2) An annuity is set up that will pay $1500 per year for ten years. What is the present value
(PV) of this annuity given that the discount rate is 9%?
A) $5776
B) $9626
C) $11,551
D) $13,476
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity
given that the discount rate is 7%?
A) $85.60
B) $171.20
C) $142.67
D) $199.74
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity
at the end of that 53 years given that the discount rate is 9%?
A) $8258.91
B) $16,517.82
C) $19,270.79
D) $13,764.85
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11
5) An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity
at the end of those 22 years, given that the discount rate is 8%?
A) $1563.88
B) $3127.76
C) $3649.06
D) $2606.47
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) If the current rate of interest is 8%, then the present value (PV) of an investment that
pays $1200 per year and lasts 24 years is closest to ________.
A) $7581
B) $15,162
C) $12,635
D) $17,689
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
12
7) If the current rate of interest is 7%, then the future value (FV) of an investment that
pays $1200 per year and lasts 18 years is closest to ________.
A) $24,479
B) $40,799
C) $48,959
D) $57,119
AACSB Objective: Analytic Skills
Author: JP
Question Status: New
8) You are saving money to buy a car. If you save $310 per month starting one month from
now at an interest rate of 6%, how much will you be able to spend on the car after saving
for 4 years?
A) $10,062.20
B) $20,124.40
C) $16,770.33
D) $23,478.46
AACSB Objective: Analytic Skills
Author: JP
Question Status: New
13
9) You are borrowing money to buy a car. If you can make payments of $320 per month
starting one month from now at an interest rate of 12%, how much will you be able to
borrow for the car today if you inance the amount over 4 years?
A) $7291.00
B) $14,582.00
C) $17,012.34
D) $12,151.67
AACSB Objective: Analytic Skills
Author: JP
Question Status: New
10) Since your irst birthday, your grandparents have been depositing $1200 into a savings
account on every one of your birthdays. The account pays 6% interest annually.
Immediately after your grandparents make the deposit on your 18th birthday, the amount
of money in your savings account will be closest to ________.
A) $37,086.78
B) $22,252.07
C) $44,504.14
D) $51,921.49
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
14
11) Since your irst birthday, your grandparents have been depositing $100 into a savings
account every month. The account pays 9% interest annually. Immediately after your
grandparents make the deposit on your 18th birthday, the amount of money in your savings
account will be closest to ________.
A) $32,181
B) $53,635
C) $64,362
D) $75,089
AACSB Objective: Analytic Skills
Author: JP
Question Status: New
12) Which of the following statements regarding annuities is FALSE?
A) PV of an annuity = C ×
B) The diference between an annuity and a perpetuity is that a perpetuity ends after some
ixed number of payments.
C) An annuity is a stream of N equal cash lows paid at regular intervals.
D) Most car loans, mortgages, and some bonds are annuities.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
4.4 Growing Cash Flows
1) A growing perpetuity, where the rate of growth is greater than the discount rate, will
have an ininitely large present value (PV).
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
15
2) Investment X and Investment Y are both growing perpetuities with initial cash low of
$100. Both investments have the same interest rate (r) and cash lows. The present value of
Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the
following is true?
A) Investment X has a higher growth rate than Investment Y.
B) Investment X has a lower growth rate than Investment Y.
C) The answer cannot be determined without knowing the interest rate for both
investments.
D) With the same initial cash low and the same interest rate, Investment X and Investment
Y should have the same present value.
AACSB Objective: Relective Thinking Skills
Author: JP
Question Status: Revised
3) Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local
museum, starting next year. She wants the annual amount paid to the museum to grow by
5% per year. Given that the interest rate is 9%, how much does she need to fund this
perpetuity?
A) $125,000.00
B) $200,000.00
C) $300,000.00
D) $250,000.00
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) Martin wants to provide money in his will for an annual bequest to whichever of his
living relatives is oldest. That bequest will provide $4000 in the irst year, and will grow by
7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this
bequest?
A) $100,000.00
B) $160,000.00
C) $200,000.00
D) $240,000.00
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16
5) A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the
hospital will receive a payment 6% larger than the previous payment, with the last payment
occurring in ten years’ time. What is the present value (PV) of this donation, given that the
interest rate is 11%?
A) $3,840,628.87
B) $5,376,880.42
C) $6,913,131.97
D) $7,681,257.74
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
6) Which of the following statements regarding growing perpetuities is FALSE?
A) We assume that r < g for a growing perpetuity.
B) PV of a growing perpetuity =
C) To ind the value of a growing perpetuity one cash low at a time would take forever.
D) A growing perpetuity is a cash low stream that occurs at regular intervals and grows at
a constant rate forever.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17
7) Which of the following formulas is INCORRECT?
A) PV of a growing annuity = C ×
B) PV of an annuity = C ×
C) PV of a growing perpetuity =
D) PV of a perpetuity =
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
8) Suppose that a young couple has just had their irst baby and they wish to insure that
enough money will be available to pay for their child’s college education. They decide to
make deposits into an educational savings account on each of their daughter’s birthdays,
starting with her irst birthday. Assume that the educational savings account will return a
constant 9%. The parents deposit $2400 on their daughter’s irst birthday and plan to
increase the size of their deposits by 7% each year. Assuming that the parents have already
made the deposit for their daughter’s 18th birthday, then the amount available for the
daughter’s college expenses on her 18th birthday is closest to ________.
A) $80,232
B) $160,463
C) $112,324
D) $176,509
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
18
9) Suppose that a young couple has just had their irst baby and they wish to ensure that
enough money will be available to pay for their child’s college education. Currently, college
tuition, books, fees, and other costs average $12,000 per year. On average, tuition and
other costs have historically increased at a rate of 5% per year.
Assuming that college costs continue to increase an average of 5% per year and that all her
college savings are invested in an account paying 8% interest, then the amount of money
she will need to have available at age 18 to pay for all four years of her undergraduate
education is closest to ________.
A) $110,793
B) $55,397
C) $77,555
D) $132,952
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
19
10) Assume that you are 30 years old today, and that you are planning on retirement at age
65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5%
per year as long as you work. To save for your retirement, you plan on making annual
contributions to a retirement account. Your irst contribution will be made on your 31st
birthday and will be 8% of this year’s salary. Likewise, you expect to deposit 8% of your
salary each year until you reach age 65. Assume that the rate of interest is 9%.
The present value (PV) (at age 30) of your retirement savings is closest to ________.
A) $61,303
B) $30,652
C) $42,912
D) $67,433
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
11) Assume that you are 30 years old today, and that you are planning on retirement at age
65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5%
per year as long as you work. To save for your retirement, you plan on making annual
contributions to a retirement account. Your irst contribution will be made on your 31st
birthday and will be 8% of this year’s salary. Likewise, you expect to deposit 8% of your
salary each year until you reach age 65. Assume that the rate of interest is 10%.
The future value (FV) at retirement (age 65) of your savings is closest to ________.
A) $722,766
B) $1,445,531
C) $1,011,872
D) $1,590,084
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
12) You are thinking about investing in a mine that will produce $10,000 worth of ore in the
irst year. As the ore closest to the surface is removed it will become more diicult to
extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7%
per year forever. If the appropriate interest rate is 3%, then the value of this mining
operation is closest to ________.