TVM Homework Business Finance 2011 Ver 2

1. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look less appealing in terms of the present value of those cash flows?

a. The discount rate decreases.

b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.

c. The discount rate increases.

d. Statements b and c are correct.

e. Statements a and b are correct.

2. Which of the following statements is most correct?

a. A 5-year $100 annuity due will have a higher present value than a 5- year $100 ordinary annuity.

b. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and same interest rate.

c. If an investment pays 10 percent interest compounded annually, its effective rate will also be 10 percent.

d. Statements a and c are correct.

e. All of the statements above are correct.

3. The future value of a lump sum at the end of five years is $1,000. The nominal interest rate is 10 percent and interest is compounded semiannually. Which of the following statements is most correct?

a. The present value of the $1,000 is greater if interest is compounded monthly rather than semiannually.

b. The effective annual rate is greater than 10 percent.

c. The periodic interest rate is 5 percent.

d. Statements b and c are correct.

e. All of the statements above are correct.

4. Frank Lewis has a 30-year, $100,000 mortgage with a nominal interest rate of 10 percent and monthly compounding. Which of the following statements regarding his mortgage is most correct?

a. The monthly payments will decline over time.

b. The proportion of the monthly payment that represents interest will be lower for the last payment than for the first payment on the loan.

c. The total dollar amount of principal being paid off each month gets larger as the loan approaches maturity.

d. Statements a and c are correct.

e. Statements b and c are correct.

5. You deposited $1,500 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?

a. less than $1,000

b. between $1,000 and $1,026

c. between $1,026 and $1,424

d. between $1,424 and $1,700

e. greater than $1,700

6. What is the future value of a 5-year ordinary annuity with annual payments of $200, evaluated at a 15 percent interest rate?

a. less than $670

b. between $670 and $842

c. between $842 and $1,169.56

d. between $1,169.56 and $1,522.64

e. greater than $1,522.64

7. You have the opportunity to buy a perpetuity that pays $1,600 annually. Your required rate of return on this investment is 15 percent. You should be essentially indifferent to buying or not buying the investment if it were offered at a price of

a. less than $5,000.00

b. between $5,000 and $6,500.00

c. between $6,500 and $9,000

d. between $9,000.00 and $14,000

e. greater than $14,000

8. A real estate investment has the following expected cash flows:

Year Cash Flows

1 $10,000

2 25,000

3 50,000

4 35,000

The discount rate is 8 percent. What is the investments present value?

a. less than $59K

b. between $59K and $75K

c. between $75K and $100K

d. between $100K and $140K

e. greater than $140K

9. Assume that you will receive $6,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $2,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows?

a. less than $10K

b. between $10K and $15K

c. between $15K and $20K

d. between $20K and 30K

e. greater than 30K

10. If a 5-year ordinary annuity has a present value of $1,000, and if the interest rate is 11 percent, what is the amount of each annuity payment?

a. less than $200

b. between $200 and $400

c. between $400 and $800

d. between $800 and $1,200

e. greater than $1,200

11. Which one of the following investments provides the highest effective return?

a. An investment that has a 9.9 percent nominal rate and annual compounding.

b. An investment that has a 9.7 percent nominal rate and daily (365) compounding.

c. An investment that has a 10.0 percent nominal rate and monthly compounding.

d. An investment that has a 10 percent nominal rate and semiannual compounding.

e. An investment that has a 9.6 percent nominal rate and hourly compounding.

12. Your subscription to Joggers World Monthly is about to run out and you have the choice of renewing it by sending in the $20 a year regular rate or of getting a lifetime subscription to the magazine by paying $110. Your cost of capital is 9 percent. How many years would you have to live to make the lifetime subscription the better buy? Payments for the regular subscription are made at the beginning of each year. (Round up if necessary to obtain a whole number of years.)

a. 15 years

b. 10 years

c. 18 years

d. 7 years

e. 8 years

13. Assume you are to receive a 20-year annuity with annual payments of $150. 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?

a. less than $10K

b. between $10K and $15K

c. between $15K and $20K

d. between $20K and 30K

e. greater than 30K

14. You just graduated, and you plan to work for 10 years and then to leave for the Australian Outback bush country. You figure you can save $1,500 a year for the first 5 years and $2,200 a year for the next 5 years. These savings cash flows will start one year from now. In addition, your family has just given you a $5,000 graduation gift. If you put the gift now, and your future savings when they start, into an account that pays 8 percent compounded annually, what will your financial stake be when you leave for Australia 10 years from now?

a. less than $10K

b. between $10K and $15K

c. between $15K and $20K

d. between $20K and 30K

e. greater than 30K

15. Foster Industries has a project that has the following cash flows:

Year Cash Flow

0 -$400.00

1 100.00

2 125.43

3 90.12

4 ?

What cash flow will the project have to generate in the fourth year in order for the project to have a 15 percent rate of return?

a. less than $200

b. between $200 and $400

c. between $400 and $800

d. between $800 and $1,200

e. greater than $1,200

16. You are willing to pay $25,625 to purchase a perpetuity that will pay you and your heirs $2,250 each year, forever. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year annual payment, ordinary annuity instead of a perpetuity?

a. less than $10K

b. between $10K and $15K

c. between $15K and $20K

d. between $20K and 30K

e. greater than 30K

17. Elizabeth has $35,000 in an investment account. Her goal is to have the account grow to $100,000 in 10 years without having to make any additional contributions to the account. What effective annual rate of interest would she need to earn on the account in order to meet her goal?

a. less than 8%

b. between 8% and 10%

c. between 10% and 14%

d. between 14% and 18%

e. greater than 18%

18. You are considering buying a new car. The sticker price is $25,000 and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10 percent and you wish to pay for the car over a 5-year period, what are your monthly car payments?

a. less than $200

b. between $200 and $400

c. between $400 and $800

d. between $800 and $1,200

e. greater than $1,200

19. What is the present value of the following cash flow stream if the interest rate is 16%?

Year 1 $200, year 2 $400, year 3 3000.

20. If you take out an $18,000 car loan for 60 months at an APR of 10%, what is your monthly payment and what is you effective annual interest rate?

21.You could lease a truck for $ 9,800 per year, for six years, or you could buy the truck for $49,000. If your opportunity cost of money is 9%, should you lease or buy?

22. A local bank advertises that if you pay them $100 per year for 10 years, they will pay you $100 forever after that point. If other interest rates available average 9%, is this a good deal?