Question 1

If the cost of capital is 8% per year, what is the discount factor for a cash flow occurring in 4 years?

Accepted Answer

The discount factor for a cash flow occurring in 4 years at an 8% cost of capital is calculated using the formula 1/(1+r)^n, where r is the discount rate (0.08) and n is the number of years (4). This calculation gives 1/(1+0.08)^4 = 0.7350.

Question 2

Three years ago, Karen deposited $25,000 in an account that paid 8% annually. Today,
she transferred the funds in that account to an account that will pay her 10% annually.
How much will she have in her account three years from now?

Accepted Answer

The answer of Three years ago, Karen deposited $25,000 in...

Question 3

You want to set aside some money today in order to present your son with a $3,000 trip upon his graduation from high school in seven years. If your opportunity cost of capital is 10% per
Year, how much do you need to set aside? Round your answer to the nearest dollar.

Accepted Answer

Using the present value formula, we have:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value (which is $3,000), r is the opportunity cost of capital (which is 10%), and n is the number of years (which is 7).
Substituting the values, we get:
PV = 3,000 / (1 + 0.1)^7
PV = 1,538.62
Rounding to the nearest dollar gives us $1,539, which is answer choice C.

Question 4

When your first child is born, you open an account for him with $5,000. If this account
will earn a compound average annual rate of 12%, is it possible for your child to
become a millionaire in his lifetime?

Accepted Answer

The answer of When your first child is born, you...

Question 5

How much must you deposit in a bank account today to have $1,000 at the end of 5 years if the bank quotes a rate of 5%, compounded daily? Assume a 365-day year and round your answer
To the nearest dollar.

Accepted Answer

The answer of How much must you deposit in a...

Question 6

A bond that promises to pay $5,000 at the end of 12 months is selling for $4,695 today. What is its implied yield? Round your answer to the nearest tenth of a percent.

Accepted Answer

The implied yield can be calculated using the formula: Yield = [(Face Value - Present Value) / Present Value] * 100. Substituting the given values: Yield = [($5,000 - $4,695) / $4,695] * 100 = 6.5%.

Question 7

A zero-coupon bond promises to pay $1,000 in ten years. The appropriate annual effective interest rate for the 10-year period is a constant 6%. Rounded to the nearest dollar, the current
Price of the bond is

Accepted Answer

The price of a zero-coupon bond is calculated by discounting the face value using the formula: Price = Face Value / (1 + interest rate)^number of years. Here, Price = $1,000 / (1 + 0.06)^10 = $558.39, which rounds to $558.

Question 8

How much must you deposit in an account today in order to have $1,000 in your account at the end of two years if you can earn 6.5% per year on your money? Round your answer to the
Nearest dollar.

Accepted Answer

The answer of How much must you deposit in an...

Question 9

A project will cost $50,000 initially, and is expected to return $25,000 in years 1 and 2, -$20,000 in year 3, and $25,000 in years 4 and 5. Calculate the project's NPV if the appropriate cost of
Capital is 20%. Round your answer to the nearest dollar.

Accepted Answer

To calculate the NPV, we need to discount each cash flow using the cost of capital of 20%.

Year 0: -$50,000 (initial investment)
Year 1: $25,000 / (1+0.2)^1 = $20,833.33
Year 2: $25,000 / (1+0.2)^2 = $17,361.11
Year 3: -$20,000 / (1+0.2)^3 = -$11,574.07
Year 4: $25,000 / (1+0.2)^4 = $12,152.78
Year 5: $25,000 / (1+0.2)^5 = $10,127.32

NPV=sum of all discounted cash flows = -$50,000 + $20,833.33 + $17,361.11 - $11,574.07 + $12,152.78 + $10,127.32 = -$1,276.44

Since the NPV is negative, the project should not be undertaken. Therefore, the best choice is B.

Question 10

Which is the better deal: a deposit of one penny today in an account that will offer a
daily return of 100% for one month (i.e., the value of the account is doubled every day
for 30 days)or a lump sum of $10 million to be received thirty days from today?

Accepted Answer

The answer of Which is the better deal: a deposit...

Question 11

A Treasury bill promises to pay $10,000 at the end of 3 months. If its annual
percentage yield (APY)is 4%, what is its current market price?

Accepted Answer

The answer of A Treasury bill promises to pay $10,000...

Question 12

Suppose you are shopping for a loan, and three different institutions quote the same
interest rate. However, the first institution uses monthly compounding, the second
compounds interest quarterly, and the third uses semiannual compounding. Which
loan is the best deal? Why?

Accepted Answer

The answer of Suppose you are shopping for a loan,...

Question 13

Consider two investment opportunities. Investment 1 pays interest at the rate of 12%
per year, compounded annually while Investment 2 pays interest at the rate of 11.5% a
year, compounded daily. Assuming a 365-day year, which investment provides the
better return?

Accepted Answer

The answer of Consider two investment opportunities. Investment 1 pays...

Question 14

A project will cost $1,000 initially, and is expected to return $500 in year 1, $400 in year 2, $300 in year 3, $100 in year 4, and nothing thereafter. What is the project's NPV if the appropriate
Cost of capital is 10%? Round your answer to the nearest dollar.

Accepted Answer

To calculate the NPV, we need to discount each year's cash flow to the present value using the appropriate cost of capital.
Year 1: $500/(1+0.1)^1 = $454.55
Year 2: $400/(1+0.1)^2 = $330.58
Year 3: $300/(1+0.1)^3 = $225.79
Year 4: $100/(1+0.1)^4 = $68.97
NPV = -$1,000 + $454.55 + $330.58 + $225.79 + $68.97 = $79.89
Rounding to the nearest dollar: NPV = $79.

Question 15

A certain project will cost a firm $5,000 today. The project is not expected to produce any cash flows until the second year, at which point it is expected to produce $6,200. No other cash
Flows are anticipated. If the appropriate cost of capital is 15%, what is this project's NPV?
Round your answer to the nearest dollar.

Accepted Answer

The answer of A certain project will cost a firm...

Question 16

You paid $713 last year for a zero-coupon bond that promised to pay you $1,000 at the end of 5 years. Rather than hold it for the remaining four years, you have decided to sell it today. The
Prevailing effective annual interest rate is 9%. To the nearest dollar, what price do you expect
To get for your bond?

Accepted Answer

To calculate the price you can sell the bond for today, we need to use the formula for present value of a lump sum:
Present value = Future value / (1+r)^n
where r is the annual interest rate and n is the number of compounding periods.

In this case, the future value is $1,000, the annual interest rate is 9%, and the number of compounding periods is 4 (since you are selling the bond after 1 year). Plugging in the numbers, we get:

Present value = $1,000 / (1+0.09)^4
Present value = $713.02

This means that the fair price you can sell your bond for today is approximately $713. However, because of market conditions or other factors, you may not be able to get the exact fair price. The closest answer choice is B, $708. To determine the price you can get for your bond, we need to calculate the Present Value (PV) of the bond using the following formula:
PV = FV / (1 + r)^n

Where FV is the future value of the bond, r is the interest rate, and n is the number of years. Plugging in the values, we get:

PV = 1,000 / (1 + 0.09)^5 = $708.02

Therefore, the closest answer choice is B ($708).

Question 17

You purchased a zero-coupon bond last week for $499. The bond promised to pay $1,000 in ten years. Since your purchase, prevailing interest rates have increased by 50 basis points. If
You assume no other changes have occurred that would affect your bond's price, which of the
Following statements is necessarily true?

Accepted Answer

When prevailing interest rates increase, the value of existing bonds decreases. Since the bond purchased is a zero-coupon bond, there are no coupon payments to offset the decrease in value. The calculation to estimate the new value is:

New Value = Face Value / (1 + Prevailing Interest Rate)^Number of Years

Using this formula, the new value would be approximately $475.95, which is closest to option A.

Question 18

How much would you have to deposit in your newborn child's account today in order
to make him a millionaire at age 36 if the account will earn an average annual rate of
10%?

Accepted Answer

The answer of How much would you have to deposit...

Question 19

A certain project will cost $50,000 and is expected to produce cash flows of $15,563 for the next seven years. The appropriate cost of capital is 15%. Calculate the project's NPV, rounding
Your answer to the nearest dollar.

Accepted Answer

The Net Present Value (NPV) is calculated by discounting the future cash flows back to their present value and then subtracting the initial investment. Using the formula for NPV: NPV = $\sum \frac{CF_t}{(1+r)^t} - Initial Investment$, where $CF_t$ is the cash flow in year $t$, $r$ is the discount rate (15% or 0.15 in this case), and the initial investment is $50,000. Calculating the NPV for each of the 7 years and subtracting the initial investment gives an NPV of approximately +$14,748.

Question 20

Which of the following statements is true?

Accepted Answer

A firm's growth rate and the rate of return you should expect to earn are not necessarily connected. A high-growth firm may have higher potential for returns, but also higher risk. It is important to look at other factors such as the firm's financial health, industry trends, and competition before making investment decisions. The growth rate of a firm does not necessarily determine the rate of return an investor should expect to earn. There are several other factors, such as the firm's cost of capital, industry risks, and competition that need to be considered.

Quiz 2: The Time Value of Money and Net Present Value

If the cost of capital is 8% per year, what is the discount factor for a cash flow occurring in 4 years?

Three years ago, Karen deposited $25,000 in an account that paid 8% annually. Today, she transferred the funds in that account to an account that will pay her 10% annually. How much will she have in her account three years from now?

You want to set aside some money today in order to present your son with a $3,000 trip upon his graduation from high school in seven years. If your opportunity cost of capital is 10% per Year, how much do you need to set aside? Round your answer to the nearest dollar.

When your first child is born, you open an account for him with $5,000. If this account will earn a compound average annual rate of 12%, is it possible for your child to become a millionaire in his lifetime?

How much must you deposit in a bank account today to have $1,000 at the end of 5 years if the bank quotes a rate of 5%, compounded daily? Assume a 365-day year and round your answer To the nearest dollar.

A bond that promises to pay $5,000 at the end of 12 months is selling for $4,695 today. What is its implied yield? Round your answer to the nearest tenth of a percent.

A zero-coupon bond promises to pay $1,000 in ten years. The appropriate annual effective interest rate for the 10-year period is a constant 6%. Rounded to the nearest dollar, the current Price of the bond is

How much must you deposit in an account today in order to have $1,000 in your account at the end of two years if you can earn 6.5% per year on your money? Round your answer to the Nearest dollar.

A project will cost $50,000 initially, and is expected to return $25,000 in years 1 and 2, -$20,000 in year 3, and $25,000 in years 4 and 5. Calculate the project's NPV if the appropriate cost of Capital is 20%. Round your answer to the nearest dollar.

Which is the better deal: a deposit of one penny today in an account that will offer a daily return of 100% for one month (i.e., the value of the account is doubled every day for 30 days)or a lump sum of $10 million to be received thirty days from today?

A Treasury bill promises to pay $10,000 at the end of 3 months. If its annual percentage yield (APY)is 4%, what is its current market price?

Suppose you are shopping for a loan, and three different institutions quote the same interest rate. However, the first institution uses monthly compounding, the second compounds interest quarterly, and the third uses semiannual compounding. Which loan is the best deal? Why?

Consider two investment opportunities. Investment 1 pays interest at the rate of 12% per year, compounded annually while Investment 2 pays interest at the rate of 11.5% a year, compounded daily. Assuming a 365-day year, which investment provides the better return?

A project will cost $1,000 initially, and is expected to return $500 in year 1, $400 in year 2, $300 in year 3, $100 in year 4, and nothing thereafter. What is the project's NPV if the appropriate Cost of capital is 10%? Round your answer to the nearest dollar.

How much would you have to deposit in your newborn child's account today in order to make him a millionaire at age 36 if the account will earn an average annual rate of 10%?

A certain project will cost $50,000 and is expected to produce cash flows of $15,563 for the next seven years. The appropriate cost of capital is 15%. Calculate the project's NPV, rounding Your answer to the nearest dollar.

Which of the following statements is true?