PRACTICE EXAM QUESTIONS ON TIME VALUE OF MONEY

1). Trisha invests $3,000 today at a 9% p.a rate of return. She wants to have $24,000 to
give to her granddaughter for college 16 years from now. Which one of the following
statements is correct concerning Trisha 's situation?

a. Trisha will have the $24,000 when she wants it

b. Trisha would have to wait an additional ten years to have $24,000.
c. Trisha would have to earn a 10% rate of return to have $24,000 in 16 years.
d. Trisha will only have about $12,000 sixteen years from now.

2). What is the present value of $2,800 to be received three years from now if the
discount rate is 9.50%?

a. $2,114.48
b. $2,132.63
c. $2,361.48
d. $2,734.54

3.) The Blackwell Co. expects to receive $135,000 from an insurance settlement four
years from now. If the company can earn 11% on its investments, what is the settlement
worth today?

a. $85,368.94
b. $87,693.43
c. $88,928.68
d. $130,161.39

4.) Isaac and Faith both want to have $5,000 in three years. Isaac expects to earn 8% on
his investments and Faith expects a 7% rate of return. Which one of the following
statements is correct concerning the amount of money they each need to invest today?

a. Faith needs to deposit $112.33 more than Isaac today.

b. Faith needs to deposit $173.33 more than Isaac today.
c. Isaac needs to deposit $3,699.16 today.
d. Faith needs to deposit $3,081.49 today.

5). Courtney invests $1,200 today. If she can earn a 13.25% rate of return for the next
two years, how much money will she have at the end of the two years?

1
 a. $1,203.18
b. $1,232.01
c. $1,359.00
d. $1,539.07

6). A customer makes two offers to settle a disputed account. He will either pay you $500
today or pay you $650 in three years. Which one of the following is correct if your
company earns 10.50% on its surplus funds?

a. The company should accept the $650 offer as it pays $150 more.
b. The company should accept the $650 offer as it is worth $12.42 more today.
c. The company should accept the $500 offer as it is worth $18.24 more today.
d. The company should accept the $500 offer as it is worth $512.42 today.

7.) One of your suppliers calls to let you know that they are raising their prices. The
supplier offers to sell you 1,000 units at a special price of $59.99 each today. Otherwise,
the price next year will be $63.99. Your firm earns 5% on its surplus cash. You have the
funds to purchase the extra units today. Which one of the following is correct if you
ignore all storage costs?

a. You should buy today as you can save 6.67% on the deal.
b. You should wait and buy next year because you can save 1.67% by waiting.
c. You should wait and buy next year because you can save 5% by waiting.
d. There is no real difference in the choices - it makes no difference whether you
buy today or buy one year from now.

8.) What is the future value of $7,540 invested at 6.50% interest for seven years?

a. $10,330.45
b. $11,001.93
c. $11,041.26
d. $11,717.06

9.) The James Co. plans on saving money to buy some new equipment. The company is
opening an account today with a deposit of $15,000 and expects to earn 4% interest.

2
After 3 years, the firm wants to add an additional $50,000 to the account. If the account
continues to earn 4%, how much money will the James Co. have in their account five
years from now?

a. $66,872.96
b. $68,249.79
c. $70,952.96
d. $72,329.79

10.) Five friends open investment accounts today. Who will have the largest amount of
money at the end of their respective investment periods?

a. John invests $1,000 for eight years at 6% p.a. simple interest.

b. Terry invests $1,000 for four years at 9% with interest compounded
annually.
c. Alicia invests $800 for ten years at 11% with interest compounded
annually.
d. Kristi invests $1,200 for six years at 8% simple interest.
e. Roger invests $900 for nine years at 9% with interest compounded
annually.

11.) Alexander Industries just had a very profitable year. The owner has decided to invest
$225,000 of the profits in a venture that pays an 8% rate of return for fifteen years. How
much more would the investment have been worth if the owner could have made 9% on
this investment?

a. $52,910.25
b. $105,820.50
c. $211,641.00
d. $713,738.05

12.) Gretchen Enterprises borrowed $149,500 for two years from the bank. At the end of
the two years, they repaid the loan with one payment of $176,590. What was the interest
rate on the loan?

a. 8.68%
b. 9.06%
c. 10.00%
d. 10.42%
13.) Six years ago, Marti invested $3,500 in an account. No other investments or
withdrawals have been made. Today the account is worth $7,403.16. What rate of return
has Marti earned thus far?

3
 a. 12.86%
b. 13.30%
c. 15.96%
d. 18.58%

14.) Ito invested $4,350. After seven years he had an account value of $6,980.58. Maria
invested $5,920. After six years she had an account value of $8,834.62. Which one of the
following statements is correct?

a. Maria earned a rate of interest that was 0.9% higher than Ito’s rate.
b. Maria earned a rate of interest of 5.89%.
c. Ito earned a rate of interest that was 0.09% higher than Maria’s rate.
d. Both Ito and Maria earned the same rate of interest.

15.) Koji invested $3,300 at 7.75% interest. After a period of time he withdrew
$9,383.31. How long did Koji have his money invested?

a. 13 years
b. 14 years
c. 15 years
d. 16 years

16.) Sampson, Inc. invested $1,325,000 in a project that earned an 8.25% rate of return.
Sampson Inc. sold their investment for $3,713,459. How much sooner could Sampson
have sold the company if they only wanted $3,000,000 from the project?

a. 2.69 years
b. 3.33 years
c. 5.17 years
d. 6.67 years

17.) Lakeside Inc. invested $735,000 at an 11.25% rate of return. The company sold their
investment for $1,067,425. How much longer would Lakeside have had to wait if they
had wanted to sell their investment for $1,250,000?

a. .98 year
b. 1.48 years
c. 1.98 years
d. 2.31 years

18.) The James Co. invested $10,000 six years ago at 5% p.a. simple interest. The Smart
Co. invested $10,000 six years ago at 5% interest, compounded annually. Which one of
the following statements is true concerning these two investments?

4
 I. The James Co. has an account value of $13,400.96 today.
II. The James Co. will have an account value of $13,400.96, six years from
now.
III. The Smart Co. will earn $525 interest in the second year.
IV Both the James Co. and the Smart Co. will earn $500 interest in the
first year.

a. I and III only

b. I, III and IV only
c. II and IV only
d. II, III and IV only
e. III and IV only

19.) Richard invests $1,000 today at 5% interest for a period of five years. One year ago,
Richard invested $1,000 at 6.25% for six years. How much total money will Richard
have saved five years from now if both investments compound annually?

a. $2,543.77
b. $2,641.98
c. $2,678.81
d. $2,714.99

20.) The interest rate charged by Lender A is 7.375% p.a., compounded daily. The
interest rate charged by Lender B is 7.44% p.a., compounded quarterly. Which of the
following choices is true regarding the effective rate charged by the lenders?

a. Lender A charges the higher effective rate

b. Lender B charges the higher effective rate
c. The effective rate charged by both lenders is almost the same
d. Insufficient information to make a decision

ANSWER KEY ON NEXT PAGE

ANSWER KEY
1. D

5
2. B
3. C
4. A
5. D
6. C
7. A
8. D
9. D
10.C
11.B
12.A
13.B
14.C
15.B
16.A
17.B
18.E
19.D
20.C