session 7

The time value of money refers to the issue of:

• what the value of the stream of future cash flows is today

• why a dollar received tomorrow is worth more than a dollar received today.

• why a dollar received tomorrow is worth the same as a dollar received today.

• None of the above

Which one of the following statements is true?

• Individuals prefer to consume goods right away rather than in the future

• Individuals prefer to consume goods in the future rather than right away

• The time of consumption is irrelevant to individuals

• None of the above

You are interested in investing $10,000, a gift from your grandparents, for the next four years in a managed fund that will earn an annual return of 8 per cent. What will your investment be worth at the end of four years? (Round to the nearest dollar.)

• 10,805

• 13,605

• 13,200

• 12,400

Brittany Willis is looking to invest for retirement, which she hopes will be in 20 years. She is looking to invest $22,500 today in an Australian fixed interest mutual fund that will earn interest at 6.25 per cent annually. How much will she have at the end of 20 years? (Round to the nearest dollar.)

• 68,870

• 50,625

• 75,642

• 71,192

Your mother is trying to choose one of the following bank term deposits to invest $10,000. Which one will have the highest future value if she plans to invest for three years?

• 3.5% compounded daily

•  3.25% compounded monthly

• 3.4% compounded quarterly

• 3.75% compounded annually

Using higher discount rates will:

• not affect the present value of the future cash flow.

• increase the present value of any future cash flow.

• decrease the present value of any future cash flow.

• None of the above

The future value of multiple cash flows is

• greater than the sum of the cash flows

• equal to the sum of all the cash flows

• less than the sum of the cash flows

• none of the above

If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called

• perpetuity

• annuity

• annuity due

• discounting

Which one of the following statements is true about amortisation?

• With an amortised loan, a bigger proportion of each month's payment goes toward interest in the early periods

• With an amortised loan, a bigger proportion of each month's payment goes toward interest in the later periods

• With an amortised loan, a smaller proportion of each month's payment goes toward interest in the early periods

• none of the above

Your father is 60 years old and wants to set up a cash flow stream that would be forever. He would like to receive $20,000 every year, beginning at the end of this year. If he could invest in account earning 9 per cent, how much would he have to invest today to receive his perpetual cash flow? (Round to the nearest dollar.)

• 222,222

• 200,000

• 189,000

• 235,222