Time Value of Money

Question 1

How much money should you invest at a rate of 10% per year if you want $600 in three years?

Answer 1

$450.79

Question 2

Suppose that you invest $300 in a savings account that pays 5% per year. How much money will you have in five years?

Answer 2

$382.88

Question 3

What is the present value of an investment that offers an annual cash flow of $600 for three years if the interest rate is 5.5%?

Answer 3

$1,617.67

Question 4

What is the present value of an investment that offers a perpetual annual cash flow of $300 if the interest rate is 7%?

Answer 4

$4,285.71

Question 5

Suppose you have an asset that generates an annual cash flow of $200, but depreciates 2% per year. What is the value of the asset if the discount rate is 8%?

Answer 5

$2,000

Question 6

MULTIPLE CHOICE. Which of the following statements regarding time value of money is false?

A. Present value is the amount of money that would have to be invested today at a given interest rate over a specified period of time to equal a future amount.

B. Future value is the value at a given future date of a present amount placed on deposit today and earning interest at a specified rate.

C. An annuity is a stream of equal periodic cash flows over a specified period.

D. A perpetuity is an annuity with a finite life.

Answer 6

D