Question 1

Bulk Purchases just purchased a new warehouse.To finance the purchase, the firm arranged for a 25-year mortgage for 80 percent of the $1,800,000 purchase price.The monthly payment is $10,800.What is the APR? The EAR?

Accepted Answer

The correct answer is A because the APR is 7.67 percent and the EAR is 7.94 percent.

Question 2

City Loans wants to earn an effective annual return on its consumer loans of 18.9 percent per year.The bank applies daily compounding.What interest rate is the firm required by law to report to potential borrowers?

Accepted Answer

The nominal interest rate required to achieve an effective annual rate of 18.9% with daily compounding is approximately 17.32%. This is calculated using the formula for effective annual rate (EAR) and solving for the nominal rate.

Question 3

Assume you can save $8,500 at the end of Year 2, $9,300 at the end of Year 3, and $7,100 at the end of Year 6.If today is Year 0, what is the future value of your savings 10 years from now if the rate of return is 7.8 percent annually?

Accepted Answer

The future value of each savings amount is calculated separately using the formula FV = PV * (1 + r)^n, where PV is the present value, r is the rate of return, and n is the number of years. Then, sum the future values.

Question 4

Roberto can afford car payments of $450 per month for 4 years.If the interest rate is 5.3 percent, how much money can he afford to borrow?

Accepted Answer

The answer of Roberto can afford car payments of $450...

Question 5

George is considering an investment that will pay $3,250 a year for eight years, starting one year from today.What is the maximum amount he should pay for this investment if he desires a rate of return of 8.0 percent?

Accepted Answer

The answer of George is considering an investment that will...

Question 6

A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now.If the discount rate is 7 percent, compounded semiannually, what is the value of this annuity 4 years from now?

Accepted Answer

The correct answer is A because the value of the annuity 4 years from now is $37,139.58. This can be calculated using the formula for the present value of an annuity, which is:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present value of the annuityPMT is the amount of each paymentr is the discount raten is the number of paymentsIn this case, the PMT is $6,200, the r is 7%, and the n is 8. Plugging these values into the formula, we get:PV = $6,200 * [1 - (1 + 0.07)^-8] / 0.07PV = $37,139.58

Question 7

Assume a project will produce cash flows of $22,400, $28,700, $30,300, $10,900 at the end of Years 1 to 4, respectively.If the discount rate is 14.7 percent, what is the current value of these cash flows?

Accepted Answer

The answer of Assume a project will produce cash flows...

Question 8

You want to buy a new sports coupe for $84,600and the finance office at the dealership has quoted you an APR of 7.1 percent, compounded monthly, for 72 months.How much interest will you pay over the life of the loan assuming you make all payments on a timely basis?

Accepted Answer

To find the total interest paid, first calculate the monthly payment using the formula for an amortizing loan: PMT = [P*r*(1+r)^n] / [(1+r)^n - 1], where P is the principal ($84,600), r is the monthly interest rate (7.1%/12), and n is the number of payments (72). Then, multiply the monthly payment by the number of payments to find the total amount paid over the life of the loan. Subtract the principal from this total to find the interest paid. The correct interest amount is $19,542.

Question 9

You want to purchase a new condominium that costs $285,000.Your plan is to pay 30 percent down in cash and finance the balance over 30 years at 5.2 percent.What will be your monthly mortgage payment including principal and interest?

Accepted Answer

The correct answer is A.The monthly mortgage payment can be calculated using the following formula:Monthly payment = (Loan amount * Annual interest rate / 12) / (1 - (1 + Annual interest rate / 12)^(-Number of months))In this case, the loan amount is $285,000 * 0.7 = $199,500, the annual interest rate is 5.2%, and the number of months is 30 * 12 = 360.Plugging these values into the formula, we get:Monthly payment = (199,500 * 0.052 / 12) / (1 - (1 + 0.052 / 12)^(-360))= $1,095.48

Question 10

Assume you pay $24,000 today in exchange for an annuity with monthly payments, an APR of 6.75 percent, and a life of 15 years.What is the payment amount?

Accepted Answer

The answer of Assume you pay $24,000 today in exchange...

Question 11

How much money does Yvonne need to have in her retirement savings account today if she wishes to withdraw $54,000 a year for 25 years? She expects to earn an average rate of return of 8.0 percent.

Accepted Answer

The answer of How much money does Yvonne need to...

Question 12

Compass Bank is offering an APR of.8 percent, compounded daily, on its savings accounts.If you deposit $2,500 today, how much will you have in the account in 15 years?

Accepted Answer

The correct answer is D. $2,818.74.To calculate the future value of the deposit, we can use the formula:FV = PV * (1 + APR/365)^ (365 * n)where:PV is the present value of the deposit ($2,500)APR is the annual percentage rate (0.8%)n is the number of years (15)Plugging in the values, we get:FV = 2500 * (1 + 0.008/365)^ (365 * 15)= 2500 * (1.00002192)^5475= 2500 * 1.12749= $2,818.74

Question 13

You want to borrow $3,600 for 36 months and can afford monthly payments of $110, but no more.Assuming monthly compounding, what is the highest APR rate you can afford?

Accepted Answer

The answer of You want to borrow $3,600 for 36...

Question 14

The manager of Furniture For Less has approved Mac's application for 36 months of credit with maximum monthly payments of $32.If the APR is 20.2 percent, what is the maximum initial purchase that Mac can buy on credit?

Accepted Answer

To find the maximum initial purchase, we need to calculate the present value of an annuity. The formula for the present value of an annuity is: PV = PMT × [(1 - (1 + r)^-n) / r], where PMT is the monthly payment, r is the monthly interest rate, and n is the number of payments. Here, PMT = $32, r = 20.2%/12 = 0.016833, and n = 36. Plugging these values into the formula gives the present value, which is approximately $858.70.

Question 15

Today, you are purchasing a 10-year, 4.8 percent annuity at a cost of $50,000.The annuity will pay annual payments starting one year from today.What is the amount of each payment?

Accepted Answer

The answer of Today, you are purchasing a 10-year, 4.8...

Question 16

JK's is borrowing $132,000 for three years at an APR of 7.6 percent.The loan calls for the principal balance to be reduced by equal amounts over the life of the loan.Interest is to be paid in full each year.The payments are to be made annually at the end of each year.How much will be paid in interest over the life of this loan?

Accepted Answer

The interest paid each year is calculated on the remaining principal balance. In the first year, the interest is $132,000 * 7.6% = $10,032. In the second year, the principal is reduced by $44,000 (since $132,000/3 = $44,000), so the interest is ($132,000 - $44,000) * 7.6% = $6,688. In the third year, the principal is reduced by another $44,000, so the interest is ($132,000 - $88,000) * 7.6% = $3,344. The total interest paid over the life of the loan is $10,032 + $6,688 + $3,344 = $20,064.

Question 17

Appalachian Bank offers you a $30,000, 2-year term loan at an APR of 5.5 percent, compounded monthly.What will be your monthly loan payment?

Accepted Answer

The monthly loan payment can be calculated using the formula for an amortizing loan: P = [r*PV] / [1 - (1 + r)^-n], where P is the monthly payment, r is the monthly interest rate, PV is the present value or loan amount, and n is the total number of payments. Here, r = 0.055/12, PV = $30,000, and n = 24. Solving this gives approximately $1,322.87.

Question 18

Given an interest rate of 9.3 percent per year, what is the value at t = 6 of a perpetual stream of $1,000 annual payments that begin t =21?

Accepted Answer

The answer of Given an interest rate of 9.3 percent...

Question 19

You want to buy a new sports car from Roy's Cars for $51,800.The contract is in the form of a 48-month annuity due at an APR of7.8 percent, compounded monthly.What would be your monthly payment?

Accepted Answer

The correct answer is A.The monthly payment for a 48-month annuity due at an APR of 7.8 percent, compounded monthly, on a $51,800 loan is $1,251.60. This can be calculated using the formula for the present value of an annuity due:PV = PMT * [1 - (1 + r)^-n] / rwhere:PV is the present value of the annuityPMT is the monthly paymentr is the monthly interest raten is the number of monthsIn this case, the present value of the annuity is $51,800, the monthly interest rate is 7.8% / 12 = 0.65%, and the number of months is 48. Plugging these values into the formula, we get:$51,800 = PMT * [1 - (1 + 0.0065)^-48] / 0.0065PMT = $1,251.60

Question 20

Alfa Life Insurance Co.is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever.If the guaranteed rate of return on this investment is 3.6 percent, how much will you pay for the policy?

Accepted Answer

The value of a perpetuity is calculated using the formula: Value = Payment / Rate. Here, the payment is $10,000 and the rate is 3.6% or 0.036. Therefore, the value of the policy is $10,000 / 0.036 = $277,777.78.

Quiz 5: Discounted Cash Flow Valuation