Tutorial 1 – Time Value of Money -

1. Which one of the following statements is NOT true?

a. The further in the future you receive a dollar, the more it is worth today.
b. The value of a dollar invested at a positive interest rate grows over time.
c. The further in the future you receive a dollar, the less it is worth today.
d. A dollar in hand today is worth more than a dollar to be received in the future.

2. Using higher interest rates will:

a. increase the future value of an investment.

b. decrease the future value of an investment.
c. not affect the future value of an investment.
d. All of the above are possible.

3. A perpetuity is defined as:

a. Equal cash flows at equal intervals of time forever

b. Equal cash flows at equal intervals of time for a specific period
c. Unequal cash flows at equal intervals of time forever
d. None of the above

4. If your investment pays the same amount at the beginning of each year for a period of
10 years, the cash flow stream is called

a. an annuity. b. a perpetuity.
c. a preference dividend. d. none of the above.

5. If the interest rate is 20%, the 2- year discount factor is close to

a. 0.7 b. 0.9 c. 1.4 d. 1.8

6. George is looking to invest for the next three years. He is looking to invest $7,500
today in a bank-term deposit that will earn interest at 5.75% annually. How much will
George have at the end of three years (round to the nearest dollar)?

a. $8,870 b. $9,225 c. $8,681 d. $8,794

7. Ronald wishes to invest $3,500 today in a money market fund that pays quarterly
interest at 5.5%. How much will Ronald have at the end of seven years (to the nearest
dollar)?

a. $5,130 b. $5,091 c. $3,548 d. $3,075

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8. Obama Ltd has made an investment that is expected to generate a cash flow of
$20,000 each year for the next five years. If Obama uses a discount rate of 5% on this
investment, the present value of this investment for Obama is (to the nearest dollar):

a. $86,590 b. $101,766 c. $101,154 d. $101,000

9. Bill has funded a retirement investment with $250,000 earning a return of 5.75%.
What is the value of the payment that Bill can receive in perpetuity (to the nearest
dollar)?

a. $12,150 b. $13,250 c. $14,000 d. $14,375

10. What is the future value of $2,500 invested for three years at an interest rate of 3%
per annum compounded semi-annually?

a. $5,783. b. $4,429. c. $4,419. d. $2,734.

11. What quarterly payment is necessary to accumulate $3.75 million over 20 years if the
annual interest rate is 4% compounded quarterly? Assume payments are made at the
end of each quarter.

a. $733.0 b. $183.0 c. $30,821. d. $123,283

12. Jimmy C. is expecting to retire 28 years from now, at which time he wishes to have
accumulated $750,000 in his retirement fund (money at that time). If the interest rate
is 5% per year, how much should Jimmy C. put into his retirement fund at the end of
each year in order to achieve his goal?

a. $4,559 b. $12,842 c. $19,118 d. $100,007

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