Question 1

The value of a five-year annuity is equal to the sum of two perpetuities. One makes its first payment in year 1, and the other makes its first payment in year 6.

Accepted Answer

A) True 
 B)False

Question 2

If the three-year present value annuity factor is 2.673 and the two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the three years?

Accepted Answer

A) $1.19 
B) $0.84 
C) $0.89 
D) $0.92

Question 3

Which of the following is generally considered an example of a perpetuity?

Accepted Answer

A) Interest payments on a 10-year bond 
B) Interest payments on a 30-year bond 
C) Interest payments on a consol 
D) Interest payments on government bonds

Question 4

Which of the following statements is true?

Accepted Answer

A) The process of discounting is the inverse of the process of compounding. 
B) Ending balances using simple interest are always greater than ending balances using compound interest at positive interest rates. 
C) The present value of an annuity due is always less than the present value of an equivalent ordinary annuity at positive interest rates. 
D) The future value of an annuity due is always less than the present value of an equivalent ordinary annuity at positive interest rates.

Question 5

What is the net present value of the following cash flow sequence at a discount rate of 11 percent?

Accepted Answer

A) $69,108.03 
B) $231,432.51 
C) $80,000.00 
D) $88,000.00

Question 6

If the present value annuity factor at 10 percent for 10 years is 6.1446, what is the equivalent future value annuity factor?

Accepted Answer

A) 3.1080 
B) 15.9375 
C) 2.5937 
D) 8.4132

Question 7

Mr. Hopper expects to retire in 30 years, and he wishes to accumulate $1,000,000 in his retirement fund by that time. If the interest rate is 12 percent per year, how much should Mr. Hopper put into his retirement fund at the end of each year in order to achieve this goal?

Accepted Answer

A) $4,143.66 
B) $8,287.32 
C) $4,000.00 
D) $12,483.17

Question 8

An investment having a 10.47 percent effective annual rate (EAR)has what APR? (Assume monthly compounding.)

Accepted Answer

A) 10.99 percent 
B) 9.57 percent 
C) 10.00 percent 
D) 8.87 percent

Question 9

If the five-year present value annuity factor is 3.60478 and the four-year present value annuity factor is 3.03735, what is the present value of the $1 received at the end of five years?

Accepted Answer

A) $0.63552 
B) $1.76233 
C) $0.56743 
D) $1.2132

Question 10

The present value of $100 expected two years from today at a discount rate of 6 percent is

Accepted Answer

A) $112.36. 
B) $106.00. 
C) $100.00. 
D) $89.00.

Question 11

The rate of return, discount rate, hurdle rate, and opportunity cost of capital all have the same meaning.

Accepted Answer

A) True 
 B)False

Question 12

What is the present value of a $1,000 per year annuity for five years at an interest rate of 12 percent?

Accepted Answer

A) $6,352.85 
B) $3,604.78 
C) $567.43 
D) $2,743.28

Question 13

A dollar today is worth more than a dollar tomorrow if the interest rate is positive.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements regarding the NPV rule and the rate of return rule is false?

Accepted Answer

A) Accept a project if its NPV > 0. 
B) Reject a project if the NPV  0. 
D) Accept a project if its rate of return > opportunity cost of capital.

Question 16

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

Accepted Answer

A) 10 percent 
B) 20 percent 
C) 30 percent 
D) 40 percent

Question 17

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 percent annual interest rate, what is the value of this trust?

Accepted Answer

A) $850,729 
B) $918,787 
C) $1,000,000 
D) $1,250,000

Question 18

One can find a project's net present value by subtracting the present value of its required investment from the present value of its future cash flows.

Accepted Answer

A) True 
 B)False

Question 19

If the present value of $250 expected one year from today is $200, what is the one-year discount rate?

Accepted Answer

A) 10 percent 
B) 20 percent 
C) 25 percent 
D) 30 percent

Question 20

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

Accepted Answer

A) net present value is greater than the cost of investment. 
B) net present value is greater than the present value of cash flows. 
C) net present value is positive. 
D) net present value is negative.

Exam 2: How to Calculate Present Values

The value of a five-year annuity is equal to the sum of two perpetuities. One makes its first payment in year 1, and the other makes its first payment in year 6.

If the three-year present value annuity factor is 2.673 and the two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the three years?

Which of the following is generally considered an example of a perpetuity?

Which of the following statements is true?

What is the net present value of the following cash flow sequence at a discount rate of 11 percent?

If the present value annuity factor at 10 percent for 10 years is 6.1446, what is the equivalent future value annuity factor?

Mr. Hopper expects to retire in 30 years, and he wishes to accumulate $1,000,000 in his retirement fund by that time. If the interest rate is 12 percent per year, how much should Mr. Hopper put into his retirement fund at the end of each year in order to achieve this goal?

An investment having a 10.47 percent effective annual rate (EAR) has what APR? (Assume monthly compounding.)

If the five-year present value annuity factor is 3.60478 and the four-year present value annuity factor is 3.03735, what is the present value of the $1 received at the end of five years?

The present value of $100 expected two years from today at a discount rate of 6 percent is

The rate of return, discount rate, hurdle rate, and opportunity cost of capital all have the same meaning.

What is the present value of a $1,000 per year annuity for five years at an interest rate of 12 percent?

A dollar today is worth more than a dollar tomorrow if the interest rate is positive.

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

Which of the following statements regarding the NPV rule and the rate of return rule is false?

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

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 percent annual interest rate, what is the value of this trust?

One can find a project's net present value by subtracting the present value of its required investment from the present value of its future cash flows.

If the present value of $250 expected one year from today is $200, what is the one-year discount rate?

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