Orange: Financial Management - Chapter 6 Discounted Cash Flow Valuation

Chapter 6 Discounted Cash Flow Valuation

An ordinary annuity is best defined by which one of the following?

A.	increasing payments paid for a definitive period of time

B.	increasing payments paid forever

C.	equal payments paid at regular intervals over a stated time period

D.	equal payments paid at regular intervals of time on an ongoing basis

E.	unequal payments that occur at set intervals for a limited period of time

Refer to section 6.2

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Annuity

Which one of the following accurately defines a perpetuity?

A.	a limited number of equal payments paid in even time increments

B.	payments of equal amounts that are paid irregularly but indefinitely

C.	varying amounts that are paid at even intervals forever

D.	unending equal payments paid at equal time intervals

E.	unending equal payments paid at either equal or unequal time intervals

Refer to section 6.2

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Perpetuity

Which one of the following terms is used to identify a British perpetuity?

A.	ordinary annuity

B.	amortized cash flow

C.	annuity due

D.	discounted loan

consol

Refer to section 6.2

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Consol

The interest rate that is quoted by a lender is referred to as which one of the following?

A.	stated interest rate

B.	compound rate

C.	effective annual rate

D.	simple rate

E.	common rate

Refer to section 6.3

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3
Topic: Stated rate

A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?

A.	stated rate

B.	discounted annual rate

C.	effective annual rate

D.	periodic monthly rate

E.	consolidated monthly rate

Refer to section 6.3

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3
Topic: Effective annual rate

What is the interest rate charged per period multiplied by the number of periods per year called?

A.	effective annual rate

B.	annual percentage rate

C.	periodic interest rate

D.	compound interest rate

E.	daily interest rate

Refer to section 6.3

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3
Topic: Annual percentage rate

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

amortized

B.	continuous

balloon

D.	pure discount

E.	interest-only

Refer to section 6.4

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4
Topic: Pure discount loan

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?

A.	amortized loan

B.	modified loan

C.	balloon loan

D.	pure discount loan

E.	interest-only loan

Refer to section 6.4

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4
Topic: Interest-only loan

Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal?

A.	amortized loan

B.	modified loan

C.	balloon loan

D.	pure discount loan

E.	interest-only loan

Refer to section 6.4

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4
Topic: Amortized loan

10.

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?

A.	amortized loan

B.	continuing loan

C.	balloon loan

D.	remainder loan

E.	interest-only loan

Refer to section 6.4

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4
Topic: Balloon loan

11.

You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities?

A.	These two annuities have equal present values but unequal futures values at the end of year five.

B.	These two annuities have equal present values as of today and equal future values at the end of year five.

C.	Annuity B is an annuity due.

D.	Annuity A has a smaller future value than annuity B.

E.	Annuity B has a smaller present value than annuity A.

Refer to section 6.2

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Annuity present and future values

12.

You are comparing two investment options that each pay 5 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

A.	Both options are of equal value given that they both provide $12,000 of income.

B.	Option A has the higher future value at the end of year three.

C.	Option B has a higher present value at time zero than does option A.

D.	Option B is a perpetuity.

E.	Option A is an annuity.

Refer to sections 6.1 and 6.2

13.

You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects?

I. Both projects have the same future value at the end of year 4, given a positive rate of return.
II. Both projects have the same future value given a zero rate of return.
III. Project X has a higher present value than Project Y, given a positive discount rate.
IV. Project Y has a higher present value than Project X, given a positive discount rate.

II only

B.	I and III only

C.	II and III only

D.	II and IV only

E.	I, II, and IV only

Refer to section 6.1

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-01 How to determine the future and present value of investments with multiple cash flows.
Section: 6.1
Topic: Present and future values

14.

Which one of the following statements is correct given the following two sets of project cash flows?

A.	The cash flows for Project B are an annuity, but those of Project A are not.

B.	Both sets of cash flows have equal present values as of time zero given a positive discount rate.

C.	The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three.

D.	The present value of Project A cannot be computed because the second cash flow is equal to zero.

E.	As long as the discount rate is positive, Project B will always be worth less today than will Project A.

Refer to section 6.1

15.

Which one of the following statements related to annuities and perpetuities is correct?

A.	An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually.

B.	A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.

C.	Most loans are a form of a perpetuity.

D.	The present value of a perpetuity cannot be computed, but the future value can.

E.	Perpetuities are finite but annuities are not.

Refer to section 6.2

16.

Which of the following statements related to interest rates are correct?

I. Annual interest rates consider the effect of interest earned on reinvested interest payments.
II. When comparing loans, you should compare the effective annual rates.
III. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers.
IV. Annual and effective interest rates are equal when interest is compounded annually.

A.	I and II only

B.	II and III only

C.	II and IV only

D.	I, II, and III only

E.	II, III, and IV only

Refer to section 6.3

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3
Topic: Interest rate

17.

Which one of the following statements concerning interest rates is correct?

A.	Savers would prefer annual compounding over monthly compounding.

B.	The effective annual rate decreases as the number of compounding periods per year increases.

C.	The effective annual rate equals the annual percentage rate when interest is compounded annually.

D.	Borrowers would prefer monthly compounding over annual compounding.

E.	For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

Refer to section 6.3

AACSB: Analytic
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 06-04 How interest rates are quoted (and misquoted).
Section: 6.3
Topic: Interest rate

18.

Which one of these statements related to growing annuities and perpetuities is correct?

A.	The cash flow used in the growing annuity formula is the initial cash flow at time zero.

B.	Growth rates cannot be applied to perpetuities if you wish to compute the present value.

C.	The future value of an annuity will decrease if the growth rate is increased.

D.	An increase in the rate of growth will decrease the present value of an annuity.

E.	The present value of a growing perpetuity will decrease if the discount rate is increased.

Refer to section 6.2

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-01 How to determine the future and present value of investments with multiple cash flows.
Section: 6.2
Topic: Growing annuities and perpetuities

19.

Which one of the following statements correctly states a relationship?

A.	Time and future values are inversely related, all else held constant.

B.	Interest rates and time are positively related, all else held constant.

C.	An increase in the discount rate increases the present value, given positive rates.

D.	An increase in time increases the future value given a zero rate of interest.

E.	Time and present value are inversely related, all else held constant.

Refer to section 6.3

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.3
Topic: Time value relationships

20.

Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate?

annual

B.	semi-annual

monthly

daily

E.	continuous

Refer to section 6.3

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.3
Topic: Interest compounding

21.

The entire repayment of which one of the following loans is computed simply by computing a single future value?

A.	interest-only loan

B.	balloon loan

C.	amortized loan

D.	pure discount loan

E.	bullet loan

Refer to section 6.4

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4
Topic: Pure discount loan

22.

How is the principal amount of an interest-only loan repaid?

A.	The principal is forgiven over the loan period so does not have to be repaid.

B.	The principal is repaid in equal increments and included in each loan payment.

C.	The principal is repaid in a lump sum at the end of the loan period.

D.	The principal is repaid in equal annual payments.

E.	The principal is repaid in increasing increments through regular monthly payments.

Refer to section 6.4

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4
Topic: Interest-only loan

23.

An amortized loan:

A.	requires the principal amount to be repaid in even increments over the life of the loan.

B.	may have equal or increasing amounts applied to the principal from each loan payment.

C.	requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term.

D.	requires that all payments be equal in amount and include both principal and interest.

E.	repays both the principal and the interest in one lump sum at the end of the loan term.

Refer to section 6.4

AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4
Topic: Amortized loan

24.

You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.

A.	interest-only loan

B.	amortized loan with equal principal payments

C.	amortized loan with equal loan payments

D.	discount loan

E.	balloon loan where 50 percent of the principal is repaid as a balloon payment

Refer to section 6.4

AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 06-03 How loans are amortized or paid off.
Section: 6.4
Topic: Loan types

25.

Your grandmother is gifting you $125 a month for four years while you attend college to earn your bachelor's degree. At a 6.5 percent discount rate, what are these payments worth to you on the day you enter college?

$5,201.16

$5,270.94

$5,509.19

$5,608.87

$5,800.00

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-01 How to determine the future and present value of investments with multiple cash flows.
Section: 6.2
Topic: Annuity present value

26.

You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you today?

A.	$172,252.71

B.	$178,411.06

C.	$181,338.40

D.	$185,333.33

E.	$190,450.25

27.

Phil can afford $200 a month for 5 years for a car loan. If the interest rate is 7.5 percent, how much can he afford to borrow to purchase a car?

$8,750.00

$9,348.03

$9,981.06

D.	$10,266.67

E.	$10,400.00

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Loan amount

28.

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money. Which option should you take and why?

A.	You should accept the payments because they are worth $209,414 to you today.

B.	You should accept the payments because they are worth $247,800 to you today.

C.	You should accept the payments because they are worth $336,000 to you today.

D.	You should accept the $200,000 because the payments are only worth $189,311 to you today.

E.	You should accept the $200,000 because the payments are only worth $195,413 to you today.

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Annuity present value

29.

Your employer contributes $50 a week to your retirement plan. Assume that you work for your employer for another 20 years and that the applicable discount rate is 9 percent. Given these assumptions, what is this employee benefit worth to you today?

A.	$24,106.15

B.	$24,618.46

C.	$25,211.11

D.	$25,306.16

E.	$25,987.74

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Present value

30.

The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 4.5 percent interest compounded monthly. The first deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years?

A.	$80,459.07

B.	$80,760.79

C.	$81,068.18

D.	$81,333.33

E.	$81,548.20

31.

You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $30 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2 percent interest per month. How much money are you borrowing?

$164.09

$168.22

$169.50

$170.68

$171.40

32.

You buy an annuity that will pay you $24,000 a year for 25 years. The payments are paid on the first day of each year. What is the value of this annuity today if the discount rate is 8.5 percent?

$241,309

$245,621

$251,409

$258,319

$266,498

33.

You are scheduled to receive annual payments of $5,100 for each of the next 7 years. The discount rate is 10 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

$2,483

$2,513

$2,721

$2,727

$2,804

Difference = $27,312 - $24,829 = $2,483
Note: The difference = 0.1 × $24,829 = $2,483

AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 06-01 How to determine the future and present value of investments with multiple cash flows.
Section: 6.2
Topic: Annuity present value

34.

You are comparing two annuities with equal present values. The applicable discount rate is 8.75 percent. One annuity pays $5,000 on the first day of each year for 20 years. How much does the second annuity pay each year for 20 years if it pays at the end of each year?

$5,211

$5,267

$5,309

$5,390

$5,438

Because each payment is received one year later, then the cash flow has to equal:
$5,000 × (1 + 0.0875) = $5,438

AACSB: Analytic
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Annuity comparison

35.

Trish receives $450 on the first of each month. Josh receives $450 on the last day of each month. Both Trish and Josh will receive payments for next four years. At a 9.5 percent discount rate, what is the difference in the present value of these two sets of payments?

$141.80

$151.06

$154.30

$159.08

$162.50

36.

What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume annual compounding.

$301,115

$306,492

$310,868

$342,908

$347,267

37.

What is the future value of $12,000 a year for 25 years at 12 percent interest?

$878,406

B.	$1,600,006

C.	$1,711,414

D.	$1,989,476

E.	$2,021,223

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Future value

38.

Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How much will she have in her account at the end of 45 years?

A.	$1,806,429

B.	$1,838,369

C.	$2,211,407

D.	$2,333,572

E.	$2,508,316

39.

Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years?

$12,093

$12,113

$12,127

$12,211

$12,219

Difference = $198,145.42 - $186,052.04 = $12,093
Note: Difference = $186,052.04 × 0.065 = $12,093

40.

You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at 8.6 percent interest. What is the amount of each payment?

$287.71

$291.40

$301.12

$342.76

$366.05

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Loan payment

41.

You borrow $165,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

$106,408

$129,079

$135,971

$164,319

$191,406

AACSB: Analytic
Blooms: Analyze
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Loan interest

42.

Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service. HT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.65 percent on the funds. How much must HT set aside each year for this purpose?

A.	$3,184,467

B.	$3,277,973

C.	$3,006,409

D.	$3,318,190

E.	$3,466,667

43.

Nadine is retiring at age 62 and expects to live to age 85. On the day she retires, she has $402,000 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death?

$1,909.92

$2,147.78

$2,219.46

$2,416.08

$2,688.77

44.

Kingston Development Corp. purchased a piece of property for $2.79 million. The firm paid a down payment of 15 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent, compounded monthly. What is the amount of each mortgage payment?

A.	$22,322.35

B.	$23,419.97

C.	$23,607.11

D.	$24,878.15

E.	$25,301.16

Amount financed = $2,790,000 × (1 - 0.15) = $2,371,500

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Loan payment

45.

You estimate that you will owe $45,300 in student loans by the time you graduate. The interest rate is 4.25 percent. If you want to have this debt paid in full within ten years, how much must you pay each month?

$411.09

$464.04

$514.28

$536.05

$542.50

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Loan payment

46.

You are buying a previously owned car today at a price of $3,500. You are paying $300 down in cash and financing the balance for 36 months at 8.5 percent. What is the amount of each loan payment?

$101.02

$112.23

$118.47

$121.60

$124.40

Amount financed = $3,500 - $300 = $3,200

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Loan payment

47.

Atlas Insurance wants to sell you an annuity which will pay you $1,600 per quarter for 25 years. You want to earn a minimum rate of return of 6.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?

A.	$72,008.24

B.	$74,208.16

C.	$78,818.41

D.	$83,008.80

E.	$88,927.59

48.

Your car dealer is willing to lease you a new car for $245 a month for 48 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease?

A.	$10,331.03

B.	$10,386.99

C.	$12,197.74

D.	$12,203.14

E.	$13,008.31

49.

Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,400 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 6.75 percent?

A.	$24,890.88

B.	$26,311.16

C.	$27,677.34

D.	$28,909.29

E.	$29,333.33

50.

You just received an insurance settlement offer related to an accident you had six years ago. The offer gives you a choice of one of the following three offers:

You can earn 7.5 percent on your investments. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period. Which one of the following statements is correct given this information?

A.	Option A is the best choice as it provides the largest monthly payment.

B.	Option B is the best choice because it pays the largest total amount.

C.	Option C is the best choice because it is has the largest current value.

D.	Option B is the best choice because you will receive the most payments.

E.	You are indifferent to the three options as they are all equal in value.

Option A has a present value of $90,514.16 at 7.5 percent.
Option B has a present value of $85,255.68 at 7.5 percent.
Option C has a present value of $100,000.
Option C is the best choice since it has the largest present value.

51.

Samuelson Engines wants to save $750,000 to buy some new equipment four years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. The firm can earn 4.75 percent on its savings. How much does the firm have to save each quarter to achieve its goal?

A.	$42,337.00

B.	$42,969.70

C.	$43,192.05

D.	$43,419.29

E.	$43,911.08

52.

Stephanie is going to contribute $300 on the first of each month, starting today, to her retirement account. Her employer will provide a 50 percent match. In other words, her employer will contribute 50 percent of the amount Stephanie saves. If both Stephanie and her employer continue to do this and she can earn a monthly rate of 0.90 percent, how much will she have in her retirement account 35 years from now?

A.	$1,936,264

B.	$1,943,286

C.	$1,989,312

D.	$2,068,418

E.	$2,123,007

53.

You are considering an annuity which costs $160,000 today. The annuity pays $17,500 a year at an annual interest rate of 7.50 percent. What is the length of the annuity time period?

13 years

14 years

15 years

16 years

17 years

54.

Today, you borrowed $6,200 on your credit card to purchase some furniture. The interest rate is 14.9 percent, compounded monthly. How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $120?

A.	5.87 years

B.	6.40 years

C.	6.93 years

D.	7.23 years

E.	7.31 years

83.14 months/12 = 6.93 years

55.

Meadow Brook Manor would like to buy some additional land and build a new assisted living center. The anticipated total cost is $20.5 million. The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire construction project. Management has decided to save $1.2 million a quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on the funds it saves. How long does the company have to wait before expanding its operations?

A.	3.09 years

B.	3.82 years

C.	4.46 years

D.	4.82 years

E.	4.91 years

t = 15.26003 quarters/4 = 3.82 years

AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Annuity time period

56.

Today, you are retiring. You have a total of $411,016 in your retirement savings and have the funds invested such that you expect to earn an average of 7.10 percent, compounded monthly, on this money throughout your retirement years. You want to withdraw $2,500 at the beginning of every month, starting today. How long will it be until you run out of money?

A.	31.97 years

B.	34.56 years

C.	42.03 year

D.	48.19 years

E.	You will never run out of money.

t = 578.33688 months/12 = 48.19 years

57.

Gene's Art Gallery is notoriously known as a slow-payer. The firm currently needs to borrow $27,500 and only one company will even deal with them. The terms of the loan call for daily payments of $100. The first payment is due today. The interest rate is 24 percent, compounded daily. What is the time period of this loan? Assume a 365 day year.

A.	264.36 days

B.	280.81 days

C.	303.22 days

D.	316.46 days

E.	341.09 days

58.

The Wine Press is considering a project which has an initial cash requirement of $187,400. The project will yield cash flows of $2,832 monthly for 84 months. What is the rate of return on this project?

A.	6.97 percent

B.	7.04 percent

C.	7.28 percent

D.	7.41 percent

E.	7.56 percent

This cannot be solved directly, so it's easiest to just use the calculator method to get an answer. You can then use the calculator answer as the rate in the formula just to verify that your answer is correct.

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Interest rate

59.

Your insurance agent is trying to sell you an annuity that costs $230,000 today. By buying this annuity, your agent promises that you will receive payments of $1,225 a month for the next 30 years. What is the rate of return on this investment?

A.	3.75 percent

B.	4.47 percent

C.	4.93 percent

D.	5.45 percent

E.	5.67 percent

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Interest rate

60.

You have been investing $250 a month for the last 13 years. Today, your investment account is worth $73,262. What is your average rate of return on your investments?

A.	8.94 percent

B.	9.23 percent

C.	9.36 percent

D.	9.41 percent

E.	9.78 percent

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Interest rate

61.

Will has been purchasing $25,000 worth of New Tek stock annually for the past 15 years. His holdings are now worth $598,100. What is his annual rate of return on this stock?

A.	6.13 percent

B.	6.24 percent

C.	6.29 percent

D.	6.32 percent

E.	6.36 percent

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Interest rate

62.

Your father helped you start saving $20 a month beginning on your 5^th birthday. He always made you deposit the money into your savings account on the first day of each month just to "start the month out right." Today completes your 17^th year of saving and you now have $6,528.91 in this account. What is the rate of return on your savings?

A.	5.15 percent

B.	5.30 percent

C.	5.47 percent

D.	5.98 percent

E.	6.12 percent

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Interest rate

63.

Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40^th birthday. In an attempt to reach this goal, you decide to save $75 a day, every day until you turn 40. You open an investment account and deposit your first $75 today. What rate of return must you earn to achieve your goal?

A.	7.67 percent

B.	8.09 percent

C.	9.90 percent

D.	10.06 percent

E.	10.54 percent

AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 06-02 How loan payments are calculated and how to find the interest rate on a loan.
Section: 6.2
Topic: Interest rate

64.

You just settled an insurance claim. The settlement calls for increasing payments over a 10-year period. The first payment will be paid one year from now in the amount of $10,000. The following payments will increase by 4.5 percent annually. What is the value of this settlement to you today if you can earn 8 percent on your investments?

A.	$76,408.28

B.	$80,192.76

C.	$82,023.05

D.	$84,141.14

E.	$85,008.16

Orange

Contents

Tuesday, November 1, 2016

Financial Management - Chapter 6 Discounted Cash Flow Valuation

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