Appendix Problems
MULTIPLE CHOICE
1. If the annual interest rate is 25%, the present discounted value of $100 to be received in one year is:
a.
$75.
b.
$80.
c.
$100.
d.
$120.
e.
$125.
2. The present value of expected future profits will if the discount rate increases and will
if expected future profits increase.
a.
increase; not change
b.
increase; increase
c.
not change; decrease
d.
decrease; increase
e.
decrease; decrease
3. You buy your child a $100 savings bond that matures in 10 years and pays an annual interest rate of
10%. At maturity the bond will be worth:
a.
$228.17.
b.
$200.
c.
$259.37.
d.
$271.17.
e.
$217.71.
4. If the annual interest rate is i, the present value of $X to be received at the end of each of the next n
years is:
a.
$X/i.
b.
$X/(1 + i)n.
c.
d.
$X[(1 + i)n] / [ i(1 + i)n – 1].
e.
$X / [i(1 + i)n – 1].
5. You’ve just won the $25 million lottery. You are going to receive a check for $1 million today and at
the end of every year for the next 24 years. If the interest rate is 10%, the present value of your prize
is:
a.
$8,984,744.
b.
$9,984,744.
c.
$12,984,744.
d.
$20,000,000.
e.
$25,000,000.
6. You borrow money from Fast Eddie’s Fast Cash at 20% per year interest and agree to pay $500 at the
end of each of the next four years. You must have borrowed approximately:
a.
$2,000.
b.
$1,595.
c.
$1,295.
d.
$1,095.
e.
$895.
7. Your mortgage requires that you pay $12,000 at the end of each of the next 30 years. If the annual
interest rate is 12%, then you must have borrowed approximately:
a.
$117,660.
b.
$96,660.
c.
$78,660.
d.
$63,660.
e.
$133,660.
8. If the annual interest rate is i, the present value of $X to be received at the end of each future year
forever is:
a.
$X/(1 + i).
b.
$X/i.
c.
$X/(1 + i)n.
d.
$X/i n.
e.
$Xn/i n.
9. If the annual interest rate is i, the present value of a payment of $X to be received n years from now
forever is:
a.
$X/(1 + i).
b.
$X/i.
c.
$X/(1 + i )n.
d.
$X/i n.
e.
none of the above.