Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.
1)
1)
Which of the following would be used to convert a future value into a uniform series of cash
flows?
A)
Single–payment compound–amount factor
B)
Single–payment present–worth factor
C)
Uniform–series capital recovery factor
D)
Uniform–series sinking–fund factor
Answer:
D
A)
B)
C)
D)
2)
2)
Which of the following is the most common period used for the periodic interest rate?
A)
B)
C)
D)
Answer:
B
A)
B)
C)
D)
3)
3)
Which of the following steps can be used to determine the present value of a uniform series of
cash flows that start in year three and end in year eight?
A)
Convert the uniform series to a cash flow in year eight and find its present value in year
zero
B)
Find the present value of the individual cash flows in year zero and add them together
C)
Convert the uniform series to a cash flow in year two and find its present value in year zero
D)
All of the above
Answer:
D
A)
B)
C)
D)
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4)
4)
Which of the following would be used to convert a present value to a future value?
A)
Single–payment compound–amount factor
B)
Single–payment present–worth factor
C)
Uniform–series capital recovery factor
D)
Uniform–series sinking–fund factor
Answer:
A
A)
B)
C)
D)
5)
5)
Which of the following would be used to find how much money needs to be set aside today in an
interest–bearing account to make some payment in the future?
A)
Single–payment compound–amount factor
B)
Single–payment present–worth factor
C)
Uniform–series capital recovery factor
D)
Uniform–series sinking–fund factor
Answer:
B
A)
B)
C)
D)
6)
6)
Equivalence is a function of which of the following?
A)
Timing of the cash flows
B)
Interest rate
C)
Size of the cash flows
D)
All of the above
Answer:
D
A)
B)
C)
D)
7)
7)
Which of the following would be used to convert a present value into a uniform series of cash
flows?
A)
Uniform–series capital recovery factor
B)
Single–payment present–worth factor
C)
Single–payment compound–amount factor
D)
Uniform–series sinking–fund factor
Answer:
A
A)
B)
C)
D)
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8)
8)
Which of the following is not true about the cash flows in a uniform series?
A)
The length of the periods must be the same.
B)
The cash flows must be equivalent.
C)
The cash flows must occur at the end every period in the series.
D)
The cash flows must be equal.
Answer:
B
A)
B)
C)
D)
9)
9)
Which of the following is not true about cash flow diagrams?
A)
The periods are represented along the horizontal axis.
B)
Cash receipts are drawn in the up direction.
C)
Cash disbursements are drawn in the down direction.
D)
The cash flow diagram is the same from the borrower’s perspective as the bank’s
perspective.
Answer:
D
A)
B)
C)
D)
10)
10)
Which of the following Microsoft Excel functions would be used to convert a present value into a
uniform series?
A)
B)
C)
D)
Answer:
C
A)
B)
C)
D)
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
11)
Define equivalence.
Answer:
Equivalent cash flows are cash flows that produce the same result over a specific period of time.
12)
How are complex (e.g., non–uniform) cash flows handled?
Answer:
Complex cash flows may require that multiple equations be used and their results added together.
13)
How does the time period chosen to evaluate equivalence affect equivalence?
Answer:
Equivalence is independent of the time period chosen to evaluate equivalence.
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14)
What is the advantage of using the uniform–series compound–amount factor over using the single–payment
compound–amount factor when dealing with a uniform series?
Answer:
The uniform–series compound–amount factor simplifies the calculations when dealing with a uniform
series of cash flows.
15)
What factors does the constant–dollar interest rate take into account?
Answer:
The constant–dollar interest rate (i’) incorporates both the periodic interest rate and the inflation rate.
16)
How can Microsoft Excel be used to solve for an unknown interest rate?
Answer:
Use the Goal Seek tool to solve for the interest rate.
17)
How much would $1,000 today be worth in 20 years at an interest rate of 10% compounded annually?
Answer:
From Table E–15 (Figure 15–2 in the text), the compound amount factor for 20 years is 6.7275. The
$1,000 would be worth $6,727.50 ($1,000 × 6.7275).
18)
How do taxes affect the interest earned on investments?
Answer:
While money is in the bank earning interest, taxes on the interest are reducing the growth of the money
by the amount paid in taxes.
19)
When using the uniform–series sinking–fund factor, when does the last cash flow in the uniform series occur?
Answer:
The last cash flow for the uniform series occurs at the same point in time as the future value.
20)
When using the uniform–series present–worth factor, when does the present value occur?
Answer:
The present value occurs one period prior to the first cash flow in the uniform series.
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Answer Key
Testname: C15
1)
D
2)
B
3)
D
4)
A
5)
B
6)
D
7)
A
8)
B
9)
D
10)
C
11)
Equivalent cash flows are cash flows that produce the same result over a specific period of time.
12)
Complex cash flows may require that multiple equations be used and their results added together.
13)
Equivalence is independent of the time period chosen to evaluate equivalence.
14)
The uniform–series compound–amount factor simplifies the calculations when dealing with a uniform series of cash
flows.
15)
The constant–dollar interest rate (i’) incorporates both the periodic interest rate and the inflation rate.
16)
Use the Goal Seek tool to solve for the interest rate.
17)
From Table E–15 (Figure 15–2 in the text), the compound amount factor for 20 years is 6.7275. The $1,000 would be
worth $6,727.50 ($1,000 × 6.7275).
18)
While money is in the bank earning interest, taxes on the interest are reducing the growth of the money by the
amount paid in taxes.
19)
The last cash flow for the uniform series occurs at the same point in time as the future value.
20)
The present value occurs one period prior to the first cash flow in the uniform series.
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