C) $250,000
D) This problem cannot be solved.
Answer: A
Explanation: A)
Dif: 3 Var: 44
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13) Deine the following terms:
(a) perpetuity
(b) annuity
(c) growing perpetuity
(d) growing annuity
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
21
14) How do you calculate (mathematically) the present value (PV) of a(n):
(a) perpetuity
(b) annuity
(c) growing perpetuity
(d) growing annuity
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
15) Can we apply the growing perpetuity equation for negative growth as well?
AACSB Objective: Relective Thinking Skills
Author: SS
Question Status: Previous Edition
22
16) 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 $12,500 per year. On average, tuition and
other costs have historically increased at a rate of 4% per year.
Assuming that college costs continue to increase an average of 4% per year and that all her
college savings are invested in an account paying 7% interest, then what is the amount of
money she will need to have available at age 18 to pay for all four years of her
undergraduate education?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17) How do the growth perpetuity results difer with negative and positive growths of
similar magnitude assuming everything else remains unchanged?
AACSB Objective: Relective Thinking Skills
Author: SS
Question Status: Previous Edition
23
4.5 Solving for Variables Other Than Present Value or Future Value
1) The internal rate of return (IRR) is the interest rate that sets the net present value (NPV)
of the cash lows equal to zero.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Trial and error is the only way to compute the internal rate of return (IRR) when interest
is calculated over ive or more periods.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Dan buys a property for $210,000. He is ofered a 30-year loan by the bank, at an
interest rate of 8% per year. What is the annual loan payment Dan must make?
A) $18,653.76
B) $22,384.51
C) $26,115.26
D) $29,846.02
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
24
4) A bank is negotiating a loan. The loan can either be paid of as a lump sum of $80,000 at
the end of four years, or as equal annual payments at the end of each of the next four
years. If the interest rate on the loan is 6%, what annual payments should be made so that
both forms of payment are equivalent?
A) $14,630
B) $18,287
C) $25,602
D) $29,259
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
5) A bank ofers a home buyer a 20-year loan at 8% per year. If the home buyer borrows
$130,000 from the bank, how much must be repaid every year?
A) $15,888.95
B) $18,537.11
C) $21,185.26
D) $13,240.79
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
6) Matthew wants to take out a loan to buy a car. He calculates that he can make
repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%,
what is the maximum price he can pay for the car?
A) $16,598
B) $19,918
C) $23,237
D) $26,557
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
25
7) A businessman wants to buy a truck. The dealer ofers to sell the truck for either
$120,000 now, or six yearly payments of $25,000. Which of the following is closest to the
interest rate being ofered by the dealer?
A) 5.8%
B) 6.8%
C) 7.8%
D) 9.8%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
8) How long will it take $50,000 placed in a savings account at 10% interest to grow into
$75,000?
A) 4.25 years
B) 3.25 years
C) 5.25 years
D) 6.25 years
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
9) Faisal has $12,000 in his savings account and can save an additional $3600 per year. If
interest rates are 12%, how long will it take his savings to grow to $47,000?
A) 4.3 years
B) 6.3 years
C) 5.3 years
D) 7.3 years
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
26
10) What is the internal rate of return (IRR) of an investment that requires an initial
investment of $11,000 today and pays $15,400 in one year’s time?
A) 37%
B) 44%
C) 43%
D) 40%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
11) You are interested in purchasing a new automobile that costs $33,000. The dealership
ofers you a special inancing rate of (0.75% per month) for 60 months. Assuming
that you do not make a down payment on the auto and you take the dealer’s inancing deal,
then your monthly car payments would be closest to ________.
A) $548
B) $685
C) $959
D) $1096
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
27
12) You are considering purchasing a new home. You will need to borrow $290,000 to
purchase the home. A mortgage company ofers you a 20-year ixed rate mortgage (240
months) at (1% month). If you borrow the money from this mortgage company,
your monthly mortgage payment will be closest to ________.
A) $2554
B) $4470
C) $3193
D) $5109
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13) You are considering investing in a zero-coupon bond that will pay you its face value of
$1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of
return (IRR) for investing in this bond is closest to ________.
A) 5.0%
B) 7.1%
C) 6.0%
D) 8.2%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
28
14) You are ofered an investment opportunity that costs you $28,000, has a net present
value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the
following cash lows:
The missing cash low from year 2 is closest to ________.
A) $12,500
B) $12,000
C) $13,000
D) $10,000
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
29