13. You owe your credit company $25,000 and plan to make no payments on your credit card for 1.0 year. Due to your current credit score, your credit card company charges you an APR of 30.0%. If, however, you took measures to improve your credit score by 100points, your APR would improve by 5.0%. How much would you save over 1.0 year if you took actions to improve your credit score? a. $1,525 b. $1,603 c. $1,677 d. $8,622 e. $8,717 14. You are the beneficiary of a trust set up by your grandparents. You will receive your first $1,000 cash six years from now (T=6) when you turn age 25. These payments are intended to help cover your living expenses over the course of your expected lifetime. Assume the appropriate discount rate is 6.0% per annum. What is the present value of this perpetuity? a. $11,749 b. $12,077 C. $12,098 d. $12,454 e. $ 16,667 15. You have $1000 in a savings account today (T=O). Approximately how much longer would it take for your investment to double (i.e. to become worth $2000) if you earned 4.0% on your savings as opposed to 12.0% at the end of every calendar year? Hint: Think Rule of 72. a. 6 years b. 8 years c. 12 years d. 16 years e. 18 years 16. Today is January 19, 2020 (T=0). You take out a 30 year fully amortizing mortgage of $300,000. Payments are made at the end of each calendar month. The loan has a fixed annual rate of 5.0% (or 5.0%/12 per month). Approximately how much is each payment? a. $833 b. $875 c. $1,610 d. $1,626 e. $1,729 17. Today is January 19, 2020 (T=0). You take out a 30 year fully amortizing mortgage of $300,000. Payments are made at the end of each calendar month. The loan has a fixed annual rate of 5.0% (or 5.0%/12 per month). Ignore your answer to the previous question and assume you try to pay off the mortgage early by making payments of $2,000 instead. Approximately how payments will you have to make until you have at least $100,000 of equity in your home? a. 106 b. 107 c. 179 d. 180 181 18. Today (T=0), you deposit $250.00 in a savings account. You make no additional deposits and no withdrawals over the next 10 years (T=10). In 10 years, you have $539.73 in your savings account. Assuming a constant interest rate, the balance of you savings account in 5 years (T=5) is closest to: a. $342 b. $367 c. $378 d. $394 e. $400 19. Assuming a discount rate of 8%, a cash flow of $1.00 two years from now (T=2) a. is worth about 16.6% less than a $1.00 cash flow received today (T=0) b. is worth about 14.3% less than a $1.00 cash flow received today (T=0) c. is worth about 13.0% less than a $1.00 cash flow received today (T=0) d. is worth about 85.7% more than a $1.00 cash flow received today (T=0) e. is worth about 87.0% more than a $1.00 cash flow received today (T=0) Use the following information about Company Y to help answer problems 20-22. Today (T=0), Company Y proposes to invest in project 1 or project 2 The appropriate discount rate is 8.0% Each project's cash flows are forecasted below Project 1 Project 2 T=0 $ (340) $ (400) T=1 $ 80 $ 85 T=2 $ 80$ 90 T=3 $ 80 $ 95 T=4 $ 80 $ 100 T=5 $ 80 $ 105 TE6 $ 80 $ 110 20. The discounted payback period for Project 1 is closest to: a. 51 months b. 53 months c. 63 months d. 65 months e. 67 months 21. The internal rate of return of Project 1 is closest to: a. 10.8% b. 11.0% c. 11.8% d. 12.0% e. 17.8% 22. The crossover rate for the projects is closest to: a. 11.2% b. 13.4% c. 14.3% d. 16.4% e. 17.3% 23. Assume the appropriate discount rate for each of the following projects (1,2,3) is 7.25% per period and the projects are mutually exclusive. Based on NPV, which of the following projects in management most likely to pursue? Project 1 Project 2 Project 3 T=0 $ (100) $ (100) $ (100) T=1 $ 60 $ 50 $ 210 T=2 $ 50 $ 61 $ (110) a. b. 1 d. II & III e. None of the projects 24. A company estimates an NPV of a project under three different set of assumptions (Bear, Base, Bull) to evaluate forecasting risk management agrees to undertake the project if the weighted average NPV for the three different scenarios (Bear, Base, Bull) is positive. Based on the scenario analysis performed, the company will pursue the project. Evaluate the underlined words in italics. True or False? Scenerio Bear Base Bull $ $ $ NPV Probability (100) 30.00% 35 50.00% 65 20.00% a. b. True False 25. Assume management has found profitable investment opportunities, but lacks the funds to undertake one or more of these opportunities. This situation is most closely related to the concept of: a. Managerial options b. Sensitivity analysis c. Forecasting risk d. Capital rationing e. Opportunity costs