Deck 3: Time Value of Money Concepts

Question 1

Your prospective client plans to purchase an automobile with a total "drive-out" cost of $32,000. The down payment will be $5,000. The balance of the purchase price will be financed at an annual interest rate of 3.5 percent for a period of five years. What will be the annual payments to the lender?

A) -4,978.50.
B) 4,978.50.
C) -5,979.99.
D) 5,979.99.

Answer 1

C

Question 2

Stephanie purchased an antique necklace six years ago for $300 as an investment. The clasp was repaired at the end of the second year for $150. The repaired necklace has just sold at auction for $850. What is the average compound annual rate of return that was earned by investing in this collectible?

A) 5.40.
B) 10.54.
C) 12.54.
D) 13.00.

Answer 2

C

Question 3

Darren and Alice Johnson are in the information technology consulting business. Alice's father just passed away and left her $100,000. They are considering investing her inheritance in a server farm owned by one of their clients. The client has a cash flow problem and has offered the Johnsons the following investment proposal: purchase an investment interest for $100,000 today; receive cash distributions of $6,000, $7,000, and $8,000 respectively over the next three years; and at the end of the third year the owner will purchase back the interest in the server farm for $115,000. Even though the owner is a client the Johnsons trust, they consider the investment to be risky. Darren and Alice feel that they should earn at least 12 percent on the investment in order to be fairly compensated for the investment risk. Should the Johnsons invest in the server farm?

A) Yes, the return equals their required rate of return.
B) Yes, the return exceeds their required rate of return.
C) No, the return meets their required rate of return.
D) No, the return does not meet their required rate of return.

Answer 3

D

Question 4

A prospective PFP client comes to you with an investment statement. The first page of the statement, which contained the initial investment amount of a mutual fund purchased five years ago, is missing, and as a result the initial cash flow is -0-. The initial investment of the mutual fund can be determined based on the following information provided in the investment statement. The statement indicates that the five-year return for the investment was 10 percent. Year 1: capital gain and dividend were $100
Year 2: capital gain and dividend year were $150
Year 3: no capital gain or dividend paid and the client invested $1,000
Year 4: no capital gain or dividend paid
Year 5: no capital gain or dividend paid and the client sold out of his position for $18,000

A) 8,484.2598.
B) 10,640.1450.
C) 11,574.3498.
D) 11,487.3091.

Question 5

A client wants the IRR to be ________ or ________ the client's required rate of return.

A) Equal to / greater than.
B) Equal to / less than.
C) Less than / equal to.
D) Less than / greater than.

Question 6

Kim and Doug Richards are making a gift to the college they both attended. They met and were married there, as well. They plan to make a $1 million gift, from which they will draw $150,000 of annual income for five years. At the end of the fifth year, the balance of the investment, $500,000, will go to the college. What return does the college need to achieve in order to meet the financial goal of $500,000?

A) 6.01 percent.
B) 6.16 percent.
C) 8.21 percent.
D) 9.63 percent.

Question 7

Brad Smith is considering the purchase of a REIT. The REIT's prospectus projects positive cash flows for Years 1, 2, and 3 of $6,000, $7,000, and $8,000, respectively. At the end of three years, Brad anticipates he will sell the REIT for $115,000. He wants to make a return of at least 6 percent. How much should he pay for the REIT?

A) 112,983.2317.
B) 113,383.5314.
C) 114,173.8319.
D) 115,163.5243.

Question 8

Utilizing a 6 percent interest rate, the NPV of an investment is calculated to be zero at the end of the term. The purchase price of the investment is $100,000. Which of the following is true?

A) The IRR is 0 percent.
B) The IRR is 6 percent.
C) The IRR is less than 6 percent.
D) The IRR is more than 6 percent.