loadingChapter 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
45. Sixteen years ago, Alicia invested $1,000. Eight years ago, Travis invested $2,000. Today, both Alicia's and Travis' investments are each worth $2,400. Assume that both Alicia and
Travis continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments?
A. Three years from today, Travis' investment will be worth more than Alicia's. B. One year ago, Alicia's investment was worth less than Travis' investment. C. Travis earns a higher rate of return than Alicia.
D. Travis has earned an average annual interest rate of 3.37 percent. E. Alicia has earned an average annual interest rate of 6.01 percent.
46. Penn Station is saving money to build a new loading platform. Two years ago, they set aside $24,000 for this purpose. Today, that account is worth $28,399. What rate of interest is Penn Station earning on this investment? A. 6.39 percent B. 7.47 percent C. 8.78 percent D. 9.23 percent E. 9.67 percent
47. Fifteen years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today, that account has increased in value to $330,592. What rate of interest is the firm earning on this money? A. 5.80 percent B. 6.42 percent C. 6.75 percent D. 7.28 percent E. 7.53 percent
5-13
Chapter 05 - Introduction to Valuation: The Time Value of Money
48. Fourteen years ago, your parents set aside $7,500 to help fund your college education. Today, that fund is valued at $26,180. What rate of interest is being earned on this account? A. 7.99 percent B. 8.36 percent C. 8.51 percent D. 9.34 percent E. 10.06 percent
49. Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 10.5 percent per year? A. 13.33 years B. 16.98 years C. 17.64 years D. 19.29 years E. 21.08 years
50. On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? A. age 29 B. age 30 C. age 31 D. age 32 E. age 33
Essay Questions
51. You want to deposit sufficient money today into a savings account so that you will have $1,000 in the account three years from today. Explain why you could deposit less money today if you could earn 3.5 percent interest rather than 3 percent interest.
5-14
Chapter 05 - Introduction to Valuation: The Time Value of Money
52. You are considering two separate investments. Both investments pay 7 percent interest. Investment A pays simple interest and Investment B pays compound interest. Which
investment should you choose, and why, if you plan on investing for a period of 5 years?
53. What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
54. You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years. Assume you can earn 6 percent on your savings. Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different.
5-15
Chapter 05 - Introduction to Valuation: The Time Value of Money
55. At an interest rate of 10 percent 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?
Multiple Choice Questions
56. Assume the total cost of a college education will be $300,000 when your child enters
college in 16 years. You presently have $75,561 to invest. What rate of interest must you earn on your investment to cover the cost of your child's college education? A. 7.75 percent B. 8.50 percent C. 9.00 percent D. 9.25 percent E. 9.50 percent
57. At 11 percent interest, how long would it take to quadruple your money? A. 6.55 years B. 6.64 years C. 13.09 years D. 13.28 years E. 13.56 years
58. Assume the average vehicle selling price in the United States last year was $41,996. The average price 9 years earlier was $29,000. What was the annual increase in the selling price over this time period? A. 3.89 percent B. 4.20 percent C. 4.56 percent D. 5.01 percent E. 5.40 percent
5-16