Question 1

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?
A) $6,000.00
B) $7,715.61
C) $7,908.48
D) $11,193.97

Accepted Answer

The interest is calculated using the formula for compound interest: A = P(1 + r/n)^(nt). Here, P = $10,000, r = 0.06, n = 1, t = 10. The total amount A is $17,908.48, so the interest paid is $17,908.48 - $10,000 = $7,908.48.

Question 2

You have $50,000 in your account. Assuming no additional deposits are made and your account earns 8 percent per year, how long will it take for the account to have a balance of $500,000?
A) 28.83 years
B) 29.92 years
C) 50.00 years
D) 90.00 years

Accepted Answer

The answer of You have $50,000 in your account. Assuming...

Question 3

Your firm receives an offer from the supplier who provides computer chips used to manufacture cell phones. Due to poor planning, the supplier has an excess amount of chips and is willing to sell $600,000 worth of chips for only $500,000. You already have two years' supply on hand. It would cost you $7,500 today to store the chips until your firm needs them in two years. What implied interest rate would you be earning if you purchased and store the chips?
A) 6.57 percent
B) 8.73 percent
C) 9.54 percent
D) 18.23 percent

Accepted Answer

The implied interest rate can be calculated using the formula for the future value of a single sum: FV = PV * (1 + r)^n. Here, FV is $600,000, PV is $507,500 ($500,000 purchase price + $7,500 storage cost), and n is 2 years. Solving for r gives approximately 8.73 percent.

Question 4

An appliance store sells a TV for $1,200 and gives their customers a full three years to pay for the TV. If interest rates are 5 percent, what is the equivalent sales price of the TV when the customer takes the full 3 years to pay for it?
A) $991.72
B) $1,036.61
C) $1,104.14
D) $1,389.15

Accepted Answer

The equivalent sales price is the present value of the $1,200 payment due in 3 years, discounted at 5% per annum. Using the formula for present value: PV = FV / (1 + r)^n, where FV = $1,200, r = 0.05, and n = 3, the calculation is $1,200 / (1.05)^3 = $1,036.61.

Question 5

You double your money in five years. The reason your return is not 20 percent per year is because:
A) it is probably a "fad" investment.
B) it does not reflect the effect of discounting.
C) it does not reflect the effect of the Rule of 72.
D) it does not reflect the effect of compounding.

Accepted Answer

Doubling your money in five years does not equate to a 20 percent return per year due to the effect of compounding. Compounding interest means that the interest earned each year is added to the principal, so the amount of interest earned each subsequent year is based on the principal plus the previously earned interest. This process results in a rate of return that is effectively less than a simple 20 percent per year when you double your money over five years.

Question 6

You borrow $3,500 and will pay back the entire amount in five years. You are charged 9 percent interest per year. How much interest do you pay on this loan?
A) $1,885.18
B) $1,907.35
C) $1,959.02
D) $2,106.81

Accepted Answer

The interest paid on the loan can be calculated using the simple interest formula: Interest = Principal × Rate × Time. Here, Principal = $3,500, Rate = 9% or 0.09, and Time = 5 years. So, Interest = $3,500 × 0.09 × 5 = $1,575. Therefore, none of the provided options are correct based on the simple interest calculation. However, if the interest is compounded annually, we use the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount after t years, P is the principal amount ($3,500), r is the annual interest rate (9% or 0.09), n is the number of times the interest is compounded per year (1 for annually), and t is the time the money is borrowed for in years (5). Solving this gives a different amount, but the question asks for the interest paid, not the final amount. The correct calculation for simple interest does not match any of the options, suggesting a possible misunderstanding in the question's premise or a calculation error in the provided options. Given the options and assuming a potential for compound interest without specifying the compounding frequency, none align directly with standard simple or compound interest calculations as described.

Question 7

You are scheduled to receive a $750 cash flow in one year, a $1,000 cash flow in two years, and pay a $300 payment in four years. If interest rates are 6 percent per year, what is the combined present value of these cash flows?
A) $1,359.92
B) $1,413.92
C) $1,592.63
D) $1,613.02

Accepted Answer

The present value of each cash flow is calculated using the formula PV = FV / (1 + r)^n. The combined present value is the sum of these individual present values: $750/(1.06)^1 + $1,000/(1.06)^2 - $300/(1.06)^4 = $1,359.92.

Question 8

Which of the following statements is correct?
A) $100 to be received in the future is worth more than that today since it could be invested and earn interest.
B) $100 to be received in the future is worth less than that today since it could be invested and earn interest.
C) The Rule of 72 calculates the compounded return on investments.
D) Discounting is finding the future value of an original investment.

Accepted Answer

$100 to be received in the future is worth less than that today due to the potential of current funds to be invested and earn interest, a concept known as the time value of money.

Question 9

Assume you borrow $500 from a payday lender. The terms are that you must pay a fee of $75 in advance (today) and one year from now you need to repay $750. What implied interest rate are you paying?
A) 43.09 percent
B) 55.78 percent
C) 76.47 percent
D) 81.03 percent

Accepted Answer

The implied interest rate can be calculated by considering the initial amount borrowed and the total amount to be repaid. Here, you effectively borrow $425 ($500 - $75 fee) and agree to repay $750 in a year. The interest paid is $325 ($750 - $425), so the interest rate is $325/$425 = 76.47%.

Question 10

Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?
A) 12.00 percent
B) 25.00 percent
C) 49.33 percent
D) 86.99 percent

Accepted Answer

The effective interest rate can be calculated by considering the actual amount borrowed and the total amount to be repaid. After paying a $25 fee upfront, you effectively borrow $75 ($100 - $25). One year later, you repay $112. The interest paid is $112 - $75 = $37. The interest rate is $37/$75 = 49.33%.

Question 11

We call the process of earning interest on both the original deposit and on the earlier interest payments
A) simple interest.
B) compounding.
C) future value.
D) discounting.

Accepted Answer

Compounding refers to the process where the value of an investment increases because the earnings on an investment, both capital and interest, earn interest as time passes. This is different from simple interest, where only the original principal earns interest.

Question 12

Five years ago, sales were $4 million. Today your company's sales are $10 million. What annual rate have sales been growing?
A) 1.5 percent
B) 12.65 percent
C) 16.65 percent
D) 20.11 percent

Accepted Answer

The answer of Five years ago, sales were $4 million....

Question 13

How long will it take for the purchasing power of $1 to be cut in half if inflation is 4 percent?
A) 4.97 years
B) 7.42 years
C) 10.72 years
D) 17.67 years

Accepted Answer

The answer of How long will it take for the...

Question 14

You are scheduled to pay a $350 cash flow in one year, and receive a $1,000 cash flow in years 3 and 4. If interest rates are 10 percent per year, what is the combined present value of these cash flows?
A) $991.38
B) $1,097.14
C) $1,116.14
D) $1,213.92

Accepted Answer

To find the present value of the cash flows, discount each cash flow to the present using the formula PV = FV / (1 + r)^n. For the $350 payment in one year: PV = 350 / (1.10)^1 = $318.18. For the $1,000 cash flow in year 3: PV = 1000 / (1.10)^3 = $751.31. For the $1,000 cash flow in year 4: PV = 1000 / (1.10)^4 = $683.01. The combined present value is $318.18 + $751.31 + $683.01 = $1,116.50, which is closest to option C.

Question 15

Assume you borrow $5,000 today and pay back the loan in one lump sum four years from today. You are charged 8 percent interest per year. What amount will you pay back and how much interest will you pay?
A) $6,399.56, $1,399.56
B) $6,508.21, $1,508.21
C) $6,802.44, $1,802.44
D) $7,902.11, $2,902.11

Accepted Answer

The future value of the loan is calculated using the formula FV = PV * (1 + r)^n, where PV is the present value ($5,000), r is the interest rate (0.08), and n is the number of years (4). This results in $6,802.44, with $1,802.44 being the interest paid.

Question 16

You are considering an investment that is expected to pay 5 percent in year 1, 7 percent in years 2 and 3 and 9 percent in year 4. If you invest $2,000 today, what will this investment be worth at the end of the fourth year?
A) $2,501.42
B) $2,693.71
C) $2,713.04
D) $2,620.68

Accepted Answer

The answer of You are considering an investment that is...

Question 17

You have $100,000 in your account. Assuming no additional deposits are made and your account earns 15 percent per year, how long will it take for the account to have a balance of $500,000?
A) 10.28 years
B) 11.09 years
C) 11.52 years
D) 12.64 years

Accepted Answer

The answer of You have $100,000 in your account. Assuming...

Question 18

As the production manager of HPG, Inc., you have received an offer from the supplier who provides the wires used in headsets. Due to poor planning, the supplier has an excess amount of wire and is willing to sell $750,000 worth for only $600,000. You already have one year's supply of wire on hand. This new wire would be used one year from today. What implied interest rate would your firm be earning if you purchased the wire?
A) −20 percent
B) 13.5 percent
C) 21 percent
D) 25 percent

Accepted Answer

The answer of As the production manager of HPG, Inc.,...

Question 19

Assume that you borrow $2,000 from your sister and that you will pay her back in one lump sum. She charges you 9 percent interest in year 1 and increases the rate by 1 percent per year until the loan is paid off. How much will you owe if you wait until year 3 to pay off the loan?
A) $2,467.91
B) $2,661.78
C) $2,775.23
D) $2,809.53

Accepted Answer

In year 1, the interest is 9%, so the amount owed is $2,000 * 1.09 = $2,180. In year 2, the interest is 10%, so the amount owed is $2,180 * 1.10 = $2,398. In year 3, the interest is 11%, so the amount owed is $2,398 * 1.11 = $2,661.78.

Question 20

You are considering an investment that is expected to pay 3 percent in year 1, 5 percent in years 2 and 3 and 7 percent in year 4. If you invest $1,000 today, what will this investment be worth at the end of the fourth year?
A) $1215.07
B) $1215.51
C) $1275.81
D) $1285.75

Accepted Answer

The future value of the investment can be calculated using the formula:FV = PV * (1 + r1) * (1 + r2) * (1 + r3) * (1 + r4)where:PV is the present value of the investment ($1,000)r1 is the interest rate in year 1 (3%)r2 is the interest rate in year 2 (5%)r3 is the interest rate in year 3 (5%)r4 is the interest rate in year 4 (7%)Substituting these values into the formula, we get:FV = 1000 * (1 + 0.03) * (1 + 0.05) * (1 + 0.05) * (1 + 0.07)= 1000 * 1.03 * 1.05 * 1.05 * 1.07= 1215.07Therefore, the investment will be worth $1215.07 at the end of the fourth year.

Quiz 4: Time Value of Money 1: Analyzing Single Cash Flows

You borrow $10,000 and will pay back the entire amount in 10 years. You are charged 6 percent interest per year. How much interest do you pay on this loan?

You have $50,000 in your account. Assuming no additional deposits are made and your account earns 8 percent per year, how long will it take for the account to have a balance of $500,000?

An appliance store sells a TV for $1,200 and gives their customers a full three years to pay for the TV. If interest rates are 5 percent, what is the equivalent sales price of the TV when the customer takes the full 3 years to pay for it?

You double your money in five years. The reason your return is not 20 percent per year is because:

You borrow $3,500 and will pay back the entire amount in five years. You are charged 9 percent interest per year. How much interest do you pay on this loan?

You are scheduled to receive a $750 cash flow in one year, a $1,000 cash flow in two years, and pay a $300 payment in four years. If interest rates are 6 percent per year, what is the combined present value of these cash flows?

Which of the following statements is correct?

Assume you borrow $500 from a payday lender. The terms are that you must pay a fee of $75 in advance (today) and one year from now you need to repay $750. What implied interest rate are you paying?

Assume you borrow $100 from a payday lender. The terms are that you must pay a fee of $25 in advance (today) and one year from now you need to repay $112. What implied interest rate are you paying?

We call the process of earning interest on both the original deposit and on the earlier interest payments

Five years ago, sales were $4 million. Today your company's sales are $10 million. What annual rate have sales been growing?

How long will it take for the purchasing power of $1 to be cut in half if inflation is 4 percent?

You are scheduled to pay a $350 cash flow in one year, and receive a $1,000 cash flow in years 3 and 4. If interest rates are 10 percent per year, what is the combined present value of these cash flows?

Assume you borrow $5,000 today and pay back the loan in one lump sum four years from today. You are charged 8 percent interest per year. What amount will you pay back and how much interest will you pay?

You are considering an investment that is expected to pay 5 percent in year 1, 7 percent in years 2 and 3 and 9 percent in year 4. If you invest $2,000 today, what will this investment be worth at the end of the fourth year?

You have $100,000 in your account. Assuming no additional deposits are made and your account earns 15 percent per year, how long will it take for the account to have a balance of $500,000?

Assume that you borrow $2,000 from your sister and that you will pay her back in one lump sum. She charges you 9 percent interest in year 1 and increases the rate by 1 percent per year until the loan is paid off. How much will you owe if you wait until year 3 to pay off the loan?

You are considering an investment that is expected to pay 3 percent in year 1, 5 percent in years 2 and 3 and 7 percent in year 4. If you invest $1,000 today, what will this investment be worth at the end of the fourth year?