Question 1

Use the information for the question(s)below.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education.Currently,college tuition,books,fees,and other costs,average $12,500 per year.On average,tuition and other costs have historically increased at a rate of 4% per year.
-Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest,then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to:

Accepted Answer

The answer of Use the information for the question(s)below.
Suppose that...

Question 2

How do you calculate (mathematically)the present value of a(n):
(a)perpetuity
(b)annuity
(c)growing perpetuity
(d)growing annuity

Accepted Answer

The answer of How do you calculate (mathematically)the present value...

Question 3

You have an $8000 balance on your credit card,which charges 18% interest annually (1% per month).If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

Accepted Answer

A) 170 months 
B) 14 months 
C) 162 months 
D) You will never get the card paid off at that rate.

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments. 
B) Most car loans,mortgages,and some bonds are annuities. 
C) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever. 
D) An annuity is a stream of N equal cash flows paid at irregular intervals.

Question 5

You are considering investing in a security that will pay you $80 in interest at the end of each of the next 10 years.If this security is currently selling for $588.81,then the IRR for investing in this security is closest to:

Accepted Answer

A) 6.0% 
B) 7.0% 
C) 6.5% 
D) 5.0%

Question 6

If the current rate of interest is 8%,then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:

Accepted Answer

A) $18,519 
B) $45,761 
C) $9818 
D) $20,000

Question 7

Consider the following timeline detailing a stream of cash flows: 
If the current market rate of interest is 8%,then the future value of this stream of cash flows is closest to:

Accepted Answer

A) $11,699 
B) $10,832 
C) $12,635 
D) $10,339

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) The process of moving a value or cash flow backward in time is known as discounting. 
B) FV =  
C) The process of moving a value or cash flow forward in time is known as compounding. 
D) The value of a cash flow that is moved forward in time is known as its future value.

Question 9

If the appropriate interest rate is 8%,then present value of $500 paid at the beginning of each of the next 40 years is closest to:

Accepted Answer

A) $23 
B) $5962 
C) $6439 
D) $20,000

Question 10

Use the following information to answer the question(s)below.
Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now,$450,000 two years from now,and $650,000 three years from now.
-The Internal Rate of return of this project is closest to:

Accepted Answer

A) 10.2% 
B) 12.2% 
C) 14.2% 
D) 16.2%

Question 11

You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15 year fixed rate mortgage (180 months)at 9% APR (0.75% month).If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:

Accepted Answer

A) $2585 
B) $660 
C) $2535 
D) $1390

Question 12

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year.As the ore closest to the surface is removed it will become more difficult to extract the ore.Therefore,the value of the ore that you mine will decline at a rate of 8% per year forever.If the appropriate interest rate is 6%,then the value of this mining operation is closest to:

Accepted Answer

A) $71,429 
B) $500,000 
C) $166,667 
D) This problem cannot be solved.

Question 13

Which of the following statements regarding growing perpetuities is FALSE?

Accepted Answer

A) We assume that r < g for a growing perpetuity. 
B) PV of a growing perpetuity =  
C) To find the value of a growing perpetuity one cash flow at a time would take forever. 
D) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.

Question 14

Which of the following statements regarding perpetuities is FALSE?

Accepted Answer

A) To find the value of a perpetuity one cash flow at a time would take forever. 
B) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. 
C) PV of a perpetuity =  
D) One example of a perpetuity is the British government bond called a consol.

Question 15

If the appropriate interest rate is 15%,then Nielson Motors should:

Accepted Answer

A) invest in this opportunity since the NPV is positive. 
B) not invest in this opportunity since the NPV is positive. 
C) invest in this opportunity since the NPV is negative. 
D) not invest in this opportunity since the NPV is negative.

Question 16

Suppose that you are considering an investment that will pay you $4000 per year for the next five years.The appropriate rate of interest is 5%.You want to know the present value of the cash flows from this investment.To solve this problem in Microsoft Excel,you would use which of the following excel formulas?

Accepted Answer

A) =PV(.05,5,4000,0,0) 
B) =PV(.05,5,4000,0,1) 
C) =PV(5,.05,4000,0) 
D) =PV(5,5,4000,0)

Question 17

Which of the following statements regarding annuities is FALSE?

Accepted Answer

A) PV of an annuity = C × 
 
B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. 
C) An annuity is a stream of N equal cash flows paid at regular intervals. 
D) Most car loans,mortgages,and some bonds are annuities.

Question 18

If the current rate of interest is 8%,then the future value 20 years from now of an investment that pays $1000 per year and lasts 20 years is closest to:

Accepted Answer

A) $45,762 
B) $36,725 
C) $9818 
D) $93,219

Question 19

Which of the following formulas is INCORRECT?

Accepted Answer

A) PV of a growing annuity = C × 
 
B) PV of an annuity = C × 
 
C) PV of a growing perpetuity =  
D) PV of a perpetuity =

Question 20

If the appropriate interest rate is 8%,then present value of $500 paid at the end of each of the next 40 years is closest to:

Accepted Answer

A) $23 
B) $5962 
C) $6439 
D) $20,0000

Exam 4: The Time Value of Money

How do you calculate (mathematically)the present value of a(n): (a)perpetuity (b)annuity (c)growing perpetuity (d)growing annuity

You have an $8000 balance on your credit card,which charges 18% interest annually (1% per month) .If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

Which of the following statements is FALSE?

You are considering investing in a security that will pay you $80 in interest at the end of each of the next 10 years.If this security is currently selling for $588.81,then the IRR for investing in this security is closest to:

If the current rate of interest is 8%,then the present value of an investment that pays $1000 per year and lasts 20 years is closest to:

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%,then the future value of this stream of cash flows is closest to:

Which of the following statements is FALSE?

If the appropriate interest rate is 8%,then present value of $500 paid at the beginning of each of the next 40 years is closest to:

You are considering purchasing a new home.You will need to borrow $250,000 to purchase the home.A mortgage company offers you a 15 year fixed rate mortgage (180 months) at 9% APR (0.75% month) .If you borrow the money from this mortgage company,your monthly mortgage payment will be closest to:

Which of the following statements regarding growing perpetuities is FALSE?

Which of the following statements regarding perpetuities is FALSE?

If the appropriate interest rate is 15%,then Nielson Motors should:

Which of the following statements regarding annuities is FALSE?

If the current rate of interest is 8%,then the future value 20 years from now of an investment that pays $1000 per year and lasts 20 years is closest to:

Which of the following formulas is INCORRECT?

If the appropriate interest rate is 8%,then present value of $500 paid at the end of each of the next 40 years is closest to: