1a) Which of the following help to explain the fact that a dollar today is worth

Question

1a) Which of the following help to explain the fact that a dollar today is worth more than a dollar in the future?

(1) Positive rates of inflation

(2) Opportunity cost of lost earnings

(3) People prefer consumption now rather than later

(4) Uncertainty of future

1 and 2 only

2, 3 and 4

1, 2, 3, and 4

1, 2 and 3

1b) What is the approximate future value of a portfolio given that the client has investing $250 at the end of each year for 20 years and the investments earned 9% annually?

$13,900

$5,450

$12,800

$14,190

1c) Which formula is appropriate to solve for the beginning-of-the-month payment required for a car loan if you know the interest rate, length of the loan, and the borrowed amount?

Present value

Annuity due

Future value

Ordinary annuity

1 and 2 only

2, 3 and 4

1, 2, 3, and 4

1, 2 and 3

Explanation / Answer

(1a) Correct option is (c)

Dollar today is worth more than a dollar in the future.due to positive rate of inflation, opportunity cost of lost earnings, people prefer consumption now rather than later and uncertainty of future.

(1b)

Annuity amount = $250

Interest rate = 9%

Time period = 20 years

CVAF(9%, 20) = Compound value annuity factor at 9% for 20 years

Future value = Annuity amount x CVAF(9%, 20)

= 250 X 51.160

= $12,800

Hence, correct option is (c)  

(1c) If we want to solve for the begining of the month payment required for a car loan, if we know the interest rate, length of the loan and the borrowed amount, then the appropriate formula is the annuity due.

Hence, correct option is (b)

In case of annuity due, cash flows occur at the begining of the period.

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