113. Mendez Implements records the following cash flows at the BEGINNING of each year for a project. If
the firm’s discount rate is 11%, what is the value of the project at the end of the last year?
Year
Cash flow
1
$794,633
2
$542,149
3
$836,200
4
$716,080
5
$520,354
a.
$4,293,253
b.
$2,547,837
c.
$4,657,524
d.
$4,765,511
114. Mayfield Development, LLC forecasts the following cash flows at the BEGINNING of each year for a
project. If the firm’s discount rate is 9%, what is the present value of the project?
Year
Cash flow
1
$ 697,000
2
$ 631,000
3
$ 574,000
4
$ 898,000
5
$9,981,000
a.
$7,634,980
b.
$8,736,914
c.
$9,523,236
d.
$12,268,998
115. You’ve just won $1 million dollars in a lottery. For your prize, you may except a $1 million lump sum
paid immediately, a constant perpetuity of $80,000 per year (with the first payment arriving in one
year), or a stream of cash flows that starts at $45,000 next year and grows at 3.5% per year in
perpetuity. If the interest rate is 8%, which of these choices has a higher present value?
a.
a $1 million lump sum
b.
a constant stream of $80,000 per year in perpetuity
c.
a stream that begins at $45,000 and grows at 3.5% in perpetuity
d.
all three choices have the same present value
116. A financial advisor recommends saving $1,000,000 for a comfortable retirement. With investment
returns of 8%, what is the annual year-end cash flow generated by the $1 million for 25 years,
assuming you spend all of the principal and interest?
a.
$80,000
b.
$86,740
c.
$93,679
d.
$94,978
117. If you invest $2,500 in a bank account that pays 6% interest compounded monthly, how much will you
have in five years?
a.
$1,853.43
b.
$3,345.56
c.
$2,505.20
d.
$3,372.13
118. A few years after graduating from college, you decide to get an MBA. This endeavor sets you back
$100,000 in loans. Luckily, you have the option to consolidate these loans at 5%. You opt for a
30-year payback period with monthly installments due at the end of each month. What is the monthly
payment on the consolidated loan?
a.
$536.82
b.
$542.10
c.
$544.86
d.
$3,552.94
119. Your aunt is evaluating her retirement pension. She can retire at age 65 and collect $1,000 per month
for the rest of her life. Assume that payments begin one month after her 65th birthday. If your aunt
lives to be exactly 80 years old and can earn 7% interest (compounded monthly), what is the
equivalent lump sum she would need at retirement to equal the value of the pension?
a.
$106,906
b.
$111,256
c.
$115,313
d.
$215,027
120. Prudent Policy Life Insurance Co. offers a 10-year term life insurance policy with a $250,000 benefit
and annual premiums of $200, paid at the BEGINNING of each year. If Prudent can earn 8% on
invested capital, what is the present value to the firm of the premiums from one policy, assuming the
policy holder outlives the policy term?
a.
$1,120
b.
$1,342
c.
$1,449
d.
$1,852
121. Prudent Policy Life Insurance Co. offers a 10-year term life insurance policy with a $250,000 benefit
and annual premiums of $200, paid at the BEGINNING of each year. If Prudent can earn 8% on
invested capital, what is the future value to the firm of the premiums from one policy, assuming the
policy holder outlives the policy term?
a.
$3,129
b.
$2,897
c.
$2,720
d.
$1,342
122. You are evaluating a perpetuity. The first payment is $100, and it arrives in one year. Each subsequent
annual payment will increase by 10%. If the discount rate is 8%, what is the present value of this
perpetuity?
a.
$5,500
b.
$1,000
c.
$1,250
d.
The present value is infinite
123. You invest $10,000 in August 2004. In August 2009, the investment is worth $12,000. What was your
compound annual rate of return over the period?
a.
3.09%
b.
3.71%
c.
4.00%
d.
4.21%
124. If a bank lends you $10,000 and requires that you make payments of $2,500 at the end of each of the
next five years, what interest rate is the bank charging?
a.
4.56%
b.
5.61%
c.
7.93%
d.
11.18%
125. Which of the following statements is TRUE?
a.
It is important to adjust for the differences in the timing of benefits and costs.
b.
A dollar received today is worth more than a dollar received in the future, assuming a
positive interest rate.
c.
Many fund transfers occur over long periods of time and the time frame needs to be
adjusted for.
d.
All of the above statements are true.
e.
Only (a) and (b) are true
126. Discounting is:
a.
calculating the future value of present cash flows.
b.
calculating the present value of future cash flows.
c.
is necessary in order to pull present values to the future.
d.
none of the above
127. An annuity is considered:
a.
an ordinary annuity if the payments occur at the beginning of each period.
b.
an annuity due if the payments occur at the end of each period.
c.
an ordinary annuity if the payments occur at the end of each period
d.
an annuity due if the payments occur at the beginning of each period.
e.
Both (c) and (d)
128. Which of the following statements is TRUE?
a.
If compounding at a positive interest rate, the future value of an annuity due is always less
than the future value of an otherwise identical ordinary annuity.
b.
If compounding at a positive interest rate, the future value of an annuity due is always
greater than the future value of an otherwise identical ordinary annuity.
c.
If compounding at a positive interest rate, the future value of an ordinary annuity is always
greater than the future value of an otherwise identical annuity due.
d.
If compounding at an interest rate of 0%, the future value of an annuity due is always
greater than the future value of an otherwise identical ordinary annuity.
e.
None of the above
129. If you were evaluating a investment over a 10-year period that paid 8% compounded semiannually:
a.
you would not need to make any special adjustments because the semiannual
compounding will not impact the investment’s future value.
b.
you would need to divide the number of years by two and multiply the interest rate by two
to properly adjust for the semiannual compounding.
c.
you would need to divide the interest rate by two and multiply the number of years by two
to properly adjust for the semiannual compounding.
d.
None of the above
130. You are comparing four different investments, as described below:
Investment A: Pays 12%, compounded annually
Investment B: Pays 12%, compounded quarterly
Investment C: Pays 12%, compounded semi-annually
Investment D: Pays 12%, compounded continuously
Which of the above investments would result in the highest future value?
a.
Investment A
b.
Investment B
c.
Investment C
d.
Investment D
e.
All of the investments would have the same future value since the stated interest rate is the
same.
131. You wish to save $2,500,000 for your retirement by saving a certain sum every month for the next 40
years. If you can earn 9% compounded monthly, and you make your deposits at the BEGINNING of
each month, how much would you have to deposit each month to achieve your objective?
a.
$616.59
b.
$534.04
c.
$565.67
d.
$530.06
e.
None of the above
132. EmmaCat Industries estimates that the scratching post project “Wonder Post” will have the following
end of the year cash flows. What is the EQUIVALENT ANNUITY (4-year)
of the inflows of Wonder Post if the annual rate of interest is 10%?
Year
Cash Flow
1
$ 356
2
$ 800
3
$1,200
4
$2,000
a.
$1,260
b.
$1,026
c.
$ 827
d.
$1322
133. EmmaCat Industries estimates that the scratching post project “Wonder Post” will have the following
end of the year cash flows. What is the FUTURE VALUE of the inflows at the end of the 4th year if
the annual rate of interest is 10%?
Year
Cash Flow
1
$ 356
2
$ 800
3
$1,200
4
$2,000
a.
$4,761.84
b.
$4,328.99
c.
$4,213.83
d.
$4,155.98
134. EmmaCat Industries estimates that the scratching post project “Wonder Post” will have the following
BEGINNING of the year cash flows. What is the FUTURE VALUE of the inflows at the end of the
4th year if the annual rate of interest is 10%?
Year
Cash Flow
1
$ 356
2
$ 800
3
$1,200
4
$2,000
a.
$5,238.02
b.
$4,761.89
c.
$4,635.21
d.
$4,571.58
135. EmmaCat Industries estimates that the scratching post project “Wonder Post” will have the following
end of the year cash flows. What is the PRESENT VALUE of the inflows of Wonder Post if the
annual rate of interest is 10% COMPOUNDED MONTHLY?
Year
Cash Flow
1
$ 356
2
$ 800
3
$1,200
4
$2,000
a.
$3208.22
b.
$3210.73
c.
$3199.11
d.
$3102.32
136. EmmaCat Industries estimates that the scratching post project “Wonder Post” will have the following
end of the year cash flows. What is the PRESENT VALUE of the inflows of Wonder Post if the
annual rate of interest is 10% COMPOUNDED CONTINOUSLY?
Year
Cash Flow
1
$ 356
2
$ 800
3
$1,200
4
$2,000
a.
$3,102.32
b.
$3,199.11
c.
$3,208.22
d.
$3,206.73
137. EmmaCat Industries estimates that the scratching post project “Wonder Post” will have the following
BEGINING of the year cash flows. What is the PRESENT VALUE of the inflows of Wonder Post if
the annual rate of interest is 10%?
Year
Cash Flow
1
$ 356
2
$ 800
3
$1,200
4
$2,000
a.
$3,529.04
b.
$3,577.64
c.
$3,482.50
d.
$3,434.68
138. Michelle is buying a house and the mortgage terms are 30 years, monthly payments. If the interest
rate is 5% (APR), what are the payments on a $150,000 loan?
a.
$7500
b.
$9757
c.
$ 805
d.
$5229
139. Emma is buying a house and the mortgage terms are 30 years, monthly payments. If the interest rate
is 6% (APR), the loan is $200,000 loan, but Emma will make $300 a month in addition to the required
payment, what will the life of the loan be?
a.
220 months
b.
360 months
c.
290 months
d.
185 months
140. Roxy is buying a house and the mortgage terms are 30 years, monthly payments. If the interest rate is
7% (APR), the loan is $300,000 loan, what is the amount of the principal in the third payment?
a.
$248.78
b.
$199.59
c.
$300.00
d.
$265.52
141. Roxy is buying a house and the mortgage terms are 30 years, monthly payments. If the interest rate is
7% (APR), the loan is $300,000 loan, what is the amount of the interest in the fifth payment?
a.
$1995.90
b.
$1425.64
c.
$1744.21
d.
$ 139.65
142. Roxy is buying a house and the mortgage terms are 30 years, monthly payments. If the interest rate is
7% (APR), the loan is $300,000 loan, what is the balance of the loan after the seventh payment?
a.
$300,000
b.
$298,248
c.
$286,028
d.
$275,568
143. Consider the following cash flows each arriving at the end of the year. If the discount rate is 15%
COMPOUNDED QUARTERLY, what is the present value?
Year
Cash flow
1
$1,000
2
$2,000
3
$3,000
a.
$4,354.40
b.
$4,303.67
c.
$4,281.56
d.
$4,270.38
144. Consider the following cash flows each arriving at the end of the year. If the discount rate is 15%
COMPOUNDED CONTINOUSLY, what is the present value?
Year
Cash flow
1
$1,000
2
$2,000
3
$3,000
a.
$4,255.22
b.
$4,270.36
c.
$4,312.07
d.
$4,354.40
145. Consider the following cash flows each arriving at the end of the year. If the discount rate is 15% ,
what is the (3-year) EQUIVALENT ANNUITY ?
Year
Cash flow
1
$1,000
2
$2,000
3
$3,000
a.
$1,935.65
b.
$1,932.48
c.
$1,916.62
d.
$1,907.13
