Exam 2: How to Calculate Present Values

In the amortization of a mortgage loan with equal payments,the fraction of each payment devoted to interest steadily increases over time and the fraction devoted to reducing the loan balance decreases steadily.

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Question 1

Correct Answer:

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If you are paid $1,000 at the end of each year for the next five years,what type of cash flow did you receive?

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Question 2

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Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.

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Question 3

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If a dollar tomorrow were worth less than a dollar a day after tomorrow,it would be possible to earn a very large amount of money through a "money-machine" effect.This is only possible if someone else is losing a very large amount of money.These conditions can only exist for a short period and cannot exist in equilibrium as the source of money is quickly exhausted.Thus,a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.

The one-year discount factor,at a discount rate of 25% per year,is:

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Question 4

If the present value of $1.00 received n years from today at an interest rate of r is 0.3855,then what is the future value of $1.00 invested today at an interest rate of r% for n years?

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Question 5

Mr.Williams expects to retire in 30 years and would like to accumulate $1 million in his pension fund.If the annual interest rate is 12% APR,how much should Mr.Williams put into his pension fund each month in order to achieve his goal? (Assume that Mr.Williams will deposit the same amount each month into his pension fund,using monthly compounding.)

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Question 6

According to the net present value rule,an investment in a project should be made if the:

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Question 7

The opportunity cost of capital is higher for safe investments than for risky ones.

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Question 8

If the present value annuity factor at 12% for five years is 3.6048,what is the equivalent future value annuity factor?

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Question 9

An initial investment of $400,000 is expected to produce an end-of-year cash flow of $480,000.What is the NPV of the project at a discount rate of 20%?

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Question 10

If the one-year discount factor is 0.8333,what is the discount rate (interest rate)per year?

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Question 11

If the present value of $1.00 received n years from today at an interest rate of r is 0.621,then what is the future value of $1.00 invested today at an interest rate of r% for n years?

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Question 12

You would like to have enough money saved to receive a growing annuity for 20 years,growing at a rate of 5% per year,with the first payment of $50,000 occurring exactly one year after retirement.How much would you need to save in your retirement fund to achieve this goal? (The interest rate is 10%.)

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Question 13

If the annual interest rate is 12.00%,what is the two-year discount factor?

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Question 14

After retirement,you expect to live for 25 years.You would like to have $75,000 income each year.How much should you have saved in your retirement account to receive this income if the interest rate is 9% per year? (Assume that the payments start one year after your retirement.)

(Multiple Choice)

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Question 15

John House has taken a 20-year,$250,000 mortgage on his house at an interest rate of 6% per year.What is the value of the mortgage after the payment of the fifth annual installment?

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Question 16

You just inherited a trust that will pay you $100,000 per year in perpetuity.However,the first payment will not occur for exactly five more years.Assuming an 8% annual interest rate,what is the value of this trust?

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Question 17

"Accept investments that have positive net present values" is called the net present value rule.

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Question 18

One can find the present value of a future cash flow by dividing it by an appropriate discount factor.

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Question 19

Describe how you would go about finding the present value of any annuity given the formula for the present value of a perpetuity.

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Question 20

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Exam 2: How to Calculate Present Values

In the amortization of a mortgage loan with equal payments,the fraction of each payment devoted to interest steadily increases over time and the fraction devoted to reducing the loan balance decreases steadily.

If you are paid $1,000 at the end of each year for the next five years,what type of cash flow did you receive?

Discuss why a dollar tomorrow cannot be worth less than a dollar the day after tomorrow.

The one-year discount factor,at a discount rate of 25% per year,is:

If the present value of $1.00 received n years from today at an interest rate of r is 0.3855,then what is the future value of $1.00 invested today at an interest rate of r% for n years?

According to the net present value rule,an investment in a project should be made if the:

The opportunity cost of capital is higher for safe investments than for risky ones.

If the present value annuity factor at 12% for five years is 3.6048,what is the equivalent future value annuity factor?

An initial investment of $400,000 is expected to produce an end-of-year cash flow of $480,000.What is the NPV of the project at a discount rate of 20%?

If the one-year discount factor is 0.8333,what is the discount rate (interest rate)per year?

If the present value of $1.00 received n years from today at an interest rate of r is 0.621,then what is the future value of $1.00 invested today at an interest rate of r% for n years?

If the annual interest rate is 12.00%,what is the two-year discount factor?

After retirement,you expect to live for 25 years.You would like to have $75,000 income each year.How much should you have saved in your retirement account to receive this income if the interest rate is 9% per year? (Assume that the payments start one year after your retirement.)

John House has taken a 20-year,$250,000 mortgage on his house at an interest rate of 6% per year.What is the value of the mortgage after the payment of the fifth annual installment?

You just inherited a trust that will pay you $100,000 per year in perpetuity.However,the first payment will not occur for exactly five more years.Assuming an 8% annual interest rate,what is the value of this trust?

"Accept investments that have positive net present values" is called the net present value rule.

One can find the present value of a future cash flow by dividing it by an appropriate discount factor.

Describe how you would go about finding the present value of any annuity given the formula for the present value of a perpetuity.

Introduction to Corporate Finance

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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