Deck 3: Discounted Cash Flows and Valuation

Question 1

Suppose you put in $500 in a savings account today, another $400 in 1 years' time. The interest rate on the savings account is 6%. How much money will you have in the savings account at the end of 2 years?

A) $954.00.
B) $985.80.
C) $1,484.00.
D) None of the above. Not enough information has been provided.

Answer 1

$985.80.

Question 2

Suppose you put in $500 in a savings account today, another $400 in 1 years' time and $500 in 3 years' time. The interest rate on the savings account is 6%. How much money will you have in the savings account at the end of 4 years?

A) $2,268.88.
B) $2,131.92.
C) $1,637.55.
D) None of the above. Not enough information has been provided.

Answer 2

$1,637.55.

Question 3

Suppose James wants to buy a car in 3 years' time and estimates that he will need $25,000. The interest rate that he can earn from a savings account is 6% per annum. If James can put in $7,000 today, $6,000 in one year's time and $5,000 in 2 years' time, how much will he have to come up with at the end of the third year to buy his car?

A) He does not require more money as the total amount earned from the savings account at the end of 3 years will be enough.
B) $4,621.29.
C) $20,378.71.
D) None of the above. Not enough information has been provided.

Answer 3

$4,621.29.

Question 4

An investment paying $1,000 in 1 year, $2,000 in 2 years and $7,000 in 3 years returning 10% per annum has a present value of:

A) $6,002.54.
B) $7,210.20.
C) $7,821.19.
D) $8,129.39.

Question 5

An investment paying $2,000 in 2 years, $6,000 in 4 years and $5,000 in 12 years at an interest rate of 5% per annum has a present value of:

A) $6,505.29.
B) $7,354.21.
C) $9,534.46.
D) $12,090.49.

Question 6

At an interest rate of 15% per annum, cash flows of $1,000 today, $2,000 in 1 year and $6,000 in 2 years have a future value in 2 years of:

A) $10,200.46.
B) $9,709.37.
C) $8,700.00.
D) $9,622.50.

Question 7

Sheetal has made an investment that will pay her $11,455, $16,376, and $19,812 at the end of the next three years. Her investment was to earn her a return of 14 per cent. How much did she invest? (Round to the nearest dollar.)

A) $33,124.
B) $36,022.
C) $39,208.
D) $41,675.

Question 8

Suppose you open an account into which you deposit $200 semi-annually for 10 years. If the account pays 13% compounded semi-annually, how much will be in the account at the end of the 10 year period?

A) $2,698.88.
B) $7,765.06.
C) $16,189.37.
D) None of the above.

Question 9

The present value of an ordinary annuity paying $100 for 12 years at an interest rate of 9.25% per annum is:

A) $707.14.
B) $829.61.
C) $843.05.
D) $856.39.

Question 10

Julia is saving to buy a new car in four years. She will save $5,500 at the end of each of the next four years. If she invests her savings at 6.75 per cent, how much will she have after four years? (Round to the nearest dollar.)

A) $23,345.
B) $22,000.
C) $24,329.
D) $27,556.

Question 11

Nadeen has funded a retirement investment with $250,000 earning a return of 5.75 per cent. What is the value of the payment that she can receive in a perpetuity? (Round to the nearest dollar.)

A) $12,150.
B) $14,375.
C) $14,900.
D) $15,250.

Question 12

A lakefront cottage is selling at $100,000, with a $25,000 deposit, and the remainder mortgaged at 12 % per annum, to be amortised over 30 years. What is the monthly mortgage payment?

A) $1,906.11.
B) $792.90.
C) $771.46.
D) $931.77.

Question 13

Your firm is looking at expanding its operations and need to borrow $2 million for 5 years. Three banks have submitted their interest rate quotes (all Annual percentage rates): Bank A: 15% compounded daily; Bank B: 15% compounded weekly; and Bank C: 15% compounded monthly. Which bank should the firm borrow from?

A) Bank A.
B) Bank B.
C) Bank C.
D) Any bank would do since the APR is the same across all banks.

Question 14

Your firm has generated extra profits and decides to put some money in a savings account. Three banks have submitted their interest rate quotes (all Annual percentage rates): Bank A: 15% compounded daily; Bank B: 15% compounded weekly; and Bank C: 15% compounded monthly. Which bank should the firm borrow from?

A) Bank A.
B) Bank B.
C) Bank C.
D) Any bank would do since the APR is the same across all banks.

Question 15

ABC Ltd borrowed $152,300 from a bank for three years. If the quoted rate (APR) is 11.75 per cent, and the compounding is daily, what is the effective annual rate (EAR)? (Round to one decimal place.)

A) 11.6%
B) 11.7%
C) 12.5%
D) 14.3%

Question 16

Thelma borrows $10,000 from "Jaw Breaker Joe" and promises to repay Joe a total of $10,500 in one month. What is the effective annual interest rate charged by Joe?

A) 79.6%.
B) 5.0%.
C) 60.0%.
D) 179.6%.