24
Type: Definitions

25. Compound interest means that you earn:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #25
Type: Definitions
26. Calculating the present value of a future cash flow to
determine its value today is called:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #26
Type: Definitions

27. The rate used to find the present value of a future

payment is called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #27
Type: Definitions

28. The discounted value of money is called the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #28
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #29
Type: Definitions

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

the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #30
Type: Definitions

31. The present value equation is:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #31
Type: Definitions
32. The amount an investment will worth after one or more
periods of time is the _____ value.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #32
Type: Definitions

33. The process of accumulating interest on an investment

over time to earn more interest is called:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #33
Type: Definitions

34. Interest earned on the reinvestment of previous interest

payments is called _____ interest.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #34
Type: Definitions
35. Interest earned on both the initial principal and the
interest reinvested from prior periods is called _____
interest.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #35
Type: Definitions

36. Interest earned only on the original principal amount

invested is called _____ interest.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #36
Type: Definitions

37. The current value of future cash flows discounted at the

appropriate discount rate to current time is called the
_____ value.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #37
Type: Definitions
38. The process of finding the present value of some future
amount is often called:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #38
Type: Definitions

39. The interest rate used to calculate the present value of

future cash flows is called the _____ rate.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #39
Type: Definitions

40. Future value is best defined as:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #40
Type: Definitions

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

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #41
Type: Definitions
42. Present value is defined as the:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #42
Type: Definitions

43. Compound interest is best defined as the interest

earned:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #43
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #44
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #45
Type: Concepts

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #46
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #47
Type: Concepts

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #48
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #49
Type: Concepts
50. As long as the interest rate is greater than zero, the
present value of a single sum will always:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #50
Type: Concepts

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #51
Type: Concepts

52. The greater the number of years, the:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #52
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #53
Type: Concepts

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #54
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #55
Type: Concepts

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #56
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #57
Type: Concepts
58. At a 6% rate of interest you will double your money in
approximately ___ years.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #58
Type: Concepts

59. At a 3% rate of interest, you will quadruple your money

in approximately ____ years.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #59
Type: Concepts

60. The present value factor will decrease:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #60
Type: Concepts

61. The future value factor will decrease:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #61
Type: Concepts
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #62
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #63
Type: Concepts

64. Many financial calculators require that:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #64
Type: Concepts
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #65
Type: Concepts

66. The formula for a present value calculation using Excel

is:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #66
Type: Concepts

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

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #67
Type: Concepts
68. As the discount rate increases, the present value of $500
to be received six years from now:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #68
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #69
Type: Concepts

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #70
 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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #71
Type: Concepts

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #72
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #73
Type: Concepts
74. To decrease the amount required today to fund a
$10,000 debt due two years from now, you could _____
on your savings.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #74
Type: Concepts

75. Given a constant future value and discount rate, an

increase in the number of time periods will _____ the
present value.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #75
Type: Concepts

76. To create the same future value given a stated discount

rate, you can:

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #76
Type: Concepts
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #77
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #78
Type: Concepts
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #79
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #80
Type: Concepts

81. Which one of the following statements is correct?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #81
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #82
Type: Concepts

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #83
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #84
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #85
Type: Problems

86. What is the future value of $25,000 received today if it

is invested at 6.5% compounded annually for six
years?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #86
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #87
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #88
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #89
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #90
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #91
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #92
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #93
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #94
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #95
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #96
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #97
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #98
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #99
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #100
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #101
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #102
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #103
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #104
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #105
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.

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #106
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #107
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.

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #108
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #109
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #110
 Type: Problems

111. During year 2, the account earned ________.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #111
Type: Problems

112. During year 5, the account earned ________

compounded annually.

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #112
Type: Problems

113. Over the first four years, the account earned ________
compounded annually.

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #113
Type: Problems

114. In which year did the account earn its highest annually
compounded return?

A.
B.
C.
D.
E.
Difficulty: Intermediate
 Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #114
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #115
Type: Problems

116. During years 2 and 3 combined, the account earned $10

compound interest. How much was in simple interest?

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #116
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #117
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #118
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #119
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #120
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #121
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #122
Type: Problems

123. What is the future value of $7,540 invested at 6.5%

interest for seven years?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #123
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.
B.
C.
D.
E.
Difficulty: Challenge
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #124
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Challenge
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #125
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #126
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #127
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #128
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #129
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #130
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Challenge
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #131
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #132
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #133
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Challenge
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #134
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #135
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #136
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #137
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #138
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #139
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #140
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #141
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #142
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #143
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #144
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #145
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #146
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #147
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #148
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #149
Type: Problems
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #150
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #151
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Intermediate
 Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #152
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #153
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #154
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #155
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #156
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #157
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #158
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #159
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #160
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #161
Type: Problems
162. What is the future value of $4,160 invested for eight
years at 8.5% compounded annually?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #162
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #163
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #164
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #165
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #166
Type: Problems

167. What is the present value of $36,500 to be received five

years from today if the discount rate is 6.75%?

A.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #167
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #168
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #169
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #170
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #171
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #172
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #173
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #174
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #175
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
 Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #176
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.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #177
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #178
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #179
Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #180
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #181
 Type: Problems

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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #182
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #183
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #184
Type: Problems
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #185
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #186
Type: Problems
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #187
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.
B.
C.
D.
E.
Difficulty: Basic
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #188
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #189
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #190
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #191
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #192
Type: Problems

193. What is the future value of $3,497 invested for 15 years

at 7.5% compounded annually?

A.
B.
C.
D.
E.

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.
Ross - Chapter 05 #193
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #194
Type: Problems

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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #195
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #196
Type: Problems

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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #197
 Type: Problems

198. What is the present value of $36,800 to be received 6

years from today if the discount rate is 12%?

A.
B.
C.
D.
E.

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.
Ross - Chapter 05 #198
Type: Problems

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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #199
Type: Problems
200. One year ago, you invested $2,500. Today it is worth
$2,789.50. What rate of interest did you earn?

A.
B.
C.
D.
E.

$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.
Ross - Chapter 05 #200
Type: Problems

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.
B.
C.
D.
E.

$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.
Ross - Chapter 05 #201
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #202
Type: Problems
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.
B.
C.
D.
E.

$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.
Ross - Chapter 05 #203
Type: Problems

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.
B.
C.
D.
E.

$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.
Ross - Chapter 05 #204
Type: Problems
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.
B.
C.
D.
E.

$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.
Ross - Chapter 05 #205
Type: Problems
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.
B.
C.
D.
E.

$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.
Ross - Chapter 05 #206
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #207
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #208
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #209
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #210
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #211
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #212
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #213
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #214
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #215
Type: Problems
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.
B.
C.
D.
E.

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.
Ross - Chapter 05 #216
Type: Problems
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.
B.
C.
D.
E.

$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.
Ross - Chapter 05 #217
Type: Problems

218. Which of the following will result in a future value

greater than $100?

A.
B.
C.
D.
E.

$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.
Ross - Chapter 05 #218
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #219
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #220
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #221
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #222
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-04 How long it takes for an investment to reach a desired value.
Ross - Chapter 05 #223
Type: Problems
224. The price of fuel has tripled over the past fifteen years.
Determine the rate of growth over this time period.

A.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-03 How to find the return on an investment.
Ross - Chapter 05 #224
Type: Problems

225. The term to convert a future value amount into its

present value is:

A.
B.
C.
D.
E.
Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #225
Type: Concepts
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #226
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-02 How to determine the present value of cash to be received at a future date.
Ross - Chapter 05 #227
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #228
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #229
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #230
Type: Problems
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.
B.
C.
D.
E.

Difficulty: Intermediate
Learning Objective: 05-01 How to determine the future value of an investment made today.
Ross - Chapter 05 #231
Type: Problems
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.
Ross - Chapter 05 #232
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.
Ross - Chapter 05 #233
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.
Ross - Chapter 05 #234
Type: Essay
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.
Ross - Chapter 05 #235
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.
Ross - Chapter 05 #236
Type: Essay
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.
Ross - Chapter 05 #237
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.
Ross - Chapter 05 #238
Type: Essay
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.
Ross - Chapter 05 #239
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.
Ross - Chapter 05 #240
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.
Ross - Chapter 05 #241
Type: Essay

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.
Ross - Chapter 05 #242
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.
Ross - Chapter 05 #243
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.
Ross - Chapter 05 #244
Type: Essay

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.
Ross - Chapter 05 #245
Type: Essay
Chapter 05 Introduction to Valuation: The Time Value of Money
Summary