Foundations of Financial Management 16th Edition Block Test Bank

Foundations of Financial Management
16th Edition Block Test Bank

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Chapter 09 Test Bank – Static Key
1. An amount of money to be received in the future is worth less today than the stated present value
amount.
TRUE
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Basic
Gradable: automatic
Learning Objective: 09-01 Money has a time value associated with it, and therefore a dollar received today is worth more than a dollar received in the future.
Topic: Time value of money
2. Discounting refers to devaluing the item from the higher future value amount to the present value amount
through the consideration of interest.
TRUE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
Learning Objective: 09-03 The present value is based on the current value of funds to be received.
3. Compounding refers to the growth process that turns $1 today into a greater value several periods in the
future.
TRUE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
Learning Objective: 09-02 The future value is based on the number of periods over which the funds are to be compounded at a given interest rate.
4. The interest factor for the future value of a single sum is equal to (1 + n)i.
FALSE
AACSB: Reflective Thinking
Blooms: Remember
Difficulty: Basic
Gradable: automatic
Topic: Future value-single cash flow
5. The time value of money is not a useful concept in determining the value of a bond or in capital
investment decisions.
FALSE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
6. If a single amount were put on deposit at a given interest rate and allowed to grow, its future value could
be determined by reference to a "future value of $1" table.
TRUE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
09-1
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
7. The time value of money concept is fundamental to the analysis of cash inflow and outflow decisions
covering multiple periods of time.
TRUE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
8. The future value is the same concept as the way money grows in a bank account.
TRUE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
9. Time value of money considers many changes to the value of the dollar such as interest, inflation,
deflation, etc.
FALSE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
10. A major disadvantage to time value of money is that is only considers one item that changes the value
of the dollar such as interest.
TRUE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
11. Cash flow decisions that ignore time value of money will probably not be as accurate as those
decisions that do consider time value of money.
TRUE
Blooms: Understand
Difficulty: Intermediate
Gradable: automatic
12. The present value of a positive future inflow can become negative as discount rates become higher and
higher.
FALSE
Blooms: Understand
Gradable: automatic
Topic: Present value-single cash flow
09-2
13. The interest factor for a future value (FVIF) is equal to (1 + i)n
TRUE
Blooms: Remember
Difficulty: Basic
Gradable: automatic
14. The formula PV = FV(1 + n)i will determine the present value of $1.
FALSE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
15. To determine the current worth of four annual payments of $1,000 at 4% annual interest, one would
refer to a time value of money table for the present value of $1.
FALSE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
Topic: Present value-annuity
16. As the interest rate increases, the interest factor (IF) for the present value of $1 increases.
FALSE
Blooms: Understand
Difficulty: Basic
Gradable: automatic
17. The interest factor for the present value of a single amount is the reciprocal of the future value interest
factor.
TRUE
Blooms: Remember
Difficulty: Basic
Gradable: automatic
18. The interest factor for the present value of a single sum is equal to (1 + i)/i..
FALSE
Blooms: Remember
Difficulty: Basic
Gradable: automatic
19. Higher interest rates reduce the present value amount.
09-3
TRUE
Blooms: Understand
Gradable: automatic
Topic: Present value-multiple cash flows
20. In determining the future value of an ordinary annuity, the final payment is not compounded at all.
TRUE
Blooms: Remember
Gradable: automatic
Topic: Future value-annuity
21. The future value of an ordinary annuity assumes that the payments are received at the end of the year
and that the last payment does not compound.
TRUE
Blooms: Understand
Gradable: automatic
22. Time value of money can be calculated in a few different ways such as time value of money tables,
calculator, and/or equation, which all come up with a very similar answer.
TRUE
Blooms: Understand
Gradable: automatic
23. The future value of an annuity table provides a "shortcut" for calculating the future value of a steady
stream of payments, denoted as A. The same value can be calculated directly from the following equation:
FALSE
Blooms: Understand
Gradable: automatic
24. The present value of an annuity table provides a "shortcut" for calculating the future value of a steady
stream of payments, denoted as A. The same value can be calculated directly from the following equation:
TRUE
Blooms: Understand
Gradable: automatic
09-4
25. The amount of annual payments necessary to accumulate a desired future total can be found by
reference to the present value of an annuity table.
FALSE
Blooms: Understand
Gradable: automatic
26. If an individual’s cost of capital were 6%, the person would prefer to receive $110 at the end of one
year rather than $100 right now.
TRUE
PV = FV × PVIF (App. B: 6%, 1 period)

= $110 × 0.943 = $104
Blooms: Apply
Difficulty: Basic
Gradable: automatic
27. In evaluating capital investment projects, current outlays must be judged against the current value of
future benefits.
TRUE
Blooms: Understand
Gradable: automatic
28. The farther into the future any given amount is received, the larger its present value.
FALSE
Time amplifies the growth of money. Consequently, to achieve a certain future value, more time means that
you can start with less.
Blooms: Understand
Gradable: automatic
29. The interest factor for the future value of an annuity is simply the sum of the interest factors for the
future value using the same number of periods.
FALSE
Blooms: Understand
Gradable: automatic
30. An annuity is a series of consecutive payments of equal amount.
TRUE
09-5
If even ONE of a stream of payments is not the same, we cannot use the "shortcut" of annuity tables and
calculations
Blooms: Remember
Difficulty: Basic
Gradable: automatic
Topic: Annuities
31. Using semi-annual compounding rather than annual compounding will increase the future value of an
annuity.
TRUE
Blooms: Understand
Gradable: automatic
Learning Objective: 09-05 Compounding or discounting may take place on a less than annual basis such as semiannually or monthly.
Topic: Simple and compound interest
32. Compounding more than once a year (semi-annually, quarterly, or monthly) will increase the interest
rate and number of periods used in the calculations.
FALSE
Blooms: Understand
Gradable: automatic
33. When the inflation rate is zero, the present value of $1 is identical to the future value of $1.
FALSE
Blooms: Understand
Difficulty: Challenge
Gradable: automatic
Topic: Nominal and real rates
34. The amount of annual payments necessary to repay a mortgage loan can be found by reference to the
present value of an annuity table.
TRUE
Blooms: Understand
Gradable: automatic
Learning Objective: 09-04 Not only can future value and present value be computed, but other factors such as yield (rate of return) can be determined as well.
Topic: Loan payments
35. In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of
principal increases over the life of the mortgage.
TRUE
Blooms: Understand
Gradable: automatic
Topic: Amortization
09-6
36. The time value of money concept becomes less critical as the prime rate of lending increases.
FALSE
Blooms: Understand
Gradable: automatic
37. Discounted at 6%, $1,000 received three years from now is worth less than $800 received today.
FALSE
PV = FV × PVIF (App B: 3 periods, 6%)

= $1,000 × .840 = $840
Blooms: Apply
Difficulty: Basic
Gradable: automatic
38. Discounted at 10%, $1,000 received at the end of each year for three years is worth less than $2,700
received today.
TRUE
PVA = A × PVIFA (App. D: 3 periods, 10%)

= $1,000 × 2.487 = $2,487
Blooms: Apply
Difficulty: Basic
Gradable: automatic
39. When adjusting for semi-annual compounding of an annuity, the adjustments include multiplying the
periods and annuity payment amount by 2.
FALSE
Blooms: Understand
Gradable: automatic
40. Calculation of the yield of an investment provides the total return over multiple years.
FALSE
Blooms: Understand
Gradable: automatic
Topic: Bond yields and returns
41. To calculate "Future or Present Values of an "Annuity Due," we must assume that payments happen
twice as often.
FALSE
Annuities Due simply move TVM calculations back to the beginning of a year, rather than the end.
09-7
Blooms: Understand
Gradable: automatic
Topic: Annuities
42. Under what conditions must a distinction be made between money to be received today and money to
be received in the future?
A. A period of recession
B. When idle money can earn a positive return
C. When there is no risk of non payment in the future
D. When current interest rates are different from expected future rates
Blooms: Understand
Gradable: automatic
43. As the compounding rate becomes lower and lower, the future value of inflows approaches
A. 0.
B. the present value of the inflows.
C. infinity.
D. More information is needed to answer the question.
Blooms: Understand
Gradable: automatic
44. Time value of money considers which of the following item(s) that change the value of money?
A. Inflation
B. Interest
C. Currency changes
D. All of the options are true
Blooms: Understand
Gradable: automatic
45. If you invest $10,000 today at 10% interest, how much will you have in 10 years?
A. $13,860
B. $25,940
C. $3,860
D. $80,712
FV = PV × FVIF (App. A: 10%, 10 years)

= $10,000 × 2.594 = $25,940
Blooms: Apply
Gradable: automatic
46. In determining the future value of a single amount, one must consider
09-8
A. the periodic payments at a given interest rate and time.
B. the future value at a given interest rate and time.
C. the future periodic payments discounted at a given interest rate and time.
D. the present value at a given interest rate and time.
Blooms: Understand
Gradable: automatic
47. The concept of time value of money is important to financial decision making because
A. it emphasizes earning a return on invested capital.

B. it recognizes that earning a return makes $1 today worth less than $1 received in the future.
C. it can be applied to future cash flows in order to compare different streams of income.
D. All of these options are true.
Blooms: Understand
Gradable: automatic
48. As the discount rate becomes higher and higher, the present value of inflows approaches
A. 0.
B. minus infinity.
C. plus infinity.
D. More information is needed.
Blooms: Understand
Gradable: automatic
49. How much must you invest today at 8% interest in order to see your investment grow to $8,000 in 10
years?
A. $3,070
B. $3,704
C. $3,105
D. $17,272
PV = A × PVIF (App. B: 8%, 10 periods)

= $8,000 × 0.463 = $3,704
Blooms: Apply
Gradable: automatic
50. An annuity may best be defined as
A. a payment at a fixed interest rate.

B. a series of payments of unequal amount.
C. a series of yearly payments, regardless of amount.
D. a series of consecutive payments of equal amounts.
Blooms: Remember
09-9
Difficulty: Basic
Gradable: automatic
Topic: Annuities
51. You are to receive $12,000 at the end of five years. The available yield on investments is 6%. Which
table would you use to determine the value of that sum today?
A. Present value of an annuity of $1

B. Future value of an annuity of $1
C. Present value of $1
D. Future value of $1
Blooms: Understand
Difficulty: Basic
Gradable: automatic
52. You are to receive $12,000 at the end of each of five years. The available yield on investments is 6%.
Which table would you use to determine the value of that sum today?
A. Present value of an annuity of $1

B. Future value of an annuity of $1
C. Present value of $1
D. Future value of $1
Blooms: Understand
Difficulty: Basic
Gradable: automatic
53. As the interest rate increases, the present value
A. increases.
B. decreases.
C. remains the same.
D. Not enough information is given to tell.
Blooms: Understand
Gradable: automatic
54. As the time period until receipt increases, the present value
A. decreases.
B. remains the same.
C. increases.
D. Not enough information is given to tell.
Blooms: Understand
Difficulty: Basic
Gradable: automatic
55. A company wants to find the yield on an investment that requires a certain amount today in which then
returns a single amount some time in the future. Which time value of money table would the company use?
A. the present value of $1 or the future value of $1.

B. the future value of an annuity of $1.
C. present value of an annuity of $1.
09-10
D. None of these are correct.
Blooms: Understand
Gradable: automatic
56. If a father and mother set aside a certain amount each year for their daughter ’s college fund, which
table would be used to determine the amount necessary to be put away each year in order to reach a
certain goal once the daughter attends college?
A. The present value of $1

B. The future value of $1.
C. The future value of an annuity of $1.
D. Present value of an annuity of $1.
Blooms: Understand
Gradable: automatic
57. Shah sets aside $2,000 each year for five years. After five years, he then withdraws the funds on an
equal annual basis for the next four years. If Shah wishes to determine the amount of the annuity to be
withdrawn in years 6 through 9, he should use the following two tables in this order:
A. present value of an annuity of $1; future value of an annuity of $1

B. future value of an annuity of $1; present value of an annuity of $1
C. future value of an annuity of $1; present value of $1
D. future value of an annuity of $1; future value of $1
Blooms: Understand
Gradable: automatic
Topic: Annuities
58. To save for her newborn son ’s college education, Lea Wilson will invest $1,000 at the end of each year
for the next 20 years. The interest rate is 10%. What is the future value?
A. $8,514
B. $2,980
C. $63,440
D. $57,275
FVA = A × FVIFA (App. C: 10%, 20 periods)

= $1,000 × (57.275 ) = $57,275
Blooms: Apply
Gradable: automatic
59. If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, which table would
you use to find the ending balance in your account?
A. Present value of $1
B. Future value of $1
C. Present value of an annuity of $1
D. Future value of an annuity of $1
09-11
Blooms: Understand
Difficulty: Basic
Gradable: automatic
60. If you were to put $1,000 in the bank at 6% interest each year for the next 10 years, how much would
you have as an ending balance in your account?
A. Present value of $1
B. Future value of $1
C. Present value of an annuity of $1
D. Future value of an annuity of $1
Blooms: Understand
Difficulty: Basic
Gradable: automatic
61. The interest factor (IF) for the future value of an ordinary annuity is 4.641 at 10% for four years. If we
wish to accumulate $8,000 by the end of four years, how much should the annual payments be?
A. $2,500
B. $2,000
C. $1,724
D. $37,128
(App. C: 10%, 4 periods)

A $8,000/4.641
A = $1,724
Blooms: Apply
Gradable: automatic
Topic: Time value payments
62. Mr. Blochirt is creating a college investment fund for his daughter. He will put in $1,000 per year for the
next 5 years starting one year from now and expects to earn a 6% annual rate of return. How much money
will his daughter have when she starts college?
A. $4,212
B. $12,263
C. $5,000
D. $5,637

= $1,000 ×5.637 = $5,637
Blooms: Apply
Gradable: automatic
63. Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of
8% compounded for four years. How much total return will his investment earn during this time period?
A. $3,675
B. $1,800
C. $6,254
09-12
D. $8,570
FV = PV × FVIF (App. A: 8%, 4 periods)

= $5,000 × 1.360 = $6,800
$6,800 - Initial investment of $5,000 = $1,800
Blooms: Apply
Gradable: automatic
64. Lou Lewis borrows $10,000 to be completely repaid over 10 years at 8%. Repayment of principal in the
first year is ______.
A. $1,493
B. $693
C. $690
D. $885
(App. D: 8%, 10 periods)

A = $10,000/6.710
A = $1,493 annual payment less interest in year 1 ($10,000 × 8%) of $800 = $693
Blooms: Apply
Gradable: automatic
Topic: Amortization
65. Sharon Smith will receive $1 million in 20 years. The discount rate is 10%. As an alternative, she can
receive $200,000 today. Which should she choose?
A. The $200,000 today.

B. The $1 million in 20 years.
C. Both equal the same value.
D. Neither option would be preferred.
PV = FV × PVIF (App. B: 10%, 20 periods)

= ($1,000,000 /(1 + .10)20 = $149,000
Blooms: Apply
Difficulty: Basic
Gradable: automatic
66. Pedro Gonzalez will invest $5,000 at the end of each year. If the interest rate is 8%, what will the value
be after three years?
A. $12,885
B. $6,300
C. $16,230
D. $15,400
FVA = A × FVIFA (App. C: 8%, 3periods)

= $5,000 × (3.246) = $16,230
Blooms: Apply
Gradable: automatic
09-13
67. Ambrin Corp. expects to receive $2,000 at the end of each year for 10 years. Then the corporation
expects to receive $3,500 per year for the following 10 years, at the end of each year. What is the
approximate present value of this 20-year cash flow? Use an 8% discount rate.
A. $24,294
B. $27,870
C. $32,389
D. $2,547
PVA = A × PVIFA (App. D: 8%, 10 periods)

= $2,000 ×6.710 = $13,420
= $3,500 ×6.710 = $23,485× PVIF (App. B: 8%, 10 periods)
PVIF = $23,485× (.463) = $10,874
$13,420 + $10,874 = $24,294
OR
PVIFA(8%, 20 periods) minus PVIFA (8%, 10 periods) = PVIFA years 11 through 20
PLUS PVIFA (8%, 10 periods)× $2,000
TOTAL of present values of both cash streams
Blooms: Apply
Gradable: automatic
68. Fishermen’s Corp. is considering purchasing a boat. If the boat was purchased, it is expected to
receive $20,000 at the end of the first year, $40,000 at the end of the second year, and $60,000 at the end
of the third year within its business. What is the boat worth to Fishermen’s Corp today, assume an 8%
discount rate.
A. $120,000
B. $100,440
C. $47,640
D. $98,756
Using Present value of $1 table: ($20,000*.926) + ($40,000 * .857) + ($60,000 * .794) = $100,440
Blooms: Apply
Gradable: automatic
69. Dr. J. wants to buy a Dell computer that will cost $3,000 three years from today. He would like to set
aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn an
8% annual return. How much should he set aside at the end of each year?
A. $879
B. $627
C. $924
D. $9,738

A = $3,000/3.246
A = $924
09-14
Blooms: Apply
Gradable: automatic
70. Mr. Fish wants to build a house in ten years. He estimates that the total cost will be $150,000. If he can
put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount
needed?
A. Between 8% and 10%

B. Between 6% and 8%
C. Above 10%
D. Between 4% and 6%
FVIFA = FVA (App. C: 10 periods)/A

FVIFA = $150,000/10,000 = 15.0 Rate of return = between 8% to 10% on the future value of an annuity
table.
Blooms: Apply
Gradable: automatic
Topic: Interest rates
71. Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years.
What table would you use to calculate the value of this contract in today's dollars?
A. Present value of an annuity

B. Present value of a single amount
C. Future value of an annuity
D. Future value of a dollar
Blooms: Understand
Gradable: automatic
72. Football player Walter Johnson signs a contract calling for payments of $250,000 per year, which
begins 10 years from now and then continue for five more years after that. To find the value of this contract
today, which table or tables should you use?
A. The future value of $1

B. The future value of an annuity of $1 and the future value of $1
C. The present value of an annuity of $1 and the present value of $1
D. The present value of $1 and the future value of $1
Blooms: Understand
Gradable: automatic
73. Mike Carlson will receive $12,000 a year from the end of the third year to the end of the 12th year (10
payments). The discount rate is 10%. The present value today of this deferred annuity is ______.
A. $61,450
B. $42,185
C. $60,909
D. $55,379
09-15
= $12,000 × 6.145 = $73,740
= $73,740 × .751 = $55,379

Blooms: Apply
Gradable: automatic
74. The shorter the length of time between a present value and its corresponding future value,
A. the lower the present value, relative to the future value.

B. the higher the present value, relative to the future value.
C. the higher the interest rate used in the discounting to the present value.
D. None of these options are correct.
Blooms: Understand
Gradable: automatic
75. A dollar today is worth more than a dollar to be received in the future because
A. a stated rate of return is guaranteed on all investment opportunities.

B. the dollar can be invested today and earn interest.
C. inflation will increase the purchasing power of a future dollar.
D. None of these options are true.
Blooms: Understand
Difficulty: Basic
Gradable: automatic
76. The higher the interest rate used in determining the future value of a $1 annuity,
A. the smaller the future value at the end of the period.

B. the greater the future value at the end of a period.
C. the greater the present value at the beginning of a period.
D. None of these options. The interest has no effect on the future value of an annuity.
Blooms: Understand
Difficulty: Basic
Gradable: automatic
77. Mr. Darden is selling his house for $200,000. He bought it for $164,000 ten years ago. What is the
annual return on his investment?
A. 2%
C. 10%
D. Less than 1%
PVIF = PV (App. B: 10 periods)/FV

= $164,000/$200,000 = 0.82; Return = 2%
Blooms: Apply
Gradable: automatic
09-16
78. Mr. Bubble wants to sell his bubble machine for $1,000,000, but it might take awhile before it is valued
that high. He bought it for $149,000 and is earning annual interest of 10% on the machine. How long will
Mr. Bubble have to wait before the machine is valued at $1,000,000?
A. 20 years
B. 10 years
C. 5 years
D. More than 20 years
= $149,000 / $1,000,000 = .149 on table present value of $1 (future value of $1 table can also be used.
Take the .149 factor and find 10% next to 20 years. 20 years is the answer.
Blooms: Apply
Gradable: automatic
79. Increasing the number of periods will increase all of the following except
A. the present value of an annuity.

B. the present value of $1.
C. the future value of $1.
D. the future value of an annuity.
Blooms: Understand
Gradable: automatic
Topic: Number of time periods
80. Joe Nautilus has $210,000 and wants to retire. What approximate return must his money earn so he
may receive annual benefits of $30,000 for the next 10 years?
A. Greater than 10%

C. Between 6% and 8%
D. Lower than 6%
PVIFA = PVA (App. D: 10 periods)/A

= $210,000/$30,000 = 7.0; Return = between 6% and 8%
Blooms: Apply
Gradable: automatic
81. You will deposit $2,000 today. It will grow for five years at 12% interest, but compounded semi-
annually. You will then withdraw the funds annually over the next four years at the end of each year, with
an annual interest rate of 8%. Your annual withdrawal will be approximately ______.
A. $2,340
B. $4,332
C. $797
D. $1,082

= $2,000 × 1.791 = $3,582
09-17
A = PVA (App. D: 8%, 4 periods)
PVIFA= $3,582/3.312 = $1,082
Blooms: Apply
Gradable: automatic
82. You will deposit $200,000 today. It will grow for five years at 12% interest, but compounded semi-
annually. What will your investment grow to?
A. $111,600
B. $1,120,000
C. $352,468
D. $358,200

= $200,000 × 1.791 = $358,200
Blooms: Apply
Gradable: automatic
83. Carol Thomas will pay out $6,000 at the end of year two and $8,000 at the end of year three. Then
Carol will receive $10,000 at the end of year four. With an interest rate of 10%, what is the net value of the
payments versus receipts in today's dollars?
A. $7,326
B. $10,242
C. $17,794
D. $4,134

= $6,000 × .826 = $4,956
= $8,000 × .751 = $6,008
= $10,000 × .683 = $6,830
Net Value of Payments = ($4,956) + ($6,008) + $6,830 = $4,134
Blooms: Apply
Gradable: automatic
84. John Doeber borrowed $150,000 to buy a house. His loan cost was 16% annually because of his bad
credit score. He promised to repay the loan in 5 years on a quarterly basis.. How much are the quarterly
payments?
A. $11,453
B. $45,811
C. $13,113
D. $11,038
PVA = A × PVIFA (App. D: 16%/4 = 4%, 5 * 4 = 20 periods)
09-18
A = PVA/PVIFA = $150,000/13.590 = $11,038
Blooms: Apply
Gradable: automatic
85. John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the
loan in 10 equal annual payments. What is the principal outstanding after the first loan payment?
A. $143,555
B. $134,560
C. $141,200
D. $138,620

= $150,000/7.360 = $20,380
Annual Payment - Interest = Amount to be applied to principal
$20,380 - (.06 × $150,000) = $11,380
Outstanding principal at end of year 1 = Loan - Payment to principal
= $150,000 - $11,380
= $138,620
Blooms: Apply
Gradable: automatic
Topic: Amortization
86. John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the
loan in 10 equal annual payments. What are John’s annual payment amounts?
A. $15,000
B. $20,380
C. $15,445
D. $11,453

= $150,000/7.360 = $20,380
Blooms: Apply
Gradable: automatic
Topic: Amortization
87. A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much
should the annual loan payments be?
A. $1,584
B. $7,384
C. $15,555
D. $15,588
$72,500/9.818 = $7,384.
Blooms: Apply
09-19
Gradable: automatic
88. A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of
retirement, you will have $73,425. The plan anticipates earning 8% interest. Given the following
information, how much will you be able to take out on an annual basis while you are retired?
A. $1,435
B. $13,070
C. $7,479
D. $13,102
$73,425/9.818 = $7,479
Blooms: Apply
Gradable: automatic
89. After 10 years, some shares of stock originally purchased for $500 total were sold for $900 total. What
was the yield on the investment? Choose the closest answer.
A. 10%
B. 4%
C. 8%
D. 6%
PVIF = PV/FV (App. B: 10 periods)

= $500/$900 = 0.555 Yield = approx 6%

Blooms: Apply
Gradable: automatic
90. Dr. Stein has just invested $10,000 for his son (age 7). The money will be used for his son's education
10 years from now. He calculates that he will need $21,598 for his son's education by the time the boy
goes to school. What rate of return will Dr. Stein need to achieve this goal? Choose the closest answer.
A. 10%
B. 8%
C. 4%
D. 1%

= $10,000/$21,598 = 0.463 Return: 8%
Blooms: Apply
Gradable: automatic
91. The future value of a $500 investment today at 8% annual interest compounded semiannually for five
years is ______.
A. $805
09-20
B. $814
C. $740
D. $923
FV = PV × FVIF (App. A: 8%/2=4%, 5*2=10 periods)

= $500 × 1.480 = $740
Blooms: Apply
Gradable: automatic
92. Dan would like to save $1,500,000 by the time he retires in 30 years and believes he can earn an
annual return of 8%. How much does he need to invest in each of the following years to achieve his goal?
A. $13,241
B. $133,239
C. $10,727
D. $52,450

= $1,500,000/113.283 = $13,241
Blooms: Apply
Gradable: automatic
93. Sydney saved $10,000 during her first year of work after college and plans to invest it for her retirement
in 20 years. How much will she have available for retirement if she can make 8% on her investment?
A. $2,150
B. $457,620
C. $46,610
D. $217,250
FV = PV × PVIF (8%, 20 periods) = $10,000 ×4.661 = $46,610

Blooms: Apply
Gradable: automatic
94. Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have
available for retirement if he can earn 8% on his investment and begins investing one year from now?
A. $566,400
B. $681,550
C. $150,000
D. $162,000

= $5,000 × 113.28 = $566,400
Blooms: Apply
Gradable: automatic
09-21
95. Ian would like to save $2,000,000 by the time he retires in 30 years. If he believes that he can achieve
a 6% rate of return, how much does he need to deposit each year, starting one year from now, to achieve
his goal?
A. $12,065
B. $37,500
C. $5,790
D. $25,298

= $2,000,000/79.058 = $25,298
Blooms: Apply
Gradable: automatic
96. Jeff believes he will need a $60,000 annual income during retirement. If he can achieve a 6% return
during retirement and believes he will live 20 years after retirement, how much does he need to save by the
time he retires? Assume he'll start drawing his money out one year after his retirement.
A. $724,055
B. $1,600,000
C. $688,200
D. $209,320

= $60,000 × 11.470 = $688,200
Blooms: Apply
Gradable: automatic
97. If Allison has saved $1,000,000 upon retirement, how much money can she live on each year if she can
earn 4% per year and will end with $0 when she expects to die 30 years after retirement?
A. $40,000
B. $20,953
C. $17,830
D. $57,830
A = PVA/PVIFA (App. D: 4%, 30 periods)

= $1,000,000/17.292 = $57,830
Blooms: Apply
Gradable: automatic
98. Kathy has $50,000 to invest today and would like to determine whether it is realistic for her to achieve
her goal of buying a home for $150,000 in 10 years with this investment. What return must she achieve in
order to buy her home in 10 years?
A. Above 10%
09-22
B. Between 8% to 10%
C. Exactly 10%
D. Below 8%

= $50,000/$150,000 = 0.333 Return = above 10%
Blooms: Apply
Gradable: automatic
99. If Gerry makes a deposit of $1,500 at the end of each quarter for five years, how much will he have at
the end of the five years assuming a 12% annual return and quarterly compounding?
A. $40,305
B. $30,000
C. $108,078
D. $161,220

= $1,500 × 26.870 = $40,305
Blooms: Apply
Gradable: automatic
100. Sara would like to evaluate the performance of her portfolio over the past 10 years. What compound
annual rate of return has she achieved if she invested $12,000 ten years ago and now has $25,000?
A. Between 4% and 6%
B. Above 10%
C. Between 8% and 10%
D. Between 6% and 8%

= $12,000/$25,000 = 0.48 Return: between 6% and 8%
Blooms: Apply
Gradable: automatic
Chapter 09 Test Bank - Static Summary

Category # of Questions
AACSB: Analytical Thinking 93
AACSB: Reflective Thinking 7
Accessibility: Keyboard Navigation 93
Blooms: Apply 40
Blooms: Remember 7
Blooms: Understand 53
Difficulty: Basic 29
09-23
Difficulty: Challenge 15
Difficulty: Intermediate 56
Gradable: automatic 100
Learning Objective: 09-01 Money has a time value associated with it, and therefore a dollar received 14
today is worth more than a dollar received in the future.
Learning Objective: 09-02 The future value is based on the number of periods over which the funds are to 31
be compounded at a given interest rate.
Learning Objective: 09-03 The present value is based on the current value of funds to be received. 42
Learning Objective: 09-04 Not only can future value and present value be computed, but other factors 23
such as yield (rate of return) can be determined as well.
Learning Objective: 09-05 Compounding or discounting may take place on a less than annual basis such 8
as semi annually or monthly.
Topic: Amortization 4
Topic: Annuities 4
Topic: Bond yields and returns 1
Topic: Future value-annuity 14
Topic: Future value-single cash flow 9
Topic: Interest rates 8
Topic: Loan payments 3
Topic: Loan security 6
Topic: Nominal and real rates 1
Topic: Number of time periods 1
Topic: Present value-annuity 8
Topic: Present value-multiple cash flows 3
Topic: Present value-single cash flow 18
Topic: Simple and compound interest 3
Topic: Time value of money 15
Topic: Time value payments 8
09-24

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Foundations of Financial Management

16th Edition Block Test Bank

19. Higher interest rates reduce the present value amount.

PV = FV × PVIF (App. B: 6%, 1 period)

30. An annuity is a series of consecutive payments of equal amount.

PV = FV × PVIF (App B: 3 periods, 6%)

PVA = A × PVIFA (App. D: 3 periods, 10%)

FV = PV × FVIF (App. A: 10%, 10 years)

A. it emphasizes earning a return on invested capital.

PV = A × PVIF (App. B: 8%, 10 periods)

50. An annuity may best be defined as

A. a payment at a fixed interest rate.

A. Present value of an annuity of $1

A. Present value of an annuity of $1

53. As the interest rate increases, the present value

A. the present value of $1 or the future value of $1.

A. The present value of $1

A. present value of an annuity of $1; future value of an annuity of $1

FVA = A × FVIFA (App. C: 10%, 20 periods)

(App. C: 10%, 4 periods)

FVA = A × FVIFA (App. C: 6%, 5 periods)

FV = PV × FVIF (App. A: 8%, 4 periods)

(App. D: 8%, 10 periods)

A. The $200,000 today.

PV = FV × PVIF (App. B: 10%, 20 periods)

FVA = A × FVIFA (App. C: 8%, 3periods)

PVA = A × PVIFA (App. D: 8%, 10 periods)

(App. C: 8%, 3 periods)

A. Between 8% and 10%

FVIFA = FVA (App. C: 10 periods)/A

A. Present value of an annuity

A. The future value of $1

PVA = A × PVIFA (App. D: 10%, 10 periods)

AACSB: Analytical Thinking

A. the lower the present value, relative to the future value.

A. a stated rate of return is guaranteed on all investment opportunities.

A. the smaller the future value at the end of the period.

PVIF = PV (App. B: 10 periods)/FV

A. the present value of an annuity.

A. Greater than 10%

PVIFA = PVA (App. D: 10 periods)/A

FV = PV × FVIF (App. A: 6%, 10 periods)

FV = PV × FVIF (App. A: 6%, 10 periods)

PV = FV × PVIF (App. B: 10%, 2 periods)

PVA = A × PVIFA (App. D: 16%/4 = 4%, 5 * 4 = 20 periods)

PVA = A × PVIFA (App. D: 6%, 10 periods)

PVA = A × PVIFA (App. D: 6%, 10 periods)

PVIF = PV/FV (App. B: 10 periods)

AACSB: Analytical Thinking

PVIF = PV/FV (App. B: 10 periods)

FV = PV × FVIF (App. A: 8%/2=4%, 5*2=10 periods)

(App. C: 8%, 30 periods)

FV = PV × PVIF (8%, 20 periods) = $10,000 ×4.661 = $46,610

FVA = A × FVIFA (App. C: 8%, 30 periods)

(App. C: 6%, 30 periods)

PVA = A × PVIFA (App. D: 6%, 20 periods)

A = PVA/PVIFA (App. D: 4%, 30 periods)

PVIF = PV/FV (App. B: 10 periods)

FVA = A × FVIFA (App. C: 3%, 20 periods)