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Chapter 2

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12 views

Chapter 2

Uploaded by

Semma T. Fenta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 7

Chapter 2 – Time Value of Money

1. What does the Time Value of Money (TVM) concept state?


a) Money gains value over time
b) Money has a constant value
c) Money loses its value over time

2. Why is money earned now considered more valuable than money earned in
the future according to TVM?
a) Due to increased purchasing power
b) Additional return could have been obtained
c) Both a and b

3. Which technique measures cash flows at the end of a project's life?


a) Future Value
b) Present Value
c) Both a and b

4. What does compounding refer to in the context of TVM?


a) Calculating present value
b) Calculating future value
c) Measuring cash flows at the start of a project's life

5. How is the future value of a single amount calculated for n periods?


a) FV = PV(1 + i)
b) FV = PV(1 + i)^n
c) FV = PV^n

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6. In the example given, if you invest $100 at 5% interest compounded
annually, what is the value at the end of year 2?
a) $110.25
b) $105
c) $115.50

7. If you invest $1000 at an annual rate of 8% with interest compounded


quarterly, how much would you have at the end of 4 years?
a) $1360
b) $1373
c) $1377

8. How does the Time Value of Money (TVM) concept affect the value of
money over time?
a) Money retains constant value
b) Money depreciates linearly
c) Money appreciates over time

9. What role does the discount rate play in present value calculations?
a) It determines the future value
b) It represents the expected rate of return
c) It adjusts future cash flows to their present value

10. What is the main purpose of using discounting in present value


calculations?
a) To increase the future value
b) To adjust for the time value of money
c) To decrease the present value

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11. How is the future value of a single amount calculated for multiple non-
annual compounding periods?
a) FV = PV(1 + i)^n
b) FV = PV(1 + i/m)^(mn)
c) FV = PV^n

12. What does the present value technique use to find the present value of
each cash flow?
a) Compounding
b) Discounting
c) Future value calculation

13. In the context of TVM, what does "compounding" refer to?


a) Calculating present value
b) Calculating future value
c) Measuring cash flows at the start of a project's life

14. How does the frequency of compounding per year affect the future value of
an investment?
a) Increases future value
b) Decreases future value
c) Has no impact on future value

15. If you invest $500 at an annual interest rate of 8%, compounded quarterly,
what will be the future value after 3 years?
a) $640.00
b) $648.32
c) $652.19
d) $634.12

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16. You want to have $10,000 in 6 years, and the annual interest rate is 6%.
How much should you invest today?
a) $7,049.61
b) $8,490.57
c) $8,925.47
d) $9,433.96

17. If an investment grows from $1,000 to $1,500 in 5 years, what is the annual
compound interest rate?
a) 4.65%
b) 5.73%
c) 6.82%
d) 8.45%

18. How much should you invest today to receive $2,000 at the end of each
year for the next 4 years, assuming an annual discount rate of 10%?
a) $6,526.46
b) $6,339.73
c) $7,027.62
d) $7,315.11

19. If you want to have $5,000 in 8 years, and the annual interest rate is 12%,
what should be the annual contribution to a savings account?
a) $937.79
b) $852.89
c) $768.55
d) $1,006.51

20. You deposit $1,200 in a bank account that pays an annual interest rate of
4%. How much will you have after 2 years, compounded monthly?

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a) $1,248.96
b) $1,258.63
c) $1,299.77
d) $1,275.12

21. If you borrow $2,500 today at an annual interest rate of 6%, and you plan to
repay it in two equal installments at the end of each year, what will be the
size of each payment?
a) $1,292.45
b) $1,363.59
c) $1,325.11
d) $1,347.21

22. You need to sell your car and you receive offers from three different
buyers.
 The first offer gives 5,200,000 Birr to be paid now
 The second offer gives 6,100,000 Birr to be paid two years from now
 The third offer gives 7,600,000 Birr to be paid after five years.
 Assume that the second and third offers have no credit risk.
 The risk-free interest rate is 10%.
Which offer would you accept?
a) The First Offer
b) The Second Offer
c) The Third Offer
d) None to be selected

23. John Roberts has $42,180.53 in a brokerage account, and he plans to


contribute an additional $5,000 to the account at the end of every year. The
brokerage account has an expected annual return of 12 percent. If John’s
goal is to accumulate $250,000 in the account, how many years will it take
for John to reach his goal?

Solution:

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To calculate the number of years it will take for John to reach his goal, we can
use the future value of an annuity formula. The formula is:

Where:
 FV is the future value (John's goal of $250,000),
 P is the annual contribution ($5,000),
 r is the annual interest rate (12% or 0.12),
 t is the number of years,
 PV is the present value (initial amount in the account, $42,180.53).

The formula can be rearranged to solve for t:

250,000 = 5,000 x (1.12^t-1)/0.12 + 42,180.53 x 1.12^t


250,000 = 41,666.66 x 1.12^t -41,666.66 +42,180.53 x 1.12^t
291,666.66 = 83,847.1966 x 1.12^t
3.4785499 = 1.12^t
t= log (3.4785499) / log (1.12)
t=11 years

So, it will take 11 years for John to reach his goal of $250,000 in the brokerage
account.

Let us check the Financial Calculator:


https://metugpa.com/finance/time-value-of-money-calculator.html#calculatorTvm

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ANSWER:
1. c) Money loses its value over time
2. c) Both a and b
3. b) Present Value
4. b) Calculating future value
5. b) FV = PV(1 + i)^n
6. a) $110.25
7. b) $1373
8. c) Money appreciates over time
9. c) It adjusts future cash flows to their present value
10. b) To adjust for the time value of money
11. b) FV = PV(1 + i/m)^(mn)
12. b) Discounting
13. b) Calculating future value
14. a) Increases future value

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