Question 1

The present value (t = 0) of the following cash flow stream is $5,979.04 when discounted at 12 percent annually.What is the value of the missing (t = 2) cash flow?

Accepted Answer

A)  $2,000 
B)  $2,391 
C)  $3,000 
D)  $3,391 
E)  $4,237

Question 2

You are given the following cash flows.What is the present value (t = 0) if the discount rate is 12 percent?

Accepted Answer

A)  $3,277 
B)  $4,804 
C)  $5,302 
D)  $4,289 
E)  $2,804

Question 3

In 1981 the average tuition for one year at a certain state school was $1,800.Thirty years later, in 2011, the average cost was $13,700.What was the growth rate in tuition over the 30-year period?

Accepted Answer

A)  12% 
B)  9% 
C)  6% 
D)  7% 
E)  8%

Question 4

Disregarding risk, if money has time value, the future value of some amount of money always will be more than the amount originally invested, and the present value of some amount to be received in the future is always less than that future amount to be received.

Accepted Answer

A) True 
 B)False

Question 5

Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually.Bank B offers a 2-year CD that is compounded semi-annually.The CDs have identical risk.What is the stated, or simple, rate that Bank B would have to offer to make you indifferent between the two investments?

Accepted Answer

A)  9.67% 
B)  9.76% 
C)  9.83% 
D)  9.87% 
E)  9.93%

Question 6

Which of the following is not a rationale for using the NPV method in capital budgeting?

Accepted Answer

A)  An NPV of zero signifies that the project's cash flows are just sufficient to repay the invested capital and to provide the required rate of return on that capital. 
B)  A project whose NPV is positive will increase the value of the firm if that project is accepted. 
C)  A project is considered acceptable if it has a positive NPV. 
D)  A project is not considered acceptable if it has a negative NPV. 
E)  All of the above are true.

Question 7

All of the following factors can complicate the post-audit process except

Accepted Answer

A)  each element of the cash flow forecast is subject to uncertainty. 
B)  projects sometimes fail to meet expectations for reasons beyond the control of operating executives. 
C)  it is often difficult to separate the operating results of one investment from those of a larger system. 
D)  executives who were responsible for a given decision might have moved on by the time the time the results of the long term project are known. 
E)  the most successful firms, on average, are the ones that put the least emphasis on the post-audit.

Question 8

Which of the following statements is correct?

Accepted Answer

A)  Cash flow time lines are helpful graphical displays for situations involving simple annual interest but are not useful when time periods are more frequent than annual. 
B)  The future value of an annuity due is equal to the future value of an otherwise identical regular annuity with interest compounded on each payment for one additional period. 
C)  There is no precise method of calculating either present values or future values when fractional time periods are involved.We must instead use rough approximations. 
D)  The terminal value of a stream of uneven cash flows is found by simply summing up all the cash flows. 
E)  The annual percentage rate (APR) cannot be equivalent to the effective annual rate (EAR).

Question 9

At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years.How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4%?

Accepted Answer

A)  12 years 
B)  15 years 
C)  18 years 
D)  20 years 
E)  23 years

Question 10

Which of the following statements concerning the internal rate of return is false?

Accepted Answer

A)  The internal rate of return for a capital budgeting project is the same for all firms regardless of their cost of capital. 
B)  A project is acceptable long as the project's internal rate of return is greater than the hurdle rate for the project. 
C)  The internal rate of return is dependent on the timing of the cash flows. 
D)  A project with a positive internal rate of return will always increase the value of the firm if the project is accepted. 
E)  You do not need to know the required rate of return to solve for the internal rate of return.

Question 11

Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years.One is an annuity due, while the other is a regular (or deferred) annuity.If you are a rational wealth-maximizing investor which annuity would you choose?

Accepted Answer

A)  The annuity due. 
B)  The deferred annuity. 
C)  Either one, because as the problem is set up, they have the same present value. 
D)  Without information about the appropriate interest rate, we cannot find the values of the two annuities; hence we cannot tell which is better. 
E)  The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred.

Question 12

One of the potential benefits of investing early for retirement is that an investor can receive greater benefits from the compounding of interest.

Accepted Answer

A) True 
 B)False

Question 13

You have just borrowed $20,000 to buy a new car.The loan agreement calls for 60 monthly payments of $444.89 each to begin one month from today.If the interest is compounded monthly, then what is the effective annual rate on this loan?

Accepted Answer

A)  12.68% 
B)  14.12% 
C)  12.00% 
D)  13.25% 
E)  15.08%

Question 14

Benefits of the post-audit include all of the following except

Accepted Answer

A)  when decision makers are forced to compare their projections to actual outcomes, there is a tendency to improve. 
B)  conscious or unconscious biases are removed. 
C)  negative NPV projects are identified before they begin. 
D)  forecasts are improved. 
E)  all of the above are benefits of the post-audit.

Question 15

Assume you are to receive a 20-year annuity with annual payments of $50.The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 20.You will invest each payment in an account that pays 10 percent.What will be the value in your account at the end of Year 30?

Accepted Answer

A)  $6,354.81 
B)  $7,427.83 
C)  $7,922.33 
D)  $8,591.00 
E)  $6,752.46

Question 16

If it were evaluated with an interest rate of 0 percent, a 10-year regular annuity would have a present value of $3,755.50.If the future (compounded) value of this annuity, evaluated at Year 10, is $5,440.22, what effective annual interest rate must the analyst be using to find the future value?

Accepted Answer

A)  7% 
B)  8% 
C)  9% 
D)  10% 
E)  11%

Question 17

You can deposit your savings at the Darlington National Bank, which offers to pay 12.6 percent interest compounded monthly, or at the Bartlett Bank, which will pay interest of 11.5 percent compounded daily.(Assume 365 days in a year.) Which bank offers the higher effective annual rate?

Accepted Answer

A)  Darlington National Bank. 
B)  Bartlett Bank. 
C)  Both banks offer the same effective rate. 
D)  Cannot be determined from the information provided. 
E)  Workable only if the banks use the same compounding period.

Question 18

Assume that you are graduating, that you plan to work for 4 years, and then to go to law school for 3 years.Right now, going to law school would require $17,000 per year (for tuition, books, living expenses, etc.), but you expect this cost to rise by 8 percent per year in all future years.You now have $25,000 invested in an investment account which pays a simple annual rate of 9 percent, quarterly compounding, and you expect that rate of return to continue into the future.You want to maintain the same standard of living while in law school that $17,000 per year would currently provide.You plan to save and to make 4 equal payments (deposits) which will be added to your account at the end of each of the next 4 years; these new deposits will earn the same rate as your investment account currently earns.How large must each of the 4 payments be in order to permit you to make 3 withdrawals, at the beginning of each of your 3 years in law school? (Note: (1) The first payment is made a year from today and the last payment 4 years from today, (2) the first withdrawal is made 4 years from today, and (3) the withdrawals will not be of a constant amount.)

Accepted Answer

A)  $13,242.67 
B)  $6,562.13 
C)  $10,440.00 
D)  $7,153.56 
E)  $14,922.85

Question 19

Perpetuities represent a series of even cash flows over a finite period of time.

Accepted Answer

A) True 
 B)False

Question 20

If you presently have $6,000 invested at a rate of 15 percent, how many years will it take for your investment to triple? (Round up to obtain a whole number of years if necessary.)

Accepted Answer

A)  2 years 
B)  4 years 
C)  6 years 
D)  8 years 
E)  10 years

Exam 9: Time Value of Money

The present value (t = 0) of the following cash flow stream is $5,979.04 when discounted at 12 percent annually.What is the value of the missing (t = 2) cash flow?

You are given the following cash flows.What is the present value (t = 0) if the discount rate is 12 percent?

In 1981 the average tuition for one year at a certain state school was $1,800.Thirty years later, in 2011, the average cost was $13,700.What was the growth rate in tuition over the 30-year period?

Disregarding risk, if money has time value, the future value of some amount of money always will be more than the amount originally invested, and the present value of some amount to be received in the future is always less than that future amount to be received.

Bank A offers a 2-year certificate of deposit (CD) that pays 10 percent compounded annually.Bank B offers a 2-year CD that is compounded semi-annually.The CDs have identical risk.What is the stated, or simple, rate that Bank B would have to offer to make you indifferent between the two investments?

Which of the following is not a rationale for using the NPV method in capital budgeting?

All of the following factors can complicate the post-audit process except

Which of the following statements is correct?

At an inflation rate of 9 percent, the purchasing power of $1 would be cut in half in 8.04 years.How long to the nearest year would it take the purchasing power of $1 to be cut in half if the inflation rate were only 4%?

Which of the following statements concerning the internal rate of return is false?

Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years.One is an annuity due, while the other is a regular (or deferred) annuity.If you are a rational wealth-maximizing investor which annuity would you choose?

One of the potential benefits of investing early for retirement is that an investor can receive greater benefits from the compounding of interest.

You have just borrowed $20,000 to buy a new car.The loan agreement calls for 60 monthly payments of $444.89 each to begin one month from today.If the interest is compounded monthly, then what is the effective annual rate on this loan?

Benefits of the post-audit include all of the following except

If it were evaluated with an interest rate of 0 percent, a 10-year regular annuity would have a present value of $3,755.50.If the future (compounded) value of this annuity, evaluated at Year 10, is $5,440.22, what effective annual interest rate must the analyst be using to find the future value?

You can deposit your savings at the Darlington National Bank, which offers to pay 12.6 percent interest compounded monthly, or at the Bartlett Bank, which will pay interest of 11.5 percent compounded daily.(Assume 365 days in a year.) Which bank offers the higher effective annual rate?

Perpetuities represent a series of even cash flows over a finite period of time.

If you presently have $6,000 invested at a rate of 15 percent, how many years will it take for your investment to triple? (Round up to obtain a whole number of years if necessary.)