1. Brian invested $1,000 five years ago and earns 4% interest per annum on his i

Question

1. Brian invested $1,000 five years ago and earns 4% interest per annum on his investment. By leaving the interest earnings in the account, he increases the amount of interest he earns each year. What is the term for this effect?

2. Brian wants to know the present value of a bonus he expects to receive next year. This calculation process is known as?

3. Samantha opened a savings account this morning. Her money will earn 5% interest, compounded annually. After five years, her savings account will be worth $5,600. Assume she will not make any withdrawals. Given this, which one of the following statements is true?
A. Samantha deposited more than $5,600 this morning.
B. The present value of Samantha's account is $5,600.
C. Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest.
D. Samantha would have had to deposit more money to have $5,600 in five years if she could have earned 6 percent interest.
E. Samantha will earn an equal amount of interest every year for the next five years.

4. Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?
A. remains constant
B. increases
C. decreases
D. becomes negative
E. cannot be determined from the information provided

5. Dani is going to receive $20,000 six years from now. Mia is going to receive $20,000 nine years from now. If we apply the same 7% discount rate to these amounts, who’s money is worth more today and why?

Explanation / Answer

Question 1. Current Value of investment = 1000 x 1.04^5 =1,216.65 His interest earnings = 1216.65-1000=216.65 He earns interest at 4% annual compunding interest Question 2. Answer: Net Present Value method Question 3. Answer: C. Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest. Question 4. Answer: C. decreases. Question 5. Answer: Dani's Money. Present Value of Danie's Money = $20,000/1.07^6 =13,326.84 Present Value of Mia's Money = $20,000/1.07^9 =$10,878.67 Because it took 3 year lesser time than Mia to receive 20,000.

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