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29) When computing a present value, which of the following is TRUE?
A) You should adjust the discount rate to match the interval between cash lows.
B) You should adjust the future value to match the present value.
C) You should adjust the time period to match the present value.
D) You should adjust the cash lows to match the time period of the discount rate.
AACSB Objective: Analytic Skills
Author: WC
Question Status: New
30) Everything else remaining same, under what situation will APR and EAR be equal?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
31) What is the general relationship between the absolute values of APR and EAR for an
investment?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
32) Is it possible to analyze cash lows that occur in time intervals that are not exactly
equal to a year?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Revised
11
33) What care, if any, should be taken when cash lows occur in periodicities that are
shorter than a year (e.g., quarterly or monthly cash lows)?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
34) How do we handle a situation when both compounding period and cash low interval
are given to us but both are less than a year and not equal to each other?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
5.2 Application: Discount Rates and Loans
1) Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest
compounded monthly, at the end of three years. Joe has taken out an amortizing loan.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12
2) A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much
are monthly payments on this loan?
A) $1448.36
B) $1580.03
C) $1316.69
D) $1711.70
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much
are the monthly payments on this loan?
A) $1663.45
B) $1814.67
C) $1965.89
D) $1512.22
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) A pottery factory purchases a continuous belt conveyor kiln for $68,000. A 6.3% APR
loan with monthly payments is taken out to purchase the kiln. If the monthly payments are
$765.22, over what term is this loan being paid?
A) 8 years
B) 9 years
C) 10 years
D) 11 years
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
13
5) Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-
in. She wants her monthly payments to be about $282. Which of the following loans ofers
monthly payments closest to $282?
A) 7.8% APR for 36 months
B) 7.8% APR for 48 months
C) 7.8% APR for 60 months
D) 7.8% APR for 72 months
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
6) A house costs $148,000. It is to be paid of in exactly ten years, with monthly payments
of $1737.54. What is the APR of this loan?
A) 6.25%
B) 5.25%
C) 7.25%
D) 8.25%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
7) What is the present value (PV) of an investment that pays $100,000 every year for four
years if the interest rate is 5% APR, compounded quarterly?
A) $353,818
B) $389,200
C) $424,581
D) $459,963
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14
8) A small foundry agrees to pay $220,000 two years from now to a supplier for a given
amount of coking coal. The foundry plans to deposit a ixed amount in a bank account every
three months, starting three months from now, so that at the end of two years the account
holds $220,000. If the account pays 12.5% APR compounded monthly, how much must be
deposited every three months?
A) $24,602
B) $27,063
C) $29,523
D) $31,983
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
9) Emma runs a small factory that needs a vacuum oven for brazing small ittings. She can
purchase the model she needs for $180,000 up front, or she can lease it for ive years for
$4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the
oven will be used for ive years, should she purchase the oven or should she lease it?
A) Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven.
B) Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven.
C) Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven.
D) Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
10) A home buyer buys a house for $2,155,000. She pays 20% cash, and takes a ixed-rate
mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the
following is closest to each of her payment?
A) $11,342.47
B) $10,311.34
C) $12,373.61
D) $8249.07
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
11) A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If
the interest rate is 6.75% APR, and payments are made monthly for ive years, what
percentage of the outstanding principal does the company pay in interest each month?
A) 0.56%
15
B) 5.63%
C) 0.51%
D) 0.61%
E) 0.66%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12) A homeowner has ive years of monthly payments of $1400 before she has paid of her
house. If the interest rate is 6% APR, what is the remaining balance on her loan?
A) $57,933
B) $86,899
C) $72,416
D) $101,382
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
16
13) A Xerox DocuColor photocopier costing $44,000 is paid of in 60 monthly installments
at 6.90% APR. After three years the company wishes to sell the photocopier. What is the
minimum price for which they can sell the copier so that they can cover the cost of the
balance remaining on the loan?
A) $19,433
B) $15,546
C) $23,319
D) $27,206
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
14) A truck costing $111,000 is paid of in monthly installments over four years with 8.10%
APR. After three years the owner wishes to sell the truck. What is the closest amount from
the following list that he needs to pay on his loan before he can sell the truck?
A) $24,956
B) $37,434
C) $31,195
D) $43,673
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
17
15) A small business repairs its store. The builders charge them $130,000 which will be
paid back in monthly installments over three years at 6.80% APR. The builders will reduce
this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this
reduce the monthly loan repayments?
A) $109
B) $218
C) $164
D) $55
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
16) An investor buys a property for $608,000 with a 25-year mortgage and monthly
payments at 8.10% APR. After 18 months the investor resells the property for $667,525.
How much cash will the investor have from the sale, once the mortgage is paid of?
A) $57,216
B) $100,129
C) $71,521
D) $143,041
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
18
17) Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly.
The minimum monthly payment only requires him to pay the interest on his debt. He
receives an ofer for a credit card with an APR of 4% compounded monthly. If he rolls over
his debt onto this card and makes the same monthly payment as before, how long will it
take him to pay of his credit card debt?
A) 112 months
B) 113 months
C) 120 months
D) 122 months
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
18) A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60%
APR. After ive years he receives $50,000 as an inheritance. If he pays this $50,000 toward
his mortgage along with his regular payment, by approximately how many years will it
reduce the amount of time it takes him to pay of his mortgage?
A) 5.5 years
B) 8.6 years
C) 10.2 years
D) 12.8 years
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
19
19) Joseph buys a Hummer for $59,000, inancing it with a ive-year 7.60% APR loan paid
monthly. He decides to pay an extra $50 per month in addition to his monthly payments.
Approximately how long will he take to pay of the loan under these conditions?
A) 59.57 months
B) 57.07 months
C) 54.57 months
D) 60.57 months
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Previous Edition
20) Liam had an extension built onto his home. He inanced it for 48 months with a loan at
5.00% APR. His monthly payments were $770. How much was the loan amount for this
extension?
A) $33,436
B) $40,123
C) $46,810
D) $53,497
AACSB Objective: Relective Thinking Skills
Author: DS
Question Status: Revised
20
