Reference no: EM131448913

Assignment

Question 1
Which of the following actions will INCREASE the present value of an investment?
A. decrease the interest rate
B. decrease the future value
C. increase the amount of time
D. All of the above will increase the present value.

Question 2
Which is greater, the present value of a five-year ordinary annuity of $300 discounted at 10%, or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?
A. The first annuity because the cash flows occur sooner.
B. The second annuity because the cash flows are discounted at a lower interest rate.
C. The two annuities are of equal value.
D. The answer to this question cannot be determined.

Question 3
Your company just sold a product with the following payment plan: $50,000 today, $25,000 next year, and $10,000 the following year. If your firm places the payments into an account earning 10% per year, how much money will be in the account after collecting the last payment?
A. $99,000
B. $98,000
C. $88,500
D. $85,000

Question 4
Your grandparents leave on their dream vacation to Antarctica in two years. The cruise vacation will cost them $25,000. If they have already saved $23,500 and are investing it at a rate of 2.75% per year, will they have saved enough money for their trip?
A. No, because they forgot to factor in long underwear expenses.
B. Yes, to have enough money they would have already needed to save $23,375.
C. Yes, to have enough money they would have already needed to save $23,680.
D. No, to have enough money they would have already needed to save $23,680.

Question 5
Your university is running a special offer on tuition. This year's tuition cost is $18,000. Next year's tuition cost is scheduled to be $19,080. The university offers to discount next year's tuition at a rate of 6% if you agree to pay both years' tuition in full today. How much is the total tuition bill today if you take the offer?
A. $18,000
B. $34,981
C. $37,080
D. $36,000

Question 6
Your aunt places $13,000 into an account earning an interest rate of 7% per year. After five years the account will be valued at $18,233.17. Which of the following statements is correct?
A. The present value is $13,000, the time period is seven years, the present value is $18,233.17, and the interest rate is 5%.
B. The future value is $13,000, the time period is five years, the principal is $18,233.17, and the interest rate is 7%.
C. The principal is $13,000, the time period is five years, the future value is $18,233.17, and the interest rate is 7%.
D. The principal is $13,000, the time period is seven years, the future value is $18,233.17, and the interest rate is 5%.

Question 7
To determine the present value of a future amount, one should _________ the future cash flows.
A. annuitize
B. compound
C. discount
D. multiply

Question 8
A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.
A. $100
B. $120
C. $121
D. $122

Question 9
Your trust fund will pay you $100,000 in six years when you turn 25. A shady financial institution has encouraged you to sign away the rights to your trust fund in exchange for cash today. Would you prefer that the financial institution use a discount rate of 8% or 10% to determine the value of your lump sum payment? Why?
A. Use 8% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.
B. Use 10% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.
C. Use 8% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.
D. Use 10% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.

Question 10
A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an__________.
A. annuity
B. annuity due
C. perpetuity
D. amortization

Question 11
An investment promises a payoff of $195 two and one-half years from today. At a discount rate of 7.5% per year, what is the present value of this investment?
A. $162.03
B. $162.75
C. $169.47
D. There is not enough information to answer this question.

Question 12
Twelve years ago, you paid for the right to twelve $25,000 annual end-of-the-year cash flows. If discounting the cash flows at an annual rate of 8%, what did you pay for these cash flows back then?
A. $474,428.16
B. $300,000.00
C. $203,474.11
D. $188,401.95

Question 13
A home improvement firm has quoted a price of $9,800 to fix up John's backyard. Five years ago, John put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does John have enough money in his account to pay for the backyard fix-up?
A. Yes; John now has exactly $9,800 in his home improvement account.
B. No; John has only $9,687 in his home improvement account.
C. Yes; John now has $10,519 in his home improvement account.
D. There is not enough information to answer this question.

Question 14
A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?
A. The interest earned in year two is $12.00 and year one is $12.72.
B. The interest earned in year one is $12.00 and year two is $12.72.
C. The FV is $224.00.
D. The future value would be greater if the interest rate were lower.

Question 15
Which of the following formulas is correct for finding the present value of an investment?
A. FV =
B. PV = FV × (1 + r)n
C. PV = FVn × (1 + r)
D. PV = FV ×

Question 16
Johnson has an annuity due that pays $600 per year for 15 years. What is the present value of the cash flows if they are discounted at an annual rate of 7.50%?
A. $5,296.27
B. $5,693.49
C. $9,000.00
D. $9,675.00

Question 17
A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an__________.
A. ordinary annuity
B. annuity due
C. perpetuity
D. amortization

Question 18
Which of the following is the correct formula for calculating the future value?
A. FV =
B. FV = PV × (1 + r)n
C. PV = FV × (1 + r)n
D. PV =

Question 19
The one-time payment of money at a future date is often called a__________.
A. lump-sum payment
B. present value
C. principal amount
D. perpetuity payment

Question 20
You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years. If this bond is discounted at a rate of 3.875% per year, what is today's price (present value. for this bond?
A. $8,417
B. $8,500
C. $5,654
D. $10,000