Introduction to Finance Assignment 1

Question 1

(5 points) $50 today is worth MORE than $50 tomorrow.
Your Answer Score Explanation
True ✔ 5.00 Correct. You understand Time value of money.
False
Total 5.00 / 5.00
Question Explanation

We have assumed time value of money is positive.

Question 2

(5 points) At an interest rate of 10% it is better to have $100 today than $120 in 2 years.
Your Answer Score Explanation
True ✔ 5.00 Correct; it is compounding!
False
Total 5.00 / 5.00
Question Explanation

All about compounding!

Question 3

(5 points) Megan wants to buy a designer handbag and plans to earn the money babysitting. Suppose the interest rate is 6% and she is willing to wait one year to purchase the bag. How much babysitting money (to the nearest whole dollar) will she need to earn today to buy the bag for $400 one year from now? (Enter just the number without the $ sign or a comma)
Answer for Question 3
You entered:
377
Your Answer Score Explanation
377 ✔ 5.00 Correct. You know it has to be less than $400.
Total 5.00 / 5.00
Question Explanation

Simple PV calculation.

Question 4

(10 points) Jeff has $1,000 that he invests in a safe financial instrument expected to return 3% annually. Marge has $500 and invests in a more risky venture that is expected to return 7% annually. Who has more after 20 years? And how much does he/she have in FV terms?
Your Answer Score Explanation
Marge; 1935 ✔ 10.00 Correct. You know how to calculate FVs!
Jeff; 1604
Marge; 1806
Jeff; 1935
Marge; 1604
Jeff; 1806
Total 10.00 / 10.00
Question Explanation

FV calculations of simple one-shot cash flows. Shows power of compounding.

Question 5

(10 points) Your dad invested $25 for you in 1942 in a fund and you have not withdrawn any money since.If the fund has averaged a return of 8 percent over the last 70 years, what is the current value of that investment? (Round to the nearest whole dollar; enter