Chapter 05 - Introduction to Valuation: The Time Value of Money
40. When you retire 40 years from now, you want to have $1.2 million. You think you can earn an average of 12 percent 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 2 years from today. How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit? A. $1,414.14 B. $2,319.47 C. $2,891.11 D. $3,280.78 E. $3,406.78
Present value = $1,200,000 ? [1/(1 + .12)40] = $12,896.16 Present value = $1,200,000 ? [1/(1 + .12)38] = $16,176.94 Difference = $16,176.94 - $12,896.16 = $3,280.78
AACSB: Analytic Bloom's: Analysis
Difficulty: Intermediate Learning Objective: 5-2 Section: 5.2
Topic: Present value
5-45
Chapter 05 - Introduction to Valuation: The Time Value of Money
41. Theo needs $40,000 as a down payment for a house 6 years from now. He earns 3.5 percent on his savings. Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum. How much additional money must he deposit if he waits for one year rather than making the deposit today? A. $878.98 B. $911.13 C. $1,138.90 D. $1,348.03 E. $1,420.18
Present value = $40,000 ? [1/(1 + .035)6] = $32,540.03 Present value = $26,000 ? [1/(1 + .035)5] = $33,678.93 Difference = $33,678.93 - $32,540.03 = $1,138.90
AACSB: Analytic Bloom's: Analysis
Difficulty: Intermediate Learning Objective: 5-2 Section: 5.2
Topic: Present value
5-46
Chapter 05 - Introduction to Valuation: The Time Value of Money
42. One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?
A. 6.59 percent B. 6.67 percent C. 6.88 percent D. 6.92 percent E. 7.01 percent
$1,924.62 = $1,800 ? (1 + r)1; r = 6.92 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 5-3 Section: 5.3
Topic: Interest rate
43. According to the Rule of 72, you can do which one of the following? A. double your money in five years at 7.2 percent interest B. double your money in 7.2 years at 8 percent interest C. double your money in 8 years at 9 percent interest D. triple your money in 7.2 years at 5 percent interest E. triple your money at 10 percent interest in 7.2 years Rule of 72 = 72/8 years = 9 percent interest
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 5-3 Section: 5.3
Topic: Interest rate
5-47
Chapter 05 - Introduction to Valuation: The Time Value of Money
44. Forty years ago, your mother invested $5,000. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment? A. 11.68 percent B. 11.71 percent C. 11.78 percent D. 11.91 percent E. 12.02 percent
$430,065.11 = $5,000 ? (1 + r)40; r = 11.78 percent
AACSB: Analytic Bloom's: Application Difficulty: Basic
Learning Objective: 5-3 Section: 5.3
Topic: Interest rate
5-48
