Chapter 5 Test Questions
Question 1
As the discount rate increases, the present value of $500 to be received six years from
now:
a. remains constant.
b. also increases.
c. decreases.
d. becomes negative.
e. will vary but the direction of the change is unknown.
Answer Question 1
As the discount rate increases the present value of any amount given in the future will
decrease.
Present Value = Future Value / (1+i)
t
where i is the discount rate and t is
time.
Answer : C
Question 2
Today you earn a salary of $28,500. What will be your annual salary fifteen years from
now if you earn annual raises of 3.5 percent?
a. $47,035.35
b. $47,522.89
c. $47,747.44
d. $48,091.91
e. None of the above
Answer Question 2
For this we use our Financial Calculator.
We know that PV = $28,500, Int/Yr = 3.5% and
N = 15.
Solving for FV gives you $47,747.44 .
Answer : C
Question 3
Your grandmother invested one lump sum 17 years ago at 4.25 percent interest.
Today,
she gave you the proceeds of that investment which totaled $5,539.92. How much
did your grandmother originally invest?
a. $2,700.00
b. $2,730.30
c. $2,750.00
d. $2,768.40
e. None of the above
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Answer Question 3
For this we use our Financial Calculator.
We know that FV = $5,539.92, Int/Yr = 4.25%
and N = 17.
Solving for PV gives you $2,730.30 .
Answer : B
Question 4
On your tenth birthday, you received $100 which you invested at 4.5 percent interest,
compounded annually. That investment is now worth $3,000. How old are you
today? (round to nearest year)
a. age 77
b. age 82
c. age 84
d. age 85
e. None of the above
Answer Question 4
For this we use our Financial Calculator.
We know that FV = $3,000, Int/Yr = 4.5% and
PV = $100.
Solving for N gives you 77.3. You are thus 77.3+10 = 87.3 years old.
Answer : E
Question 5
You are the beneficiary of a life insurance policy. The insurance company informs you
that you have two options for receiving the insurance proceeds. You can receive a
lump sum of $50,000 today or receive payments of $641 a month for ten years. You
can earn 6.5 percent on your money. Which option should you take and why?
Assume endofmonth payments
a. You should accept the payments because they are worth $56,451.91 today.
b. You should accept the payments because they are worth $56,523.74 today.
c. You should accept the payments because they are worth $56,737.08 today.
d. You should accept the $50,000 because the payments are only worth $47,757.69
today.
e. You should accept the $50,000 because the payments are only worth $9,856.38
today.
Answer Question 5
For this we use our Financial Calculator.
We know that PMT = $641, Int/Month =
6.5%/12 = .5416667% and N = 12*10=120.
Solving for PV gives you $56,451.91.
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 Winter '11
 JimBrau
 Management, Time Value Of Money, Interest, Interest Rate

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