15) Assume that two investments have a three-year life and generate the cash lows shown
below. Which of the two would you prefer?
Year Investment A Investment B
1 $5,000 $8,000
2 $5,000 $5,000
3 $5,000 $2,000
A) Investment A, since it has the most even cash lows
B) Investment B, since it gives you the largest cash lows in earlier years
C) Neither, since they both have equal lives
D) Both investments are equally attractive
Question Status: Revised
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
16) You have just purchased an investment that generates the cash lows that are shown
below. You are able to invest your money at 5.75%, compounded annually. How much is this
investment worth today?
Year Amount
0 $0
1 $1,250
2 $1,585
3 $1,750
4 $2,225
5 $3,450
A) $7,758
B) $4,521
C) $10,260
D) $8,467
Question Status: Revised
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
37
17) To evaluate and compare investment proposals, we must adjust all cash lows to a
common date.
Question Status: Previous edition
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
18) Consider an investment that has cash lows of $500 the irst year and $400 for the next
four years. If your opportunity cost is 10%, you should be willing to pay $1,607.22 for this
investment.
Question Status: Revised
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
19) You believe WSU stock will pay dividends of $1.00, $1.25, and $1.50 at the end of each
of the next 3 years. Immediately after receiving the third dividend, you will sell the stock
for $28.50. If the appropriate discount rate is 12%, you should be willing to pay $20.75 for
this stock.
Question Status: New question
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
20) The present value of a complex cash low stream is equal to the sum of the present
values of each of the cash lows.
Question Status: New question
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
38
21) You are considering purchasing common stock in AMZ Corporation. You anticipate that
the company will pay dividends of $5.00 per share next year and $7.50 per share in the
following year. You also believe that you can sell the common stock two years from now for
$30.00 per share. If you require a 14% rate of return on this investment, what is the
maximum price that you would be willing to pay for a share of AMZ common stock?
Question Status: Revised
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
22) You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year
investments in the fund each year until you retire for 40 years. Assuming an opportunity
cost of 12%, what do you estimate that you will have in this account at retirement?
Question Status: Previous edition
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
23) You are planning to deposit $10,000 today into a bank account. Five years from today
you expect to withdraw $7,500. If the account pays 5% interest per year, how much will
remain in the account eight years from today? Round to the nearest dollar.
Question Status: Revised
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
39
24) Suppose you are 40 years old and plan to retire in exactly 20 years. 21 years from now
you will need to withdraw $5,000 per year from a retirement fund to supplement your
social security payments. You expect to live to the age of 85. How much money should you
place in the retirement fund each year for the next 20 years to reach your retirement goal
if you can earn 12% interest per year from the fund?
Question Status: Revised
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
25) An investment will pay $500 in three years, $700 in ive years, and $1,000 in nine
years. If the opportunity rate is 6%, what is the present value of this investment?
Question Status: Previous edition
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
26) What is the value (price) of a bond that pays $400 semiannually for 10 years and
returns $10,000 at the end of 10 years? The market discount rate is 10% paid semiannually.
Question Status: Revised
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
40
27) The expected after-tax cash low from an investment property that you are considering
is
Year 1 $25,000
Year 2 $27,500
Year 3 $30,250
At the end of year 3 you expect to sell the property for $400,000. If the appropriate
discount rate is 12%, what is the most you should pay for this property?
Question Status: Revised
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
28) In order to send your oldest child to law school when the time comes, you want to
accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay
6% compounded annually, how much would you have to deposit if:
a. you want to deposit an amount annually at the end of each year?
b. you want to deposit one large lump sum today?
Question Status: Previous edition
Objective: 6.3 Calculate the present and future values of complex cash low streams.
Keywords: complex income streams
Principles: Principle 1: Money Has a Time Value
41