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Chapter 05: Time Value of Money
114. Your grandmother just died and left you $47,500 in a trust fund that pays 6.5% interest. You must spend the money
on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much
could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?
a.
$10,936.07
b.
$9,894.54
c.
$10,805.88
d.
$14,581.43
e.
$13,019.14
Chapter 05: Time Value of Money
115. Suppose you inherited $325,000 and invested it at 8.25% per year. How much could you withdraw at the beginning
of each of the next 20 years?
a.
$30,527.27
b.
$38,626.34
c.
$33,953.80
d.
$31,150.27
e.
$38,314.84
116. Your father's employer was just acquired, and he was given a severance payment of $442,500, which he invested at a
7.5% annual rate. He now plans to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of
this year. How many years will it take to exhaust his funds, i.e., run the account down to zero?
a.
45.85
b.
31.11
c.
31.52
d.
48.31
e.
40.94
Chapter 05: Time Value of Money
117. Your uncle has $340,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of
each year, starting at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw
funds from the account. For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?
a.
18.00
b.
18.75
c.
21.75
d.
15.75
e.
22.88
Chapter 05: Time Value of Money
118. Your Aunt Ruth has $520,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the
beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down
to zero?
a.
23.29
b.
25.79
c.
29.55
d.
24.79
e.
25.04
119. Your aunt has $680,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the
beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to
withdraw funds from the account. For how many years can she make the $45,000 withdrawals and still have $50,000 left
in the end?
a.
23.40
b.
24.90
c.
30.00
d.
36.61
e.
29.40
Chapter 05: Time Value of Money
120. Suppose you just won the state lottery, and you have a choice between receiving $2,575,000 today or a 20-year
annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity?
Disregard taxes.
a.
6.41%
b.
7.37%
c.
4.74%
d.
7.44%
e.
7.13%
Chapter 05: Time Value of Money
121. Your girlfriend just won the Florida lottery. She has the choice of $15,900,000 today or a 20-year annuity of
$1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard
taxes.
a.
3.23%
b.
2.84%
c.
2.16%
d.
2.81%
e.
2.28%
122. Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made
today. You need money today to start a new business, and your uncle offers to give you $156,000 for the annuity. If you
sell it, what rate of return would your uncle earn on his investment?
a.
3.31%
b.
2.77%
c.
2.42%
d.
2.72%
e.
2.15%
Chapter 05: Time Value of Money
123. What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of
$1,600?
a.
$118.56
b.
$85.28
c.
$79.04
d.
$89.44
e.
$104.00
Chapter 05: Time Value of Money
124. What is the present value of the following cash flow stream at a rate of 7.00%?
Years:
0
1
2
3
4
CFs:
$0
$75
$225
$0
$300
a.
$485.58
b.
$589.63
c.
$495.49
d.
$436.03
e.
$490.53
125. What is the present value of the following cash flow stream at a rate of 10.0%?
Years:
0
1
2
3
4
CFs:
$0
$1,500
$3,000
$4,500
$6,000
a.
$11,888
b.
$13,473
c.
$9,850
Chapter 05: Time Value of Money
d.
$11,322
e.
$13,586
126. What is the present value of the following cash flow stream at a rate of 10.0%?
Years:
0
1
2
3
CFs:
$750
$2,450
$3,175
$4,400
a.
$7,927.25
b.
$8,817.95
c.
$9,441.45
d.
$7,570.97
e.
$8,907.02
Chapter 05: Time Value of Money
127. You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective
price you received for the car assuming an interest rate of 7.0%?
0
1
2
3
4
CFs:
$0
$1,000
$2,000
$2,000
$2,000
a.
$5,081
b.
$5,840
c.
$5,723
d.
$6,716
e.
$6,424
Chapter 05: Time Value of Money
128. At a rate of 5.5%, what is the future value of the following cash flow stream?
Years:
0
1
2
3
4
CFs:
$0
$75
$225
$0
$300
a.
$773
b.
$581
c.
$638
d.
$709
e.
$766
Chapter 05: Time Value of Money
129. Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5
years, then an additional lump sum payment of $17,750 at the end of the 5th year. What is the expected rate of return on
this investment?
a.
18.27%
b.
13.50%
c.
20.42%
d.
18.73%
e.
19.17%
130. You are offered a chance to buy an asset for $4,500 that is expected to produce cash flows of $750 at the end of Year
1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you
earn if you bought this asset?
a.
20.60%
b.
23.77%
c.
26.72%
d.
22.64%
e.
17.21%
Chapter 05: Time Value of Money
131. What's the future value of $3,300 after 5 years if the appropriate interest rate is 6%, compounded semiannually?
a.
$4,080.13
b.
$4,434.92
c.
$3,547.94
d.
$4,701.02
e.
$3,370.54
Chapter 05: Time Value of Money
132. What's the present value of $11,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded
semiannually?
a.
$9,205.87
b.
$9,113.81
c.
$10,126.45
d.
$10,678.81
e.
$9,574.10
Chapter 05: Time Value of Money
133. What's the future value of $1,950 after 5 years if the appropriate interest rate is 6%, compounded monthly?
a.
$3,051.10
b.
$2,630.26
c.
$3,208.91
d.
$2,498.74
e.
$2,130.51
134. What's the present value of $1,700 discounted back 5 years if the appropriate interest rate is 6%, compounded
monthly?
a.
$1,298.14
b.
$1,260.33
c.
$1,335.95
Chapter 05: Time Value of Money
d.
$1,411.57
e.
$1,398.97
135. Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly
statements. If the APR is stated to be 24.25%, with interest paid monthly, what is the card's EFF%?
a.
27.14%
b.
20.35%
c.
33.11%
d.
21.44%
e.
23.34%
Chapter 05: Time Value of Money
136. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus
interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an
annual rate of 6.2%, with no interest due until the end of the year. How much higher or lower is the effective annual rate
charged by Midwest versus the rate charged by Riverside?
a.
–0.54%
b.
–0.40%
c.
–0.50%
d.
–0.46%
e.
–0.52%
137. Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 17.75%, but you must
Chapter 05: Time Value of Money
make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year.
What is the effective annual rate on the loan?
a.
21.43%
b.
19.73%
c.
20.10%
d.
18.97%
e.
16.50%
138. Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments
of $170.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective
annual rate on the loan?
a.
6.98%
b.
6.07%
c.
6.63%
d.
5.79%
e.
6.21%
Chapter 05: Time Value of Money
139. Charter Bank pays a 5.00% nominal rate on deposits, with monthly compounding. What effective annual rate
(EFF%) does the bank pay?
a.
5.12%
b.
6.40%
c.
4.96%
d.
5.01%
e.
5.32%
Chapter 05: Time Value of Money
140. Suppose your credit card issuer states that it charges a 19.50% nominal annual rate, but you must make monthly
payments, which amounts to monthly compounding. What is the effective annual rate?
a.
24.12%
b.
19.21%
c.
21.34%
d.
19.85%
e.
19.42%
141. Pace Co. borrowed $30,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank
uses a 360-day year. How much interest would Pace have to pay in a 30-day month?
a.
$157.69
b.
$141.38
c.
$181.25
d.
$212.06
e.
$155.88
