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Chapter Quiz
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1
The future value is the amount an investment is worth after one or more periods.
A)True
B)False
2
Compounding is the process of accumulating interest in an investment over time to earn more interest.
A)True
B)False
3
If a lump sum of $5,000 is invested for four years at 10 percent compounded annually, it will earn total simple interest of $2,320.50 over that period.
A)True
B)False
4
All else equal, the higher the interest rate, the lower the present value of an amount to be received at some point in the future.
A)True
B)False
5
Most investments, whether they involve real assets or financial assets, can be analyzed using the discounted cash flow (DCF) approach.
A)True
B)False
6
The present value discount factor:
A)is greater than 1.0.
B)is equal to zero when the discount rate is zero.
C)increases as the time period increases.
D)decreases as the discount rate increases.
E)increases as the amount invested increases.
7
You will receive a $50,000 inheritance in 13 years. You could invest that money today at 5.75 percent compounded annually. What is the present value of your inheritance?
A)$23,798.46
B)$24,172.70
C)$24,928.03
D)$25,562.63
E)$50,000.00
8
What is the total future value six years from now of $125 received in one year, $250 received in two years, and $500 received in six years if the discount rate is 9.00 percent?
A)$1,045.22
B)$1,047.93
C)$1,145.57
D)$1,237.21
E)$1,269.15
9
All else equal, the:

I. present value increases as the discount rate increases.
II. present value increases the further away in time the future value is.
III. present value is always less than the future value when both the interest rate and the number of years are positive.
A)I only
B)II only
C)III only
D)I and II only
E)II and III only
10
Assuming a 3 percent annual increase in the price of automobiles, how much will a new BMW cost you 5 years from now if today's price is $42,000?
A)$36,230
B)$40,779
C)$46,575
D)$48,300
E)$48,690
11
Five years ago, $1,200 was deposited into a savings account paying 4.5 percent interest. Today, the balance in the account is $1,495. If interest paid on the account was compounded annually, how much interest on interest was earned?
A)$25.00
B)$93.10
C)$102.39
D)$130.28
E)$295.00
12
Given the following end-of-year cash flows, what is the future value at the end of year 3 of the second cash flow if the interest rate is 6 percent?

YearCash Flow
1$450
2$625
3$550

A)$589.62
B)$618.35
C)$662.50
D)$698.00
E)$744.39
13
A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. If the account earned a total of $300 in simple interest over its life, how much was earned in interest on interest?
A)$25
B)$50
C)$75
D)$100
E)$125
14
You have $90,000 saved today and want to purchase a new yacht when your money grows to $250,000. If you can earn 8 percent on your investments, how long do you have to wait to buy your yacht?
A)11.29 years
B)12.18 years
C)13.27 years
D)14.11 years
E)16.67 years
15
You just paid $14,960 for a rare model car. You hope to resell the car in three years and earn 15 percent annually on your investment. What selling price will you have to place on the model car? (Round to the nearest whole dollar)
A)$17,204
B)$19,785
C)$20,988
D)$21,038
E)$22,752





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