Chapter 4 Word Problems

Assume you hit mega million jackpot and they offer to give you a) a check of
$100,000,000 today or b) 10,000,000 every year for 10 years, which one would you
choose?

• I will never hit mega million, oh, wait, I won $1 last week.

• B, I am afraid that if I accept A I will spend all of that $100,000,000 in a few years.

• A, I can invest the $100,000,000 and make the money grow.

• I am indifferent.

Which one of the following is correct?

• The correct formula for the future value of $500 invested today at 7 percent interest
  for 8 years is: FV = $500/[(1 + 0.07) x 8]

• the correct formula for computing the present value of $600 to be received in 6
  years is: PV = $600 (1 + 0.07)^6

• Given an interest rate of zero percent, the future value of a lump sum invested
  today will always remain constant, regardless of the investment time period.

• None of the above.

Which one of the following is NOT correct?

• The correct formula for the future value of $100 invested today at 8 percent interest
  for 10 years is: FV = $100 x (1+8%)^10

• the correct formula for computing the present value of $100 to be received in 4
  years discounted at 5% is: PV = $100 /(1 + 0.05)^4

• Higher compounding results in a higher FV.

• Higher discounting rate leads to a higher PV.

• None of the above.

Which one of the following is NOT correct?

• Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is
  referred to as the future value.

• Tom earned $120 in interest on his savings account last year. Tom has decided to leave the
  $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called compounding.

• Todd will be receiving a $10,000 bonus one year from now. The process of determining how
  much that bonus is worth today is called discounting

• Computing the present value of a future cash flow to determine what that cash flow is worth today is called discounted cash flow valuation.

• The present value of a lump sum future amount decreases as the interest rate decreases.

Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years? (2^5 stands for 2 to the power of 5)

• FV = $500/[(1 + 0.08) x 7]

• FV = $500/[(1 + 0.07) x 8]

• FV = $500/(0.07 x 8)

• FV = $500 (1 + 0.07)^8

which one of the following statement is correct?

• Given an interest rate of zero percent, the future value of a lump sum invested today will always remain constant, regardless of the investment time period.

• Increase in the interest rate will decrease the future value of a lump sum investment made today assuming that all interest is reinvested and the interest rate is a positive value.

• Increase in the interest rate will increase the present value of a lump sum future amount, assume the interest rate is a positive value and all interest is reinvested.

• None of the above

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?

• 6 percent interest for 3 years

• 12 percent interest for 5 years

• 7 percent interest for 9 years

• 8 percent interest for 9 years

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 8 percent interest. Approximately how long must you wait for your investment to double in value?

• 6 years

• 7 years

• 8 years

• 9 years

which is the correct formula for the following question: at what interest rate will a deposit triple in 50 years?

• K=3^(1/50) -1

• K=Ln(3)/Ln(50)

• K=3x(1/50)-1

• None of the above

what is correct formula(s) for the PV of $100 discounted at 5% interest rate for 3 years?

•  

  PV=100(1+5%)^3

• PV=100x[(1+5%)^(-3)]

• PV=100/[(1+5%)^3]

• PV=100/(1+3%)^5

• both b and C are right.