1.

The city of Pawnee wants to invest in new maintenance equipment for the Parks & Rec department. The cost of the equipment is $100,000 and will lead to $25,000 in savings annually for 15 years. If Pawnee is using payback period as their measure for the decision, should they invest if their required payback period is 5 years and the appropriate discount rate is 15%?

A) No, because the 7-year payback is higher than the required 5 years

B) No, because the 4-year payback is lower than the required 5 years

C) Yes, because the 4-year payback is lower than the required 5 years

D) Yes, because the 7-year payback is higher than the required 5 years

E) No, because the project will never recover its initial investment

2.

Andy is trying to start a shoe shine stand and is looking for investors. If you invest in his shoe shine stand he promises that over the next five years he will reward you with the following cash flows: $33, $78, $146, $197, $205. What is the value of these future cash flows if the appropriate discount rate is 10%?

A) $659

B) $552

C) $593

D) $409

E) $466

3.

Your friend offers to pay you in the form of a 5-year annuity of $2,000 per year in exchange for your car. If the annual interest rate is 7.0%, what is the present value of this annuity?

A) $10,000

B) $8,200

C) $5,714

D) $28,571

E) $11,501

4.

Homer makes a payment of $35,000 a year on his house. At the end of 30 years, he's paid off his initial $600,000 loan. What was his approximate annual interest rate?

A) 2.5%

B) 9.9%

C) 7.9%

D) 75.0%

E) 4.1%

5.

Your friend wants to borrow $500 from you and gives you three options for repayment. Assuming a discount rate of 7%, which of the following options should you choose?

Option A: $625 lump sum paid 4 years from now

Option B: $550 lump sum paid 3 years from now

Option C: $60 a year for the next 10 years

A) Option B because it is the highest net present value

B) You should not lend the money because all options are negative NPV investments

C) Option A because it is the highest net present value

D) Option C because it is the highest net present value

E) You are indifferent because they all have the same net present value

6.

Your Aunt needs $12,500 in 10 years. Her investment will return 5.25%. How much money does she need to invest today to reach her goal?

A) $7,494

B) $95,361

C) $20,851

D) $1,639

E) $159,070

7.

Giant Industries borrows $225 million at a rate of 6.20% to finance a new plant. They will fully repay the loan with annual payments in 20 years. How much will they pay in total over the 20 years to repay the loan in full?

A) $398,724,325

B) $164,691,937

C) $504,000,000

D) $423,445,223

E) $225,000,000

8.

Ann will inherit a lump sum amount of $725,000 that is payable in 13 years. The current rate of return is 4.5%. What is the present value of the lump sum?

A) $58,279

B) $409,097

C) $1,284,842

D) $424,125

E) $98,834

9.

Jerry borrows $25,000 to buy a new car. His loan will be repaid with annual payments over the next 7 years at an interest rate of 5.5%. How much will Tom pay in INTEREST over the life of the loan?

A) $1,375

B) $11,367

C) $7,546

D) $5,794

E) $9,625

10.

Leslie plans on retiring in 15 years by purchasing a house on the coast. She estimates she will need $1,250,000 saved at that time and is starting now. What payment would Leslie need to make yearly into a savings account with a tax-rate of 35% and an average market return of 7.5%?

A) $15,987

B) $83,333

C) $5,556

D) $58,475

E) $47,859

11.

You are planning to retire in 40 years. You plan to live for 30 years after retirement and can live on $70,000 a year. How much do you need to save each year until retirement in order to retire with enough money saved? Assume interest rates of 10% and that you $0 left when you die.

A) $365

B) $1,491

C) $4,161

D) $4,745

E) $16,497

12.

Diane took out a $325,000 home mortgage with a 4.25% interest rate and equal annual payments. How much will she have to pay annually to repay the loan in 15 years?

A) $2,858

B) $11,605

C) $29,744

D) $21,667

E) $13,813

13.

Claire took out a $400,000 home mortgage with a 6.5% interest rate and equal annual payments over 10 years. How much will she still owe in principal on the house after her first payment?

A) $360,000

B) $370,358

C) $500,777

D) $240,793

E) $344,358

14.

Spacely Space Sprockets requires a rate of return of 10% on its investments. The firm is considering investing in a project that will generate cash flows of $1 million, $7 million, and $15 million over the next 3 years. If the upfront investment for the project is $16 million, how would you advise Spacely Space Sprockets?

A) Invest in the project because the NPV is positive $23 million

B) Invest in the project because the IRR is 37.4%, which exceeds the 10% discount rate

C) Invest in the project because the NPV is positive $7 million

D) Do not invest in the project because the NPV is negative $14 million

E) Invest in the project because the IRR is 15.1%, which exceeds the 10% discount rate

15.

JoePa Industries recently bought a new plant for $35 million and expects cash flows generated from the investment in the next four years to be: $22 million, $25 million, $20 million, and $21 million. Using a discount rate of 9%, calculate the companys NPV (rounded to the nearest million).

A) $5 million

B) $37 million

C) $53 million

D) $88 million

E) $43 million

16.

How much would you pay each year if you bought a $25,000 car that was fully financed with a 7% auto loan that lasted 5 years (assuming payments are annual)?

A) $6,097

B) $1,750

C) $30,486

D) $5,486

E) $8,750

17.

Upon graduating from Penn State, Meaghan has $46,400 worth of student loans with an interest rate of 7.50%. How many years must the loan be if his annual payment budget is $6,000?

A) 15 Years

B) 18 Years

C) 12 years

D) 10 Years

E) 5 Years

18.

If you took out a $300,000 mortgage loan to be repaid over 20 years at 5.25%, calculate the amount of principal reduction in the first year.

A) $15,750

B) $15,750

C) $24,586

D) $8,836

E) $19,557

19.

Initech invests in a new plant for $250 thousand. The investment is expected to generate cash flows in the next 4 years of: $65 thousand, $78 thousand, $82 thousand, and $110 thousand. Calculate the IRR of the project.

A) 8.5%

B) 12.0%

C) 4.0%

D) 11.7%

E) 15.9%

20.

The Local Bank Inc. offers to lend you $2,000 which you will pay off in 15 annual payments of $180. What interest rate is the bank charging you?

A) 35.0%

B) 2.3%

C) 17.4%

D) 4.0%

E) 2.1%

21.

Given the following information, in which order would you choose the following projects based on the profitability index?

Project A (NPV of cash flows: $80,000, Investment Cost: $60,000)

Project B (NPV of cash flows: $85,000, Investment Cost: $55,000)

Project C (NPV of cash flows: $150,000, Investment Cost: $120,000)

A) Project A, Project C then Project B

B) Project A, Project B then Project C

C) Project B, Project C then Project A

D) Project B, Project A then Project C

E) Project C, Project A then Project B

22.

Woolridge LP is investing is considering investing in a project that will cost $100,000 and will generate $21,000 in cash flows for the next 8 years. Assuming a Discount Rate of 12%, which of the following is true?

A) The projects IRR is 19.9%

B) All of the above are true

C) The projects profitability index is .25

D) The projects payback period is 7 years

E) The projects NPV is $4,320.44

23.

Which of the following is true regarding Internal Rate of Return (IRR)?

A) The higher the up-front cost of a project, the higher the IRR

B) The lower the IRR of a project, the more likely a company is to invest in the project

C) IRR does not account for the risk or timing of cash flows

D) The IRR rule is to invest in projects with a positive IRR

E) IRR is the rate at which the NPV of a project is zero

24.

Which of the following is true regarding Net Present Value (NPV) analysis?

A) Payback period is considered a better measure of investment return than NPV

B) A lower discount rate increases the NPV of a project

C) The NPV of a project does not influence the value of the firm

D) NPV does not account for risk and time of cash flows

E) The NPV rule is to invest in projects with a negative NPV

25.

Which of the following is NOT part of the Discounted Cash Flow approach?

A) Calculating the price of an investment

B) Determining the correct discount rate

C) Multiplying future cash flows by correct discount factors

D) Adding the present value of all expected future cash flows

E) Developing a set of expected cash flows