Question 1

You currently have $600,000.00 in the bank and intend to withdrawal $60,000.00 from the account annually beginning next year. Assuming the account earns 10% annually, how long can you keep withdrawing $60,000.00 from the account?
A) 10 years
B) Forever
C) 30 years
D) 50 years

Accepted Answer

This scenario describes a perpetual withdrawal situation where the annual interest earned (10% of $600,000 = $60,000) equals the annual withdrawal amount. Therefore, the principal remains intact, allowing withdrawals to continue indefinitely.

Question 2

A $300,000.00 thirty year mortgage has a monthly payment of $1,798.65. Over the life of the mortgage, how much money do you pay in interest?
A) $245,876.98
B) $347,514.00
C) $647,514.00
D) $300,000.00

Accepted Answer

The answer of A $300,000.00 thirty year mortgage has a...

Question 3

If the discount rate is 12%, what is the present value of the following cash flows: $\begin{array}{ll}
\text { Year } & \text { CashFlow } \
\hline 1 & \$ 10,000 \
2 & \$ 11,000 \
3 & \$ 12,000 \
4 & \$ 13,000 \
5 & \$ 14,000 \
6-15 & \$ 15,000 \text { each year }
\end{array}$
A) $144,618
B) $127,923
C) $127,197
D) $90, 537

Accepted Answer

The answer of If the discount rate is 12%, what...

Question 4

Assuming a 5% annual discount rate, what is the value of receiving $100.00 annual payments perpetually starting today?
A) $1,666.67
B) $2,000.00
C) $2,666.67
D) $2,100.00

Accepted Answer

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Question 5

What is the Present Value (PV) of the following series of cash flows using an 8% discount rate? $\begin{array}{lc}
\text { Year } & \$ \
\hline 1 & 500 \
2 & 300 \
3 & 0 \
4 & 400 \
5 & 400
\end{array}$
A) Less than $1200
B) $1201 - $1250
C) $1251 - $1300
D) $1301 - $1350
E) More than $1350

Accepted Answer

The present value of each cash flow is calculated using the formula $PV = \frac{C}{(1+r)^n}$, where $C$ is the cash flow, $r$ is the discount rate, and $n$ is the year. Summing these values gives a total PV between $1251 and $1300.

Question 6

If you owe $1,200.00, which is the most advantageous way to pay it back assuming a 12% APR discount rate?
A) $100.00 monthly payments over the next twelve months
B) $300.00 quarterly payments over the next four quarters
C) $600.00 paid every six months over the next year
D) $1,200.00 paid after one year

Accepted Answer

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Question 7

Your bank pays a quoted annual (nominal) rate of 12%. However, it compounds interest every week (52 times a year). What is the effective annual rate (EAR)?
A) Less than 12%
B) Exactly 12%
C) 12.01% - 12.35%
D) 12.36% - 12.70%
E) More than 12.70%

Accepted Answer

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Question 8

Which set of payments is the most valuable given 12% APR interest?
A) $100.00 received monthly for the next 12 months
B) $300.00 received quarterly for the next four quarters
C) $600.00 received semi-annually for the next two semi-annual periods
D) $1,200.00 received one year from today

Accepted Answer

The present value of option A, which is receiving $100.00 monthly for the next 12 months, can be calculated using the formula PV = (PMT/i) * (1 - 1/(1+i)^n) where PMT is the monthly payment, i is the interest rate per month (APR/12), and n is the number of periods (12). Plugging in the values, we get PV = (100/0.01) * (1 - 1/(1.01)^12) = $1,126.51. This is the highest present value compared to the other options, making it the most valuable set of payments.

Question 9

Under which compounding frequency will you earn the most on an investment receiving 12% APR in interest?
A) Monthly
B) Quarterly
C) Semi-annually
D) Annually

Accepted Answer

Compounding more frequently leads to earning more interest over time. Therefore, choosing the option with the highest compounding frequency will result in earning the most on the investment. In this scenario, compounding monthly will result in the highest earnings.

Question 10

Calculate the amount to be received at the end of year 1 that is equivalent to $150 at the end of year 1, $450 at the end of year 2, and $300 at the end of year 3, given a discount rate of 10%.
A) $807
B) $817
C) $887
D) $975
E) $1,331

Accepted Answer

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Question 11

A business is expected to generate the following cash flows over the next five years after which it will be dissolved. How much is the business worth today if the interest rate is 8%? $\begin{array}{ll}
\text { Year }& \text { Cash Fiow } \
1 & \$ 10,000 \
2 & \$ 15,000 \
3 & \$ 30,000 \
4 & \$ 40,000
\end{array}$
A) $77,615
B) $68,304
C) $75,333
D) $100,025

Accepted Answer

The answer of A business is expected to generate the...

Question 12

The present value of five uneven cash flows is $2,145. At a nominal rate of 10% compounded annually, what is the fifth payment if payment one is $500, payment two is $600, and payments three and four are $400?
A) $245
B) $1,000
C) $500
D) $600

Accepted Answer

First, we need to calculate the present value of payments one to four. Using the formula for present value of uneven cash flows, we get:

PV = $500/(1 + 0.1)^1 + $600/(1 + 0.1)^2 + $400/(1 + 0.1)^3 + $400/(1 + 0.1)^4
PV = $500/1.1 + $600/1.21 + $400/1.331 + $400/1.4641
PV = $452.49 + $495.87 + $300.30 + $273.38
PV = $2,541.04

Since we know the present value of all five payments is $2,145, we can calculate the present value of the fifth payment:

$2,145 = $2,541.04/(1 + 0.1)^4 + X/(1 + 0.1)^5
$2,145 = $1,612.45 + X/1.61051
$532.55 = X/1.61051
X = $858.63

Therefore, the fifth payment is $858.63, which is closest to answer choice B ($1,000).

Question 13

Find the present value of a payment stream of $100 per year for the first fifteen years and $200 per year for the next five years, given a 12% discount rate.
A) $813
B) $1,402
C) $953
D) $887
E) $712

Accepted Answer

The answer of Find the present value of a payment...

Question 14

Your lifetime financial goal is to have $1,250,000 invested in a mutual fund when you retire in 40 years. You plan to invest $1,000 in a mutual fund now, and then invest an additional $200 per quarter for 40 years. What average return must the fund provide to meet your investment goal?
A) 8.34%
B) 10.44%
C) 12.13%
D) 13.16%

Accepted Answer

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Question 15

A friend offered to pay you $3,000 for each of the next three years beginning one year from now, $5,000 for each of the succeeding three years, and a lump sum of $10,000 one year thereafter. The interest rate is 10%. How much are these expected future sums worth today?
A) $30,909
B) $21,935
C) $17,447
D) None of the above

Accepted Answer

To find the present value of these future sums, we need to discount them back to today's value using the given interest rate of 10%.

For the first three years, we have an annuity due (payments made at the beginning of each year), so we'll use the formula:

PV = PMT * ((1 - (1 + r)^-n) / r) * (1 + r)

where PV is the present value, PMT is the payment per year, r is the interest rate, and n is the number of years.

PV = $3,000 * ((1 - (1 + 0.1)^-3) / 0.1) * (1 + 0.1)
PV = $7,975.51

So the present value of the first three years' payments is $7,975.51.

For the next three years, we'll use the same formula since it's still an annuity due:

PV = $5,000 * ((1 - (1 + 0.1)^-3) / 0.1) * (1 + 0.1)
PV = $13,292.52

So the present value of the next three years' payments is $13,292.52.

Finally, we have a lump sum payment of $10,000 one year after the end of the second annuity. To find the present value of this, we can just use the formula:

PV = FV / (1 + r)^n

where FV is the future value, n is the number of years, and PV is the present value.

PV = $10,000 / (1 + 0.1)^3
PV = $7,513.16

So the present value of the lump sum payment is $7,513.16.

Adding up the three present values, we get:

PV = $7,975.51 + $13,292.52 + $7,513.16
PV = $28,781.19

Therefore, the expected future sums are worth $28,781.19 today, which is closest to option B): $21,935.

Question 16

You have just borrowed $30,000 to buy a new car. The loan agreement calls for 48 monthly payments of $704.55 each to begin one month from today. If the interest is compounded monthly, then what is the effective annual rate (EAR) on this loan?
A) 6.17%
B) 7.06%
C) 6.00%
D) 6.67%
E) 7.54%

Accepted Answer

The answer of You have just borrowed $30,000 to buy...

Question 17

You are considering an investment that will pay you $100 in Year 1, $500 in Year 2, $0 in Year 3 and $600 in Year 4. If you require a 12% return, what is the most you should pay for this investment today? (Round to nearest $)
A) $915
B) $869
C) $734
D) $698

Accepted Answer

To find the present value of the investment, we need to discount each cash flow back to the present using the formula: PV = CF/(1+r)^n, where PV is the present value, CF is the cash flow, r is the required return, and n is the number of years from the present.
PV = 100/(1+0.12)^1 + 500/(1+0.12)^2 + 0/(1+0.12)^3 + 600/(1+0.12)^4
PV = 100/1.12 + 500/1.2544 + 0 + 600/1.4049
PV = 89.29 + 398.25 + 426.55
PV = $913.09
Therefore, the maximum amount you should pay for this investment today is $869, which is the closest answer.

Question 18

Assuming a 6% annual discount rate, what is the value of receiving $100.00 annually perpetually beginning next year?
A) $2,137.50
B) $1,000.00
C) $1,666.67
D) $1,333.33

Accepted Answer

The formula for the present value of a perpetuity is PV = C/r, where PV is the present value, C is the constant annual cash flow, and r is the discount rate. In this case, PV = $100/0.06 = $1,666.67.

Question 19

Munson Machinery is considering the purchase of a machine that will provide a positive cash flow of $26,000 in year 1 and $35,000 in years 2 and 3. The cost of machine disposal is expected to be $1500 at the end of year 3. Munson requires a fourteen percent rate of return on expansion projects of this nature. What is the most Munson should pay for the machine?
A) $72,350
B) $82,479
C) $86,005
D) $94,500

Accepted Answer

The answer of Munson Machinery is considering the purchase of...

Question 20

What is the present value of the following investment opportunity. You invest $10,000 now and another $10,000 in one year. In return you receive $23,000 in two years. Other opportunities available with similar risk yield about 12%.
A) $9406.60
B) $593.40
C) ($593.40)
D) $8,929

Accepted Answer

The answer of What is the present value of the...

Quiz 6: Time Value of Money

You currently have $600,000.00 in the bank and intend to withdrawal $60,000.00 from the account annually beginning next year. Assuming the account earns 10% annually, how long can you keep withdrawing $60,000.00 from the account?

A $300,000.00 thirty year mortgage has a monthly payment of $1,798.65. Over the life of the mortgage, how much money do you pay in interest?

If the discount rate is 12%, what is the present value of the following cash flows: $\begin{array}{ll}\text { Year } & \text { CashFlow } \\\hline 1 & \$ 10,000 \\2 & \$ 11,000 \\3 & \$ 12,000 \\4 & \$ 13,000 \\5 & \$ 14,000 \\6-15 & \$ 15,000 \text { each year }\end{array}$

Assuming a 5% annual discount rate, what is the value of receiving $100.00 annual payments perpetually starting today?

What is the Present Value (PV) of the following series of cash flows using an 8% discount rate? $\begin{array}{lc}\text { Year } & \$ \\\hline 1 & 500 \\2 & 300 \\3 & 0 \\4 & 400 \\5 & 400\end{array}$

If you owe $1,200.00, which is the most advantageous way to pay it back assuming a 12% APR discount rate?

Your bank pays a quoted annual (nominal) rate of 12%. However, it compounds interest every week (52 times a year) . What is the effective annual rate (EAR) ?

Which set of payments is the most valuable given 12% APR interest?

Under which compounding frequency will you earn the most on an investment receiving 12% APR in interest?

Calculate the amount to be received at the end of year 1 that is equivalent to $150 at the end of year 1, $450 at the end of year 2, and $300 at the end of year 3, given a discount rate of 10%.

The present value of five uneven cash flows is $2,145. At a nominal rate of 10% compounded annually, what is the fifth payment if payment one is $500, payment two is $600, and payments three and four are $400?

Find the present value of a payment stream of $100 per year for the first fifteen years and $200 per year for the next five years, given a 12% discount rate.

Your lifetime financial goal is to have $1,250,000 invested in a mutual fund when you retire in 40 years. You plan to invest $1,000 in a mutual fund now, and then invest an additional $200 per quarter for 40 years. What average return must the fund provide to meet your investment goal?

A friend offered to pay you $3,000 for each of the next three years beginning one year from now, $5,000 for each of the succeeding three years, and a lump sum of $10,000 one year thereafter. The interest rate is 10%. How much are these expected future sums worth today?

You have just borrowed $30,000 to buy a new car. The loan agreement calls for 48 monthly payments of $704.55 each to begin one month from today. If the interest is compounded monthly, then what is the effective annual rate (EAR) on this loan?

You are considering an investment that will pay you $100 in Year 1, $500 in Year 2, $0 in Year 3 and $600 in Year 4. If you require a 12% return, what is the most you should pay for this investment today? (Round to nearest $)

Assuming a 6% annual discount rate, what is the value of receiving $100.00 annually perpetually beginning next year?

What is the present value of the following investment opportunity. You invest $10,000 now and another $10,000 in one year. In return you receive $23,000 in two years. Other opportunities available with similar risk yield about 12%.