Chapter 06 Question 1 Which one of the following steps is NOT involved in solving future value problems? a) All of these are necessary steps. b) First, draw a time line to make sure that each cash flow is placed in the correct time period. c) Second, discount each cash flow for its time period. d) Third, add up the values. Question 2 The future value of multiple cash flows is a) none of these. b) greater than the sum of the cash flows. c) equal to the sum of all the cash flows. d) less than the sum of the cash flows. Question 3 Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called a) a growing annuity. b) an ordinary annuity. c) an annuity due. d) a growing perpetuity. Question 4 FV of multiple cash flows: Chandler Corp. is expecting a new project to start producing cash flows, beginning at the end of this year. They expect cash flows to be as follows: 1 2 3 4 5 $643,547 $678,214 $775,908 $778,326 $735,444 If they can reinvest these cash flows to earn a return of 8.2 percent, what is the future value of this cash flow stream at the end of five years? (Round to the nearest dollar.) a) $3,889,256 b) $5,214,690 c) $4,809,112 d) $4,227,118 Question 5 PV of multiple cash flows: Jack Stuart has loaned money to his brother at an interest rate of 5.75 percent. He expects to receive $625, $650, $700, and $800 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.) a) $2,404 b) $2,545 c) $2,713 d) $2,250 Question 6 In an annuity due, cash flows occur at the beginning of each period. a) False b) True Question 7 The present value of an annuity due is less than the present value of an ordinary annuity. a) False b) True . Question 8 The future value of an annuity due is equal to the future value of an ordinary annuity a) True b) False Question 9 The APR is defined as the simple interest charged per period multiplied by the number of periods per year. a) False b) True Question 10 The effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account. a) False b) True