Question 1

Over the next three years,Marti plans to save $2,000,$2,500,and $3,000,respectively,starting one year from today.You want to have as much money as Marti does three years from now but you plan to make one lump sum investment today.What amount must you save today if you both earn 4.65 annually?

Accepted Answer

The correct answer is A because $6,811.50 is the present value of the future cash flows that Marti will have in three years, discounted at an annual rate of 4.65%.

Question 2

You have been offered a job that pays an annual salary of $48,000,$51,000,and $55,000 over the next three years,respectively.The offer also includes a starting bonus of $2,500 payable immediately.What is this offer worth to you today at a discount rate of 6.5 percent?

Accepted Answer

The answer of You have been offered a job that...

Question 3

You are considering a project with projected annual cash flows of $32,200,$41,800,and $22,900 for the next three years,respectively.What is the present value of these cash flows at a discount rate of 14 percent?

Accepted Answer

To calculate the present value of the cash flows, we need to use the formula: 
PV = CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3 
where CF is the cash flow and r is the discount rate.

Plugging in the given values, we get: 
PV = 32,200/(1+0.14)^1 + 41,800/(1+0.14)^2 + 22,900/(1+0.14)^3 
PV = 28,245.61 + 30,614.62 + 16,005.97 
PV = $75,866.20

Therefore, the correct answer is B.

Question 4

Beatrice invests $1,000 in an account that pays 5 percent simple interest.How much more could she have earned over a period of 10 years if the interest had compounded annually?

Accepted Answer

The answer of Beatrice invests $1,000 in an account that...

Question 5

Anna has $38,654 in a savings account that pays 2.3 percent interest.Assume she withdraws $10,000 today and another $10,000 one year from today.If she waits and withdraws the remaining entire balance four years from today,what will be the amount of that withdrawal?

Accepted Answer

To find the future value of Anna's remaining balance, we can use the formula:

FV = PV(1 + r)^n

Where FV is the future value, PV is the present value, r is the interest rate, and n is the number of years.

The present value of Anna's remaining balance is $18,654 ($38,654 - $10,000 - $10,000). The interest rate is 2.3 percent, or 0.023 as a decimal. The number of years until she withdraws the remaining balance is four.

Plugging these values into the formula, we get:

FV = $18,654(1 + 0.023)^4
FV = $20,676.53

Therefore, the amount of Anna's final withdrawal will be $20,676.53, which is choice C.

Question 6

Assume you borrow $12,000 for 5 years with equal annual repayments.If the interest rate on the actual loan turns out to be higher than you anticipated,then the:

Accepted Answer

If the interest rate on the loan turns out to be higher than anticipated, then the annual payments will have to increase in order to pay off the loan within the 5-year period. Therefore, the annual payments will be higher than what was originally anticipated.

Question 7

Shawn has $2,500 invested at a guaranteed rate of 4.35 percent,compounded annually.What will his investment be worth after five years?

Accepted Answer

The answer of Shawn has $2,500 invested at a guaranteed...

Question 8

You expect an investment to return $11,300,$14,600,$21,900,and $38,400 annually over the next four years,respectively.What is this investment worth to you today if you desire a rate of return of 16.5 percent?

Accepted Answer

The answer of You expect an investment to return $11,300,$14,600,$21,900,and...

Question 9

For a proposed purchase to be acceptable,the PV of the future cash flows must:

Accepted Answer

The PV of the future cash flows must equal or exceed the cost of the purchase in order for it to be acceptable. This ensures that the investment will generate sufficient returns to cover the cost of the purchase and provide a positive rate of return. Option A is incorrect because a positive NPV does not guarantee acceptability if it is less than the cost of the purchase. Option B is incorrect because if the PV of future cash flows is less than the cost of the purchase, it means that the investment will result in a negative rate of return. Option D is incorrect because the PV of future cash flows does not have to equal the purchase price, only exceed it. Option E is incorrect because a positive NPV at all discount rates is not necessary for acceptability, but the NPV must be positive at the relevant discount rate.

Question 10

U Do It Centers deposited $3,200 in an account two years ago and is depositing another $5,000 today.A final deposit of $3,500 will be made one year from now.What will the account balance be three years from now if the account pays 4.85 percent interest,compounded annually?

Accepted Answer

The answer of U Do It Centers deposited $3,200 in...

Question 11

What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?

Accepted Answer

The present value (PV) of a future amount can be calculated using the formula: PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of periods. Here, FV = $6,811, r = 6.5% or 0.065, and n = 1 year. Plugging these values into the formula gives: PV = $6,811 / (1 + 0.065)^1 = $6,811 / 1.065 ≈ $6,395.31.

Question 12

An insurance settlement offer includes annual payments of $36,000,$42,000,and $50,000 over the next three years,respectively,with the first payment being made one year from today.What is the minimum amount you should accept today as a lump sum settlement if your discount rate is 7 percent?

Accepted Answer

To find the minimum amount to accept today as a lump sum settlement, we need to calculate the present value of the three annual payments using the discount rate of 7 percent.

PV of Year 1 payment = $36,000 / (1 + 0.07)^1 = $33,644.86 
PV of Year 2 payment = $42,000 / (1 + 0.07)^2 = $36,164.30 
PV of Year 3 payment = $50,000 / (1 + 0.07)^3 = $40,335.02

Total PV of the payments = $33,644.86 + $36,164.30 + $40,335.02 = $110,144.18

Therefore, the minimum lump sum settlement that should be accepted today is $110,144.18. Option B is the closest answer.

Question 13

A project is expected to produce cash flows of $48,000,$39,000,and $15,000 over the next three years,respectively.After three years,the project will be worthless.What is the net present value of this project if the applicable discount rate is 15.25 percent and the initial cost is $78,500?

Accepted Answer

The answer of A project is expected to produce cash...

Question 14

Stu can purchase a house today for $110,000,including the cost of some minor repairs.He expects to be able to resell it in one year for $129,000 after cleaning up the property.At a discount rate of 5.5 percent,what is the expected net present value of this purchase opportunity?

Accepted Answer

The answer of Stu can purchase a house today for...

Question 15

Theo is depositing $1,300 today in an account with an expected rate of return of 8.1 percent.If he deposits an additional $3,200 two years from today,and $4,000 three years from today,what will his account balance be ten years from today?

Accepted Answer

The answer of Theo is depositing $1,300 today in an...

Question 16

You plan to invest $6,500 for three years at 4 percent simple interest.What will your investment be worth at the end of the three years?

Accepted Answer

Simple interest can be calculated using the formula $I = P \times r \times t$, where $I$ is the interest, $P$ is the principal amount ($6,500), $r$ is the annual interest rate (4% or 0.04), and $t$ is the time in years (3). Calculating the interest: $I = 6500 \times 0.04 \times 3 = 780$. The total amount after 3 years is the principal plus interest: $6500 + 780 = 7280$.

Question 17

Assume a cash flow of $82,400 in the first year and $148,600 in the second year.Also assume a present value of $303,764.34 at a discount rate of 12.75 percent.What is the cash flow in the third year if that is the only other cash flow?

Accepted Answer

The correct answer is A. The present value of the cash flows in the first two years is $230,364.34 ($82,400 / (1 + 0.1275) + $148,600 / (1 + 0.1275)^2). The cash flow in the third year must be $163,100 ($303,764.34 - $230,364.34) to make the present value of all three cash flows equal to $303,764.34.

Question 18

What rate of return should be used to compute the NPV of a proposed purchase of Smiley's,an operating business?

Accepted Answer

The most appropriate rate of return to use in calculating the NPV of a proposed purchase of Smiley's is the discount rate applicable to other investments with similar risks. This rate of return takes into account the opportunity cost of investing in the business as opposed to other investment options with similar risks. It provides a realistic assessment of the expected return on the investment and is based on market conditions and investor expectations. Using Smiley's current return on equity or net profit percentage may not accurately reflect the risks associated with the investment or the opportunity cost of capital. The rate of interest charged by a bank for a loan similar in size to the cost of the purchase may not reflect the true cost of capital as it only considers the borrowing cost and not the returns that must be generated on the investment. A discount rate that makes the NPV of the proposed purchase positive is subjective and does not provide a reliable benchmark for evaluating the investment.

Question 19

Assume you borrow $6,600 for three years.How much will you still owe after the three years if you pay all of the payments as set forth in the loan's amortization schedule?

Accepted Answer

If all payments are made as set forth in the loan's amortization schedule, the loan will be fully paid off after the three years, and there will be no amount still owed. Therefore, the correct answer is B.

Question 20

You have been awarded an insurance settlement of $250,000 that is payable one year from today.What is the minimum amount you should accept today in exchange for this settlement if you can earn 6.7 percent on your investments?

Accepted Answer

To calculate the minimum amount that should be accepted today, we need to find the present value (PV) of $250,000. We will use the formula:

PV = FV / (1 + r)^n

Where:
FV = Future value (in one year) = $250,000
r = Rate of return = 6.7%
n = Number of years = 1

Substituting the values in the formula, we get:

PV = 250,000 / (1 + 0.067)^1
PV = 234,301.78

Therefore, the minimum amount that should be accepted today is $234,301.78. Answer choice B is correct.

Quiz 4: Discounted Cash Flow Valuation