Deck 3: Cash Flow Analysis

Question 1

The present worth of an infinitely long uniform series of cash flows is equal to

A)A * [1/i - N/((1+i)N - 1)]
B)A*[(1 + i)N - 1]
C)A/(i + 1)
D)A * i
E)A/i

Answer 1

E

Question 2

Calculate the uniform annuity equivalent to an arithmetic gradient series with a basic payment of $500 per year for 10 years that increases by $50 per year beginning in year 2, under 10% annual interest rate?

A)$500
B)$550
C)$686
D)$936
E)$1 186

Answer 2

C

Question 3

If the growth rate of a series is equal to 5% and annual interest rate is equal to 10%, what is the growth adjusted interest rate?

A)+5.00%
B)-5.00%
C)+4.76%
D)-4.76%
E)+4.16%

Answer 3

C

Question 4

What is an annuity?

A)a series of payments that changes by the same proportion from one period to the next
B)a series of equal payments over a sequence of equal periods
C)a series of payments that changes by a constant amount from one period to the next
D)a single payment
E)present worth of a series of equal payments

Question 5

How much money will you accumulate in a bank account by the end of a 5-year period if you deposit $1 200 today at an interest rate of 2% per year, compounded quarterly?

A)$1 230
B)$1 326
C)$1 514
D)$1 783
E)$1 849

Question 6

An arithmetic gradient series

A)starts at zero at the end of the first period and then increases by a constant amount each period.
B)starts at zero at the beginning of the first period and then increases by a constant amount each period.
C)starts at zero at the end of the second period and then increases by a constant amount each period.
D)starts at zero at the beginning of the second period and then increases by a constant amount each period.
E)starts at zero at the end of the first period and then increases by an increasing amount each period.

Question 7

Five years ago John invested $10 000 at 5% nominal interest rate compounded daily. What is his investment worth today?

A)$10 513
B)$11 763
C)$12 763
D)$12 840
E)$13 763

Question 8

A municipality has just completed the construction of a bridge. It was calculated that operating and maintenance (O&M)costs of this bridge will be $20 000 in the first year with a 5% increase each year thereafter for the next 4 years. The interest rate used in calculations was 7.5% per year. What interest rate should be used to calculate the present worth of O&M costs over 5 years if we use the geometric series to present worth conversion factor?

A)1.9%
B)2.4%
C)5.0%
D)7.5%
E)8.2%

Question 9

The present worth of an infinitely long uniform series of cash flows is called

A)capitalized value.
B)salvage value.
C)sinking value.
D)compound value.
E)continuous value.

Question 10

If Emily deposits $500 every other year into her bank account that pays 1.5% annual interest, compounded yearly, how much will she accumulate over a 10-year period?

A)$2 500
B)$2 568
C)$2 576
D)$2 656
E)$5 738

Question 11

Natalie received a gift of $1 000 from her grandmother. She decides to invest the money into a trip she wants to take when she graduates from college three years from now. What annual rate of return does she have to have to accumulate $1 250 by the time of her graduation?

A)7.7%
B)7.9%
C)8.4%
D)9.2%
E)12.5%

Question 12

The present worth factor

A)converts an annuity into the equivalent present amount.
B)gives the future value equivalent to a series of equal payments.
C)converts a series of repeated equal payments into the equivalent future amount.
D)gives the present amount that is equivalent to some future amount.
E)gives the future amount that is equivalent to a present amount.

Question 13

How many years will it take for an investment to triple itself if the interest rate is 12% compounded annually?

A)10.0
B)9.70
C)9.40
D)9.10
E)8.80

Question 14

Suppose that you want to evaluate the following non-standard cash flow: $1 000 paid at the end of every third year in a 12-year period with annual interest rate of 10%. What is the best method?

A)Convert the non-standard cash flow into standard annuity by changing the interest rate.
B)Convert the non-standard cash flow into standard annuity by changing the compounding period.
C)Convert the non-standard cash flow into arithmetic gradient series.
D)Treat each payment as a separate payment.
E)Convert the non-standard cash flow into a geometric gradient series.

Question 15

One standard assumption for annuities and gradients is

A)each payment occurs at the beginning of the period.
B)annuities and gradients coincide with the beginning of sequential periods.
C)annuities and gradients coincide with the end of preceding periods.
D)payment period and compounding period differ.
E)payment period and compounding period are the same.

Question 16

When is the growth-adjusted interest rate for a geometric series equal to zero?

A)Growth is positive, but less than the interest rate.
B)Growth is positive and greater than the interest rate.
C)Growth is positive and equal to the interest rate.
D)Growth is negative.
E)Growth is positive.

Question 17

Calculating the growth-adjusted interest rate requires

A)the base amount and the rate of growth.
B)the base amount and the interest rate.
C)the number of periods and the rate of growth.
D)the number of periods and the interest rate.
E)the rate of growth and the interest rate.

Question 18

A geometric gradient series

A)starts with zero and from period to period increases by a constant amount.
B)starts with zero and from period to period increases by a constant rate.
C)starts with a certain amount and from period to period increases by a constant amount.
D)starts with a certain amount and from period to period increases by a constant rate.
E)starts with a certain amount and from period to period decreases by a constant percentage.

Question 19

The compound amount factor produces

A)the present amount, P, that is equivalent to a future amount, F.
B)the future amount, F, that is equivalent to a present amount, P.
C)the annuity, A, that is equivalent to a future amount, F.
D)the annuity, A, that is equivalent to a present amount, P.
E)the future amount of arithmetic gradient series.

Question 20

If i stands for the interest rate, g stands for the growth rate, and io stands for the growth-adjusted interest rate, which of the following is associated with deflation?

A)i > g > 0 (io > 0)
B)i > g > 0 (io < 0)
C)i = g > 0 (io = 0)
D)g < 0 (io > 0)
E)i = g = 0

Question 21

A wholesale company has decided to build a new warehouse 3 years from now. It must accumulate $600 000 by the end of the 3-year period by putting aside an equal amount from its revenue at the end of each year. If the annual interest rate is 9%, how much the company should put aside each year?

Question 22

Every leap year you get a bonus of $20 000, which you put into a retirement account at 5% interest. If your first payment into the account is made in four years time, and you put no other money into the account, how long will it be before you can retire with a million dollars?

A)36
B)40
C)44
D)48
E)52

Question 23

An annuity due is

A)a series that starts at the end of the first period and increases by constant amount thereafter.
B)a series that starts at the end of the first period and increases by constant percentage thereafter.
C)a series that starts at the end of the first period and remains constant thereafter.
D)a series that starts now and increases by constant amount thereafter.
E)a series that starts now and remains constant thereafter.

Question 24

You are offered a series of monthly payments of $10, continuing forever. If you deposit these at a nominal interest rate of 12%, compounded monthly, what is the present worth of the series?

A)$120
B)$1000
C)$1200
D)$1500
E)infinite

Question 25

An oil-extracting company expects to produce 1 000 barrels of oil a day over the next 5 years. If the oil price remains at $80 per barrel for the duration of the project, what will be the company's accumulated total revenue at the end of the fifth year under 5% annual interest rate?

Question 26

Capital recovery factor converts

A)A into P.
B)P into A.
C)A into F.
D)F into A.
E)P into F.

Question 27

You want to have a million dollars in the bank when you retire. You think you can save $5 000 this year, and increase that by $100 every subsequent year, in a bank that offers you 5% interest. If you make your first deposit in a year's time, how many years will it be from now before you can retire?

A)30
B)35
C)40
D)45
E)50

Question 28

A company undertakes a 5-year project that requires annual payments. Payment for the first year is It will then increase by 5% each subsequent year. The interest is fixed at 5% a year. What is the present worth of this cash flow?

A)$9 112
B)$9 328
C)$9 442
D)$9 524
E)$10 226

Question 29

Suppose that you have a series of payments: $100 in year 1, $150 in year 2 and $200 in year 3. If annual interest rate is 10%, what is the equivalent annuity for this series?

A)$150.00
B)$146.82
C)$142.33
D)$140.11
E)$135.68

Question 30

Suppose that your salary will increase by 2% per year over the next 4 years. If annual interest rate is also 2% over this period, what is the geometric series to present worth conversion factor in this case?

A)4.08
B)4.00
C)3.92
D)3.56
E)3.22

Question 31

How much should be set aside each month to accumulate $10 000 at the end of year 3 under 12% annual interest rate compounded monthly?

A)$222.14
B)$232.14
C)$242.14
D)$252.14
E)$277.78

Question 32

Maria wants to save up for a car. How much should she put in her bank account monthly to save $10 000 in two years if the bank pays 6% interest compounded monthly?

A)$293.21
B)$316.67
C)$393.21
D)$401.13
E)$416.67

Question 33

How much Jim can accumulate in a private pension fund over 20 years if the fund offers 5% interest compounded annually, and he can afford to deposit $2 000 at the end of every second year?

A)$28 946
B)$32 259
C)$66 132
D)$94 256
E)$117 853

Question 34

A person deposits $100 to his savings account biweekly. The savings account pays a nominal interest rate of 5% per year, compounded every six months. What is the effective interest rate for a 6-month period?

A)2.1%
B)2.5%
C)3.2%
D)4.2%
E)5.1%

Question 35

A trucking firm purchased two B-train trucks for $325 000. It paid 20% as a down payment and obtained a bank loan for the rest. The loan has a nominal interest rate of 10.5% compounded monthly with a 10-year amortization period. The loan term is 10 years. What are the firm's monthly payments to the bank?

Question 36

You want to have a million dollars in the bank when you retire. You think you can save $5 000 a year in a bank that offers you 5% interest. If you make your first deposit in a year's time, how many years will it be from now before you can retire?

A)30
B)40
C)50
D)60
E)70

Question 37

You are promised that when you retire from your current job, in 40 years time, you will receive a gold watch valued at $1 000. If you can invest money at 5% annual interest, what is the present worth of this promise?

A)$142
B)$156
C)$167
D)$211
E)$231

Question 38

You will need to buy a replacement computer, costing $3 000, in five years time. If you have a bank account which earns 8% annual interest, how much must you put in the bank every year in order to have enough money for the replacement, assuming you make your first deposit in a year's time?

A)$511
B)$586
C)$666
D)$675
E)$712

Question 39

A factor that relates a single cash flow in one period to another single cash flow in a later period is

A)the uniform series compound amount factor.
B)the capital recovery factor.
C)the sinking fund factor.
D)the annuity conversion factor.
E)the compound amount factor.

Question 40

You want to have a million dollars in the bank when you retire. You think you can save $5 000 this year, and increase that by 2% every subsequent year, in a bank that offers you 5% interest. If you make your first deposit in a year's time, how many years will it be from now before you can retire?

A)41
B)42
C)43
D)44
E)45

Question 41

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 42

It is expected that a company is going to invest $8 million in a project. It is also expected that the annual revenue from this project will be $2 million dollars. How long would it take for the company to recover its investment under a 20% interest rate? Under 10%?

Question 43

If the growth adjusted interest rate is negative, how should we proceed with calculation of the present worth of a geometric gradient series?

Question 44

Explain why the growth-adjusted interest rate in the geometric gradient series to present worth conversion factor is less than the original interest rate when the growth factor is positive.

Question 45

The Croesus Trust Fund currently has $1 million. It was established 10 years ago. The rate of return on the Fund's money has been 5% compounded daily. How much money was originally invested into the Fund?

Question 46

Jeremy is interested in a bond which matures in 20 years. It has a face value of $8 000 and a coupon rate of 10%. Like most bonds it pays the bearer an interest payment every 6 months. How much is it worth today?

Question 47

Amy got $5 000 from her grandma to pay her tuition fee. She invested this amount at a 10% rate of return in an investment fund and simultaneously took a student loan for the same amount at a 6% interest rate compounded daily. Was it a smart move?

Question 48

You want to buy a car that costs $20 000. You have to pay $2 000 upfront as a down-payment, and you are considering a financing option with a bank. If the bank charges 1.9% annual interest rate compounded daily, what would be your monthly payment for the 48-month financing period?

Question 49

Juliana paid off a $90 000 debt in 50 months. She paid $3 000 per month and at the end of the first year made an extra payment of $6 000, What interest rate was she charged?

Question 50

John wants to buy a laptop computer in one year. He is working part time earning $600 per month. The computer John wants to buy costs $2 000. He decides to invest money in securities that pay a monthly rate of 2%. How much should John put aside every month to accumulate the required amount?

Question 51

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 52

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 53

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 54

Stan saved $1 000 working part-time at a store. He wants to use this money for a trip to Europe. He is a smart guy and therefore decides to invest the money into an investment fund with a 24% annual interest rate compounded monthly. The trip to Europe costs $2 500. How long (in months)should Stan keep his money in the investment fund to accumulate the required amount?

Question 55

The maintenance costs of a car are approximately $400 per year. With age the costs increase by $100 a year. What is the future worth of the maintenance costs in five years' time if the interest rate is 5% compounded annually?

Question 56

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 57

A manufacturing company expects a steady 2% annual growth in profits over the next three years. The company wants to invest the profits at a 10% interest rate. Expected annual profit of the company in year one is $1 000. How much will be accumulated by the company by the end of the third year?

Question 58

Suppose you are evaluating a project that has various annual payments. These payments do not fall into any of the standard categories you have learned before. How would you approach this project?

Question 59

It is known that a bridge costs $10 million to build, and it will be in operation forever. In order to recover initial investment, what should the annual revenue be in this case under 10% interest rate?

Question 60

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 61

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 62

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 63

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 64

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 65

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below:

Question 66

In this question, you are to write down the conversion factors that are required to transform the solid arrows into the equivalent dotted arrow. You can either indicate your answer by marking labelled arrows on the diagram, or by writing down a formula, as in the example given below: