Question 1

At an annual interest rate of 7%,the present value of this timeline in year 0 is closest to:

Accepted Answer

A)  $3,080 
B)  $3,600 
C)  $3,770 
D)  $4,035

Question 2

Consider a growing perpetuity that will pay $100 in one year.Each year after that,you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment.This pattern of payments will continue forever.If the interest rate is 11%,then the value of this perpetuity is closest to:

Accepted Answer

A)  $1,667 
B)  $588 
C)  $2,000 
D)  $909

Question 3

Use the table for the question(s) below.
 
-Draw a timeline detailing the cash flows from investment "A."

Accepted Answer

The answer of Use the table for the question(s) below.
...

Question 4

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

Accepted Answer

A)  $22,871 
B)  $21,211 
C)  $24,074 
D)  $26,000

Question 5

Which of the following statements is FALSE?

Accepted Answer

A)  Finding the present value and compounding are the same. 
B)  A dollar today and a dollar in one year are not equivalent. 
C)  If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. 
D)  The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

Question 6

Consider the following time line:  If the current market rate of interest is 8%,then the present value of this timeline is closest to:

Accepted Answer

A)  $1000 
B)  $857 
C)  $860 
D)  $926

Question 7

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 8

Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that your son remains in this private school through high school and that your current interest rate is 6%,then the present value of your son's private school education is closest to:

Accepted Answer

A)  $106,230 
B)  $156,000 
C)  $137,900 
D)  This problem cannot be solved.

Question 9

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 10

Wyatt oil is considering drilling a new self sustaining oil well at a cost of $1,000,000.This well will produce $100,000 worth of oil during the first year,but as oil is removed from the well the amount of oil produced will decline by 2%,per year forever.If the Wyatt oil's appropriate interest rate is 8%,then the NPV of this oil well is closest to:

Accepted Answer

A)  -$250,000 
B)  $0 
C)  $250,000 
D)  $1,000,000

Question 11

Assume that you are 30 years old today,and that you are planning on retiring at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31^st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.At retirement (age 65)you will begin withdrawing equal annual payments to pay for your living expenses during retirement (on your 65th birthday).If you expect to die one day before your 101st birthday (Your last withdraw will be on your 100th birthday)and if the annual rate of return is 7%,then how much money will you have to spend in each of your golden years of retirement?

Accepted Answer

The answer of Assume that you are 30 years old...

Question 12

You work for a pharmaceutical company that has developed a new drug.The patent on the drug will last for 17 years.You expect that the drug will produce cash flows of $10 million in its first year and that this amount will grow at a rate of 4% per year for the next 17 years.Once the patent expires,other pharmaceutical companies will be able to produce generic equivalents of your drug and competition will drive any future profits to zero.If the interest rate is 12% per year,then the present value of producing this drug is closest to:

Accepted Answer

A)  $71 million 
B)  $90 million 
C)  $170 million 
D)  $105 million

Question 13

Consider the following timeline:  If the current market rate of interest is 8%,then the value as of year 1 is closest to:

Accepted Answer

A)  $0 
B)  $1003 
C)  $540 
D)  $77

Question 14

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)  $5,962 
C)  $6,439 
D)  $20,0000

Question 15

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)  $2,585 
B)  $660 
C)  $2,535 
D)  $1,390

Question 16

Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years or to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years in the amount of $3,184,000.If the interest rate on the loan is 6%,then the annual payment the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:

Accepted Answer

A)  $2,673,000 
B)  $2,000,000 
C)  $1,673,000 
D)  $1,000,000

Question 17

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 costs continue to increase an average of 4% per year,tuition and other costs for one year for this student in 18 years when she enters college will be closest to:

Accepted Answer

A)  $12,500 
B)  $21,500 
C)  $320,568 
D)  $25,323

Question 18

You have an $8,000 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 19

Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years of $1,000,000 each.The bank has offered to allow Taggart Transcontinental to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years.If the interest rate on the loan is 6%,then the final payment that the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:

Accepted Answer

A)  $2,673,000 
B)  $3,000,000 
C)  $3,184,000 
D)  $3,375,000

Question 20

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.
-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.

Exam 4: The Time Value of Money

At an annual interest rate of 7%,the present value of this timeline in year 0 is closest to:

Use the table for the question(s) below. -Draw a timeline detailing the cash flows from investment "A."

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

Which of the following statements is FALSE?

Consider the following time line: If the current market rate of interest is 8%,then the present value of this timeline is closest to:

Which of the following statements regarding annuities 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:

Consider the following timeline: If the current market rate of interest is 8%,then the value as of year 1 is closest to:

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:

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:

You have an $8,000 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?