Question 1

Calculate the depreciation rate of a vehicle if it was bought 5 years ago for $25 000 and can be sold now for $8 200.

Accepted Answer

A) 20% 
B) 32% 
C) 48% 
D) 68% 
E) 80%

Question 2

What is functional loss?

Accepted Answer

A) Functional loss occurs when the asset can still perform its function despite a loss in its market value. 
B) Functional loss occurs when the asset becomes unusable to to misuse. 
C) Functional loss occurs when the asset wears out due to being used for its intended function. 
D) Functional loss occurs when the asset wears out due to the passage of time, whether or not it is used. 
E) Functional loss occurs when the asset can still perform its original function, but that function is no longer valued.

Question 3

Emily is considering two mutually exclusive financial options: (i)to deposit $4 000 in her bank's savings account that pays 4.6% annual interest, or (ii)to purchase a $4 000 one-year guaranteed investment certificate with a monthly interest rate of 0.3%. From an opportunity cost standpoint, by making the decision to deposit $4 000 in the bank account, Emily will

Accepted Answer

A) gain $37.6 by the end of the year. 
B) lose $37.6 by the end of the year. 
C) gain $57.6 by the end of the year. 
D) lose $57.6 by the end of the year. 
E) make zero economic profit.

Question 4

You invest $10 000 at 5% interest rate compounded monthly, what is your accumulated interest at the end of year 2?

Accepted Answer

A) $511.62 
B) $537.79 
C) $1 025.00 
D) $1 049.41 
E) $1 089.41

Question 5

Paul just bought a car for $15 000 and paid in cash. Calculate Paul's opportunity cost as "funds tied up in the car" if you know that otherwise it was possible to invest the money at a 5% annual interest rate compounded monthly for five years.

Accepted Answer

The answer of Paul just bought a car for $15...

Question 6

A hydraulic press has just been purchased. It will have a book value of $6 465 in year 5. The present worth of its salvage value at the end of year 10 is $700, assuming a MARR of 7%. What is the purchase price of the press?

Accepted Answer

The answer of A hydraulic press has just been purchased....

Question 7

Explain the difference between scrap value and salvage value.

Accepted Answer

The answer of Explain the difference between scrap value and...

Question 8

Suppose the nominal rate is 10% per year and interest is compounded every two years. What is the effective annual rate?

Accepted Answer

A) 4.88% 
B) 9.54% 
C) 10.25% 
D) 21% 
E) 44%,

Question 9

Your accounting records show that an asset in use has book value of $7 119.14. The asset cost $30 000 when it was purchased and has been depreciated under the declining balance depreciation method with a 25% depreciation rate. How many years has the asset been in service?

Accepted Answer

A) 1 year 
B) 2 years 
C) 3 years 
D) 4 years 
E) 5 years

Question 10

It is known that the book value of an asset depreciated through declining balance depreciation is
$3 000 in year 3. Purchase price of the asset was $3 800. What is the asset's salvage value at the end of its useful life, which is 10 years?

Accepted Answer

The answer of It is known that the book value...

Question 11

What does the term "market equivalence" imply?

Accepted Answer

A) indifference on the part of a decision maker among available choices 
B) the existence of a mathematical relationship between time and money 
C) the ability to exchange one cash flow for another at minimum cost 
D) the ability to exchange one cash flow for another at no cost 
E) the ability to obtain a zero net cash flow

Question 12

If the effective annual interest rate is 10% and interest is continuously compounded, what is the nominal annual interest rate?

Accepted Answer

A) 9.00% 
B) 9.53% 
C) 10.53% 
D) 11.53% 
E) 12.53%

Question 13

You need to borrow $1 000 for a period of 10 years. Bank A will lend you the money at 10% interest, compounded annually, whereas Bank B will lend you the money at 10% interest, compounded monthly. At the end of ten years, how much more interest will you owe if you borrow from Bank B instead of Bank A?

Accepted Answer

A) $74.59 
B) $92.50 
C) $113.30 
D) $137.39 
E) $148.12

Question 14

Nominal interest rate is calculated by

Accepted Answer

A) summing up all interest rates for all compounding periods. 
B) converting a given interest rate with a compounding period to an equivalent interest rate with a one-year compounding period. 
C) dividing the interest rate per compounding period by the number of compounding periods per year. 
D) multiplying the simple interest rate by the number of years. 
E) multiplying the interest rate per compounding period by the number of compounding periods per year.

Question 15

Milo has just inherited $6 500 and immediately spent the money purchasing an investment certificate. He decided to use the investment certificate to finance his return to the university that he left because of the financial problems at the time. Milo calculated that the interest rate the bank would pay on his investment certificate would allow him to accumulate the $7 600 he would need over 4 years. What interest rate does the bank pay?

Accepted Answer

A) 2.0 
B) 2.5 
C) 3.0 
D) 3.5 
E) 4.0

Question 16

Explain why equivalences are just convenient assumptions. Give examples of two real world financial situations in which these equivalences do not hold

Accepted Answer

The answer of Explain why equivalences are just convenient assumptions....

Question 17

Two assets, A and B, are purchased for the same price. Each loses 10% of its value in the first year. Subsequently, the value of A continues to decline in the same way by declining-balance depreciation, while the value of B continues to decline in the same way by straight-line depreciation. Which will have the greater book value in five years time?

Accepted Answer

A) A 
B) B 
C) Their book values will always be equal. 
D) Their book values will generally be different, but they are exactly equal at the end of the fifth year. 
E) It is impossible to say without knowing the MARR.

Question 18

If the effective equivalent annual interest rate is 16.2%, and interest is compounded daily, what is the corresponding nominal annual interest rate?

Accepted Answer

A) 11% 
B) 13% 
C) 15% 
D) 17% 
E) 19%

Question 19

The principal amount is

Accepted Answer

A) the present value of money. 
B) the future value of money. 
C) the amount of money invested at the prime interest rate. 
D) the annual equivalent value of money. 
E) the difference between the amount of money lent and the amount of money later repaid.

Question 20

J.D.Irving Ltd. is considering a construction project with $2 million initial investment that will last for 10 years. The duration of the construction phase is one year. Once the construction is over, the project starts yielding a constant annual revenue of $1.0 million. By the end of the fifth year the project generates $0.5 million extra revenue. The annual operation and maintenance expenses of $0.5 million will start at year four and last till the end of the project's life. At the very end of the 10-year project the used equipment can be sold for $1.5 million. What cash flow diagram represents this project?

Accepted Answer

A) 
 
B) 
 
C) 
 
D) 
 
E)

Exam 2: Time Value of Money