Question 1

You have saved $47,000 for college and wish to use $15,000 per year.If you use the money as an ordinary annuity and earn 6.15% on your investment,how many years will your annuity last? Use a calculator to determine your answer.

Accepted Answer

A) 4.27 years 
B) 3.13 years 
C) 3.59 years 
D) 3.36 years

Question 2

You have a choice between a lottery lump sum payout of $10,000,000 today or a series of twenty-five annual annuity payments (first payment one year from today).At a discount rate of 6.50%,how large must the annual annuity payments be to make you indifferent between the two choices?

Accepted Answer

A) $819,814.81 
B) $873,102.77 
C) $769,779.17 
D) $400,000.00

Question 3

A wealthy woman just died and left her pet cats the following estate: $50,000 per year for the next 15 years with the first cash flow today.At a discount rate of 3.2%,what is the feline estate worth in today's dollars?

Accepted Answer

A) $588,352.84 
B) $607,180.14 
C) $750,000.00 
D) $774,000.00

Question 4

The last interest payment on a 12-year,6%,$138,000,fully-amortized loan with annual payments will be less than the first interest payment.

Accepted Answer

A) True 
 B)False

Question 5

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity)on a fully amortized loan?

Accepted Answer

A) $0.00 
B) $6,000.00 
C) $8,333.33 
D) $12,161.29

Question 6

Amy Plisko is 23 years old and plans to retire in 32 years when she is 55 years old.Amy just graduated from a university in the West.Upon graduation,she took a job with a starting annual salary of $50,000.Amy asks you to answer the following two questions:
1.If her salary increases at a rate roughly equal to the U.S.long-run average annual rate of inflation over the past 80 years (about 3% per year),how large will her annual salary be in her last year before retirement? (Use 32 years. )
2.If her salary increases at a rate roughly equal to the U.S.long-run average annual rate of return on common stocks over the past 80 years (about 10.5% per year),how large will her annual salary be in her last year before retirement? (Use 32 years. )
After hearing your answers,Amy says,"WOW! That's quite a difference." She decides that she would like an income of $500,000 per year each year in retirement,provided in equal annual end-of-the-year cash flows.These cash flows need to last for 40 years,and her investments would earn an annual rate of return of 7% during her retirement.
Amy's final question to you is how much money must she save in equal annual end-of-the-year cash flows for the next 32 years to provide for her desired retirement,if her investments earn roughly the same rate of return as those earned by U.S.small stocks over the last 80 years (geometric average is about 12% per year).
Use a calculator to determine the answers to the different parts of the problem.

Accepted Answer

The answer of Amy Plisko is 23 years old and...

Question 7

Assume a five-year equal payment amortization schedule with an annual interest rate of 12% and annual payments.If the beginning principal is $8,000,then the first interest payment will be how large?

Accepted Answer

A) $960.00 
B) $1,200.00 
C) $2,219.28 
D) There is not enough information to answer this question.

Question 8

What is the present value of a lottery paid as an annuity due for twenty years if the cash flows are $250,000 per year and the appropriate discount rate is 7.50%?

Accepted Answer

A) $5,000,000.00 
B) $3,186,045.39 
C) $2,739,769.55 
D) $2,548,622.84

Question 9

You have an annuity of equal annual end-of-the-year cash flows of $500 that begin two years from today and last for a total of ten cash flows.Using a discount rate of 4%,what are those cash flows worth in today's dollars?

Accepted Answer

A) $3,899.47 
B) $4,055.45 
C) $4,380.24 
D) $5,000.00

Question 10

You have a choice between a lottery lump sum payout of $5,975,191.24 today or a series of twenty annual annuity payments of $500,000 each (first cash flow one year from today).At what discount rate are you indifferent between the two choices?

Accepted Answer

A) 4.50% 
B) 5.50% 
C) 6.50% 
D) 7.50%

Question 11

Which of the following is NOT an example of annuity cash flows?

Accepted Answer

A) The university tuition bill you pay every month that is always the same 
B) The grocery bill that changes every week 
C) The $3.50 you pay every morning for a bagel and coffee as you run to your first morning class 
D) All of the examples above are annuity cash flows.

Question 12

Which of the following is NOT an example of ordinary annuity cash flows?

Accepted Answer

A) Insurance payments due at the start of the period 
B) Car loans due at the end of the period 
C) Mortgage payments due at the end of the period 
D) All of the examples above are ordinary annuity cash flows.

Question 13

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity)on a discount loan?

Accepted Answer

A) $0.00 
B) $6,000.00 
C) $8,333.33 
D) $12,161.29

Question 14

Johnson has an annuity due that pays $600 per year for 15 years.(Note: There are 15 annual cash flows with the first cash flow occurring today. )What is the value of the cash flows 14 years from today (immediately after the last deposit is made)if they are placed in an account that earns 7.50%?

Accepted Answer

A) $9,000.00 
B) $9,675.00 
C) $15,671.02 
D) $16,846.35

Question 15

Which is greater,the present value of a five-year ordinary annuity of $300 discounted at 10%,or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?

Accepted Answer

A) The first annuity because the cash flows occur sooner. 
B) The second annuity because the cash flows are discounted at a 0% interest rate. 
C) The two annuities are of equal value. 
D) The answer to this question cannot be determined.

Question 16

A/An ________ is a series of equal end-of-the-period cash flows.

Accepted Answer

A) ordinary annuity 
B) annuity due 
C) perpetuity due 
D) None of the above

Question 17

The first interest payment on a 5-year,8%,$100,000,fully-amortized loan with annual payments will be less than the last interest payment.

Accepted Answer

A) True 
 B)False

Question 18

You are presented with two cash flow options: Option Near,a $5,000 annuity for three years,with the first cash flow one year from today,or Option Far,a $5,000 annuity for six years with the first cash flow ten years from today.Assuming an interest rate of 7.0%,which set of cash flows has a greater present value?

Accepted Answer

A) Option Near has a greater PV of $13,121.58 vs.Option Far PV of $12,963.41. 
B) Option Far has a greater PV of $13,121.58 vs.Option Near PV of $12,963.41. 
C) Option Far has a greater PV of $30,000 vs.Option Near PV of $15,000. 
D) Option Near and Option Far have the same PV of $12,963.41.

Question 19

Autorola plans to invest $5,000 per year in equal end-of-the-year amounts at an interest rate of 6% compounded annually.How much will the firm have at the end of four years?

Accepted Answer

The answer of Autorola plans to invest $5,000 per year...

Question 20

You have a choice among three types of loan and wish to pay the LEAST total cash flows.An amortized loan will result in fewer dollars paid out than a discount or an interest-only loan for the same amount,positive interest rate,and time period.

Accepted Answer

A) True 
 B)False

Exam 4: The Time Value of Money Part 2

You have saved $47,000 for college and wish to use $15,000 per year.If you use the money as an ordinary annuity and earn 6.15% on your investment,how many years will your annuity last? Use a calculator to determine your answer.

You have a choice between a lottery lump sum payout of $10,000,000 today or a series of twenty-five annual annuity payments (first payment one year from today) .At a discount rate of 6.50%,how large must the annual annuity payments be to make you indifferent between the two choices?

A wealthy woman just died and left her pet cats the following estate: $50,000 per year for the next 15 years with the first cash flow today.At a discount rate of 3.2%,what is the feline estate worth in today's dollars?

The last interest payment on a 12-year,6%,$138,000,fully-amortized loan with annual payments will be less than the first interest payment.

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity) on a fully amortized loan?

Assume a five-year equal payment amortization schedule with an annual interest rate of 12% and annual payments.If the beginning principal is $8,000,then the first interest payment will be how large?

What is the present value of a lottery paid as an annuity due for twenty years if the cash flows are $250,000 per year and the appropriate discount rate is 7.50%?

You have an annuity of equal annual end-of-the-year cash flows of $500 that begin two years from today and last for a total of ten cash flows.Using a discount rate of 4%,what are those cash flows worth in today's dollars?

You have a choice between a lottery lump sum payout of $5,975,191.24 today or a series of twenty annual annuity payments of $500,000 each (first cash flow one year from today) .At what discount rate are you indifferent between the two choices?

Which of the following is NOT an example of annuity cash flows?

Which of the following is NOT an example of ordinary annuity cash flows?

If you borrow $50,000 at an annual interest rate of 12% for six years,what is the annual payment (prior to maturity) on a discount loan?

Johnson has an annuity due that pays $600 per year for 15 years.(Note: There are 15 annual cash flows with the first cash flow occurring today. ) What is the value of the cash flows 14 years from today (immediately after the last deposit is made) if they are placed in an account that earns 7.50%?

Which is greater,the present value of a five-year ordinary annuity of $300 discounted at 10%,or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?

A/An ________ is a series of equal end-of-the-period cash flows.

The first interest payment on a 5-year,8%,$100,000,fully-amortized loan with annual payments will be less than the last interest payment.

Autorola plans to invest $5,000 per year in equal end-of-the-year amounts at an interest rate of 6% compounded annually.How much will the firm have at the end of four years?

You have a choice among three types of loan and wish to pay the LEAST total cash flows.An amortized loan will result in fewer dollars paid out than a discount or an interest-only loan for the same amount,positive interest rate,and time period.