Discounted Cash Flow Valuation ch 6

2/11/2014Chapter 06 Discounted Cash Flow Valuation Chapter 06 - Discounted Cash Flow Valuation Chapter 06 Discounted Cash Flow Valuation Multiple Choice Questions 1. 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 2. 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 3. 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 E. consol http://dc620.4shared.com/doc/M3SH7KwE/preview.html 1/147 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 4. 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 http://dc620.4shared.com/doc/M3SH7KwE/preview.html 2/147 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 5. 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 6. 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 7. A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. amortized B. continuous C. balloon D. pure discount E. interest-only 8. 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 http://dc620.4shared.com/doc/M3SH7KwE/preview.html 3/147 continuing loan C. You are comparing two annuities which offer quarterly payments of $2. These two annuities have equal present values but unequal futures values at the end of year five. interest-only loan 11. amortized loan B. 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.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 9. interest-only loan 10.html 4/147 .4shared.com/doc/M3SH7KwE/preview. Annuity B is an annuity due. balloon loan D. remainder loan E. Annuity A has a smaller future value than annuity B. http://dc620. C. balloon loan D. 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 then must be repaid in one lump sum? A.75 percent interest per month. modified loan C.500 for five years and pay 0. These two annuities have equal present values as of today and equal future values at the end of year five. B. Which one of the following statements is correct concerning these two annuities? A. E. Which one of the following terms is defined as a loan wherein the regular payments. including both interest and principal amounts. amortized loan B. are insufficient to retire the entire loan amount. pure discount loan E. Annuity B has a smaller present value than annuity A. D. Project X has a higher present value than Project Y. 13. E. A. given a positive discount rate.000 each. II only B. given a positive discount rate.com/doc/M3SH7KwE/preview. D. Both projects have the same future value given a zero rate of return. and IV only http://dc620. Project Y has a higher present value than Project X. Both projects have the same future value at the end of year 4.000 of income. Option A pays three annual payments starting with $2.4shared. IV. You are comparing two investment options that each pay 5 percent interest.000 the first year followed by two annual payments of $5. B.000 each. Option A is an annuity. compounded annually. Which one of the following statements is correct given these two investment options? A. Option B is a perpetuity. C. Option B pays three annual payments of $4. III. I and III only C. Both options will provide you with $12. II. You are considering two projects with the following cash flows: Which of the following statements are true concerning these two projects? I.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 12. II and IV only E. II. Both options are of equal value given that they both provide $12. II and III only D. Option B has a higher present value at time zero than does option A. given a positive rate of return.000 of income.html 5/147 . Option A has the higher future value at the end of year three. I. D. E. C. but the future value can. compounded monthly. Perpetuities are finite but annuities are not.html 6/147 . C. Most loans are a form of a perpetuity. Both sets of cash flows have equal present values as of time zero given a positive discount rate. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three. given an interest rate of 12 percent. Which one of the following statements is correct given the following two sets of project cash flows? A. As long as the discount rate is positive. B. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments. 15. The present value of Project A cannot be computed because the second cash flow is equal to zero.4shared. compounded annually. E. D. An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest.com/doc/M3SH7KwE/preview. but those of Project A are not. Which one of the following statements related to annuities and perpetuities is correct? A. The cash flows for Project B are an annuity. The present value of a perpetuity cannot be computed. http://dc620. B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 14. Project B will always be worth less today than will Project A. An increase in the discount rate increases the present value.4shared. Annual interest rates consider the effect of interest earned on reinvested interest payments. all else held constant. Which one of the following statements correctly states a relationship? A. C. Interest rates and time are positively related. 18. C. Growth rates cannot be applied to perpetuities if you wish to compute the present value. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. all else held constant. IV. The effective annual rate decreases as the number of compounding periods per year increases. The cash flow used in the growing annuity formula is the initial cash flow at time zero. all else held constant. II. given positive rates. and III only E. D. An increase in time increases the future value given a zero rate of interest.html 7/147 . D. II. you should compare the effective annual rates. Which one of the following statements concerning interest rates is correct? A. Savers would prefer annual compounding over monthly compounding. II and III only C. Which of the following statements related to interest rates are correct? I. Time and future values are inversely related. An increase in the rate of growth will decrease the present value of an annuity. D. When comparing loans. 19. Time and present value are inversely related. III. B. E. I. the effective annual rate will always exceed the annual percentage rate. For any positive rate of interest. Which one of these statements related to growing annuities and perpetuities is correct? A. II and IV only D. C. Borrowers would prefer monthly compounding over annual compounding. E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 16. Annual and effective interest rates are equal when interest is compounded annually. The future value of an annuity will decrease if the growth rate is increased. A. II. The effective annual rate equals the annual percentage rate when interest is compounded annually. The present value of a growing perpetuity will decrease if the discount rate is increased.com/doc/M3SH7KwE/preview. http://dc620. B. I and II only B. E. and IV only 17. B. III. semi-annual C. B. continuous 21. E. C. bullet loan 22. C. D.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 20. balloon loan C. How is the principal amount of an interest-only loan repaid? A. annual B. An amortized loan: A. The principal is repaid in increasing increments through regular monthly payments. repays both the principal and the interest in one lump sum at the end of the loan term. The principal is repaid in a lump sum at the end of the loan period. 23. requires that all payments be equal in amount and include both principal and interest. requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. B.4shared.com/doc/M3SH7KwE/preview. The principal is repaid in equal annual payments. amortized loan D. E. Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate? A. requires the principal amount to be repaid in even increments over the life of the loan. The principal is repaid in equal increments and included in each loan payment. D.html 8/147 . The principal is forgiven over the loan period so does not have to be repaid. daily E. monthly D. http://dc620. pure discount loan E. may have equal or increasing amounts applied to the principal from each loan payment. interest-only loan B. The entire repayment of which one of the following loans is computed simply by computing a single future value? A. A.html 9/147 .71 B.6 percent.00 26. discount loan E. You need $25. $9. $185.201.88 C.33 E. Phil can afford $180 a month for 5 years for a car loan. $8. $4. amortized loan with equal loan payments D.450.000 today and have decided to take out a loan at 7 percent for five years.5 percent discount rate.00 B. $4. At a 5.19 D.348.299.87 E. $7.com/doc/M3SH7KwE/preview.333. $178. $8. $4.252.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 24. how much can he afford to borrow to purchase a car? A.00 http://dc620. You just won the grand prize in a national writing contest! As your prize.750.4shared.67 E.509.608.40 D.03 C. $190. what are these payments worth to you on the day you enter college? A. what is this prize worth to you today? A. $172.338. amortized loan with equal principal payments C.84 D. $181.16 B. If you can earn 7 percent on your money.06 C. $4. balloon loan where 50 percent of the principal is repaid as a balloon payment 25.411.400. Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. If the interest rate is 8. interest-only loan B.752.25 27. $4.266.800. 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.000 a month for ten years. $9. you will receive $2. 29.800 to you today.459. You should accept the $200. $80.000 to you today.548.5 percent. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.11 D. E.com/doc/M3SH7KwE/preview. Your employer contributes $75 a week to your retirement plan. The Design Team just decided to save $1.20 http://dc620.69 B. You should accept the payments because they are worth $247.46 C. $81. what is this employee benefit worth to you today? A.000 because the payments are only worth $189.html 10/147 .306. $40. You can receive a lump sum of $200. $44. Given these assumptions. You should accept the $200.333. You can earn 6 percent on your money.413 to you today. C. The money will be set aside in a separate savings account which pays 4.384.414 to you today.000 today or receive payments of $1. The first deposit will be made today. You are the beneficiary of a life insurance policy.760.618.500 a month for the next 5 years as a safety net for recessionary periods.068.5 percent interest compounded monthly.16 E. B.79 C. $42. 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.211. $81. $81. Which option should you take and why? A.33 E.400 a month for 20 years. D.07 B. You should accept the payments because they are worth $336.4shared.000 because the payments are only worth $195. The insurance company informs you that you have two options for receiving the insurance proceeds.987.311 to you today.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 28. $44.18 D. You should accept the payments because they are worth $209. $80.74 30. $44. 227 E.221 D.75 percent. $134.319 E.390 E.50 D. What is the value of this annuity today if the discount rate is 8.438 http://dc620. How much does the second annuity pay each year for 20 years if it pays at the end of each year? A. $138. $139.4shared.999 B. $5. 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? A. $5. $5.800 for each of the next 7 years. $5. $1. $5.5 percent interest per month.5 percent? A. He agrees to loan you the money you need. $251.68 E.09 B.498 33.22 C.309 B. $2. You buy an annuity that will pay you $24.304 34. The discount rate is 8 percent.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 31.409 D. $258. The applicable discount rate is 8. $241. $2. You are scheduled to receive annual payments of $4.267 C. One annuity pays $5. He also charges you 1.211 B.013 C.000 on the first day of each year for 20 years. $2. You are comparing two annuities with equal present values. You need some money today and the only friend you have that has any is your miserly friend. The payments are paid on the first day of each year. In keeping with his reputation. $245. he requires that the first payment be paid today. How much money are you borrowing? A.309 D. $142.57 32. $144. $266.html 11/147 .000 a year for 25 years. $2.621 C.com/doc/M3SH7KwE/preview. if you make payments of $25 a month for the next six months. 115 B.572 E. $310.492 C.211. $129. $1. $121.200 a year for 40 years at 8 percent interest? Assume annual compounding.000 a year for 30 years at 12 percent interest? A.25 percent. $342.406 B.000 a year and expects to earn an annual rate of 10.021.316 http://dc620. $3. $2.06 C. Josh receives $480 on the last day of each month.476 E.619. what is the difference in the present value of these two sets of payments? A.414 D. $1. $301. $2. At a 9.com/doc/M3SH7KwE/preview.369 C.908 E.878. $3.63 B.407 D.838. What is the future value of $15.989. Alexa plans on saving $3.html 12/147 . A.5 percent discount rate.711.08 E.267 37. What is the future value of $1.30 D. $3. $124.223 38. $132.429 B.806. Trish receives $480 on the first of each month.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 35. $4. $347.508. $306. $2.868 D. How much will she have in her account at the end of 45 years? A. $118. Both Trish and Josh will receive payments for next three years.333.4shared. $2.50 36.990 C. 000 to buy a house. You borrow $165.5 percent annual interest.05 41.184.408 B.318.com/doc/M3SH7KwE/preview. Holiday Tours (HT) has an employment contract with its newly hired CEO. They both earn 6.973 C.319 E. Theresa adds $1. The terms of the loan call for monthly payments for 5 years at 8. The mortgage rate is 7. how much total interest will you pay? A. $301. $3.40 C.062 B. $8. $250.079 C. $264.006.5 percent and the loan period is 30 years. $366.190 E. $3.277.4 million be paid to the CEO upon the successful completion of her first three years of service.211 E.6 percent interest. 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. $291.332 D.113 C.76 E.000 to his savings account on the last day of each year. What is the amount of each payment? A. $342. What is the difference in their savings account balances at the end of 35 years? A. The contract requires a lump sum payment of $10. $3. If you pay the mortgage according to the loan agreement.71 B. $206.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 39. $3.html 13/147 . $287.466.667 http://dc620.4shared. $291. Payments are made monthly. You are borrowing $17.000 to her savings account on the first day of each year.12 D. $229. $8. $3.800 to buy a car. Marcus adds $1. $8. $8. How much must HT set aside each year for this purpose? A.409 D.127 D.219 40.467 B. $8.406 42. 15 E.25 percent. purchased a piece of property for $2.919. $23. 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? A. The firm paid a down payment of 15 percent in cash and financed the balance. $714. $2.09 B.46 D.50 http://dc620.219 in her retirement savings account. $1.08 E.05 44.97 C. The interest rate is 4.878. If you want to have this debt paid in full within six years.16 45. $2.607.28 D. You estimate that you will owe $42.05 E.92 B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 43.75 percent. compounded monthly. $25.847.322. $611. $23. Kingston Development Corp. $674.com/doc/M3SH7KwE/preview. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years.301. The loan terms require monthly payments for 15 years at an annual percentage rate of 7. $22.50 C. $1. $742.609.html 14/147 . $24.79 million. Nadine is retiring at age 62 and expects to live to age 85.35 B.78 C.11 D. On the day she retires. $1.800 in student loans by the time you graduate. $736.4shared. how much must you pay each month? A. What is the amount of each mortgage payment? A. she has $348.419.116.329. You want to earn a minimum rate of return of 6. $112. $124.890. Your great aunt left you an inheritance in the form of a trust.23 C. What is the value of this inheritance today if the applicable discount rate is 6. $40.008.24 B. $118. $173. $42.com/doc/M3SH7KwE/preview.02 B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 46.008.14 E.33 http://dc620. Your car dealer is willing to lease you a new car for $245 a month for 48 months. You are buying a previously owned car today at a price of $3. You are paying $300 down in cash and financing the balance for 36 months at 8.html 15/147 .331. $13. $43. $151.600 on the first day of each year.47 D. $154.16 C. Payments are due on the first day of each month starting with the day you sign the lease contract.88 B. If your cost of money is 6.909.03 B. What is the most you are willing to pay as a lump sum today to buy this annuity? A.99 C.4shared.5 percent.489.40 47.400 per quarter for 25 years.311. The trust agreement states that you are to receive $3. $167.74 D.75 percent? A.60 E. what is the current value of the lease? A. $12.203.008.59 48.80 E.208. $38.31 49.11 D.927. $10.29 E.333. $101.197. starting immediately and continuing for 20 years.01 D.386.5 percent.5 percent. $121.16 C.500. $178.516. Atlas Insurance wants to sell you an annuity which will pay you $3. $10. What is the amount of each loan payment? A. $41. $12. 936.08 52.969.29 E.94 B.123. $26. Option B is the best choice because you will receive the most payments.264 B. Which one of the following statements is correct given this information? A. Option C is the best choice because it is has the largest current value.192. The offer gives you a choice of one of the following three offers: You can earn 7. Her employer will provide a 50 percent match. Option B is the best choice because it pays the largest total amount. starting today. E.419. how much will she have in her retirement account 35 years from now? A.418 E. D. 51.943. 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.70 C.05 D.4shared. C. to her retirement account.html 16/147 .000 to buy some new equipment six years from now.com/doc/M3SH7KwE/preview.90 percent. $1.911. Samuelson Engines wants to save $750. You are indifferent to the three options as they are all equal in value. her employer will contribute 50 percent of the amount Stephanie saves.068. $2.75 percent on its savings.312 D.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 50. $1. The firm can earn 4.5 percent on your investments. $26. How much does the firm have to save each quarter to achieve its goal? A. $27. The plan is to set aside an equal amount of money on the first day of each quarter starting today. Stephanie is going to contribute $300 on the first of each month. $27. In other words. $2. If both Stephanie and her employer continue to do this and she can earn a monthly rate of 0. $27.872. B.286 C. Option A is the best choice as it provides the largest monthly payment. $1.007 http://dc620. You just received an insurance settlement offer related to an accident you had six years ago.989. on the funds it saves. The interest rate is 14. 4.46 years D.91 years http://dc620. 15 years E.09 years B. You are considering an annuity which costs $160.31 years 55. How long does the company have to wait before expanding its operations? A. 16 years 54. The firm earns 6.9 percent.126 a year at an annual interest rate of 7.40 years C. 14 years D.87 years B. you borrowed $6.com/doc/M3SH7KwE/preview.html 17/147 . What is the length of the annuity time period? A. 7. 7. Today. compounded quarterly.4shared. 13 years C. Meadow Brook Manor would like to buy some additional land and build a new assisted living center.23 years E. 6.000 today. 12 years B.25 percent.32 years C. The anticipated total cost is $23. 4.200 on your credit card to purchase some furniture.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 53. Management has decided to save $1. 5.6 million.93 years D. 4.50 percent. The annuity pays $18.82 years E. compounded monthly.2 million a quarter for this purpose. 4. 4. 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. 6. 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. You will never run out of money. 300.000 today.43 days D.81 days C. 6.03 year D. 34. The Wine Press is considering a project which has an initial cash requirement of $187.04 percent C. 5.500 at the beginning of every month. Your insurance agent is trying to sell you an annuity that costs $200. The project will yield cash flows of $2.10 percent.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 56.41 percent E.9 percent.4shared. 7. 6. you are retiring. 5. 280. What is the rate of return on this project? A. A. What is the time period of this loan? Assume a 365 day year.400.46 days E.832 monthly for 84 months.016 in your retirement savings and have the funds invested such that you expect to earn an average of 7. 316. 48.56 percent 59. 57. 6. 7. The first payment is due today.97 years B. The terms of the loan call for daily payments of $100. 7.36 days B.20 percent D.500 and only one company will even deal with them. compounded monthly. What is the rate of return on this investment? A.19 years E. Gene's Art Gallery is notoriously known as a slow-payer.225 a month for the next 30 years. 6.56 years C. 42. The firm currently needs to borrow $27. 264.97 percent B. starting today. 31.67 percent http://dc620. compounded daily.75 percent B.97 percent C. Today. your agent promises that you will receive payments of $1. 7.09 days 58.html 18/147 . By buying this annuity. on this money throughout your retirement years. How long will it be until you run out of money? A. You have a total of $411.com/doc/M3SH7KwE/preview. You want to withdraw $2. The interest rate is 21.45 percent E. 341.28 percent D. html 19/147 .4shared.2/11/2014 Chapter 06 Discounted Cash Flow Valuation http://dc620.com/doc/M3SH7KwE/preview. every day until you turn 40. 6. 8. What rate of return must you earn to achieve your goal? A. You open an investment account and deposit your first $50 today. 14.78 percent 61.37 percent E.36 percent D. His holdings are now worth $598.100.30 percent C.23 percent C.html 20/147 . 10. What is the rate of return on your savings? A. 13.4shared.98 percent E.06 percent E. Will has been purchasing $25.85 percent C. Today.com/doc/M3SH7KwE/preview. 14.54 percent http://dc620.67 percent B.24 percent C.47 percent D. 11. 9. What is your average rate of return on your investments? A. 12. 14.15 percent B.000 worth of New Tek stock annually for the past 11 years.528. 14. 5.91 in this account. What is his annual rate of return on this stock? A.262. 9. 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.13 percent B. 13. 5. 9.68 percent 62. you turn 23. Your birthday wish is that you will be a millionaire by your 40th birthday. 9. 14. You have been investing $250 a month for the last 13 years.90 percent D. you decide to save $50 a day. your investment account is worth $73.41 percent E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 60. 5. Today. Your father helped you start saving $20 a month beginning on your 5th birthday. In an attempt to reach this goal.29 percent D.12 percent 63.94 percent B." Today completes your 17th year of saving and you now have $6. 5. $291.464.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 64. You just won a national sweepstakes! For your prize. $41. What is the value of this settlement to you today if you can earn 8 percent on your investments? A.000. $248.121. The settlement calls for increasing payments over a 10-year period.000.500 and will be paid one year from today.699.15 B.777.5 percent annually.28 B. What is the present value of your prize at a discount rate of 8 percent? A. Every year after that. $82. $166. What is your inheritance worth to you today if you can earn 9.19 C.408. $46. You will receive the first payment one year from now in the amount of $4.00 http://dc620.008. $43.4shared.908. $300.006.com/doc/M3SH7KwE/preview.14 E. $85.5 percent annually.16 65.17 66. You just settled an insurance claim.192.666.000. $36. The following payments will increase by 4.5 percent on your investments? A. Your grandfather left you an inheritance that will provide an annual income for the next 10 years.023.409. Every year thereafter. the payments will increase by 3.666. you opted to receive never-ending payments. $31. $84. The first payment will be paid one year from now in the amount of $10. $76. $277.76 C. the payment amount will increase by 6 percent.21 D.12 E. The first payment will be $12.141.67 B.12 E.05 D. $80.html 21/147 .67 C.78 D. $601. $4.098 B. $4. What is the value of this gift today at a discount rate of 8 percent? A.000 over the next three years.5 percent rate of return is applicable to this potential acquisition. $4. What is Southern Tours willing to pay today to acquire Holiday Vacations? A.450.615 C.080 E. $538. $1. $503. they feel the business will be worthless. After that time. Management believes Holiday Vacations can generate cash flows of $187.000 C.750 68.260 http://dc620.600 D.407 69.530 C. $5. Both options offer a 7. $638. respectively.920 D. The first option is to save $900. The first scholarships will be granted one year from now for a total of $35.226 E. regardless of the savings method you select. Southern Tours is considering acquiring Holiday Vacations.200. respectively. $437.000 E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 67.000. and $3.4 percent rate of return. the scholarship amount will be increased by 5.000 at the end of each year for the next three years.000. $750. Southern Tours has determined that a 13.000 D.000. The other option is to save one lump sum amount today. $220. $5.100. A wealthy benefactor just donated some money to the local college.html 22/147 . $545. $1.com/doc/M3SH7KwE/preview. and $245. The scholarship fund will last indefinitely. This gift was established to provide scholarships for worthy students. You are considering two savings options.4shared.5 percent to help offset the effects of inflation. $2. Annually thereafter. how much do you need to save today if you select the lump sum option? A.400. $1.500 B. If you want to have the same balance in your savings account at the end of the three years.410 B. Your goal is to work for three years and then return to school full-time in pursuit of an advanced degree. $29.388 E.847 http://dc620. $117.000.333 D. You are considering changing jobs. The other offer is the payment of one lump sum amount today. respectively.697 72. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. What is the present value of these cash flows. $121. $28.000.691 71. $112. $30. $11. A potential employer just offered you an annual salary of $41. $5.367 D.000. $115.4shared. and $46.439 E. and $12. Your parents have made you two offers. You are considering a project which will provide annual cash inflows of $4.html 23/147 . $15. $14. What is the minimum amount that you will accept today if you are to select the lump sum offer? A. $44. $16. $134. The first offer includes annual gifts of $10.75 percent? A.000 at the end of each of the next three years.000.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 70.407 C. respectively. $29.429 D. given a 9 percent discount rate? A.com/doc/M3SH7KwE/preview. $15. What is this offer worth to you today at a discount rate of 6.500.406 B.545 C.103 C.500 payable immediately. All salary payments are made as lump sum payments at the end of each year.700.212 E.000 at the end of each year for the next three years.877 B. $16. $30.000 a year for the next three years.216 B. respectively. and $8. The offer also includes a starting bonus of $2. E.000 one year from today. It does not matter which offer you accept as they are equally valuable. You should accept the second offer because it has the larger net present value.500 today because it has the lower future value.000 on the day you depart three years from today.910 74. What is the present value of these cash flows given a 10. You should accept the $89. C. You just signed a consulting contract that will pay you $35.695 C. You should accept the first offer as it has the greatest value to you.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 73.000 today.75 percent? A.4shared. The first offer is for $89. What is the cost of this vacation in today's dollars if the discount rate is 9.478 http://dc620. The second offer is the payment of $35.5 percent.131 E. $93. $156. The package requires that you pay $25. $89. $30.000 today and an additional $70.307 C.554 B.5 percent discount rate? A. and a final payment of $45.500 today in cash. $91.000 two years from today. D.880 D. $148. If the applicable discount rate is 11.000 annually at the end of the next three years. $91. respectively. $52.500 today because it has the higher net present value. $133.376 B.407 E. You should accept the $89. Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica. 75. which offer should you accept and why? A.com/doc/M3SH7KwE/preview.html 24/147 . B.000. $142.219 D. $86. $151. You have some property for sale and have received two offers.000. and $80. 40 http://dc620.700. $14.57 C.000 to the account one year from today. You will deposit these amounts into your investment account at the end of each year. You plan on saving $5. The company plans on making a final deposit of $20. Today.200 this year.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 76. $13.5 percent on your funds? A. One year ago.526.528. $33.html 25/147 .11 D.021 77.500 in an investment account for the purpose of buying new equipment three years from today.907.919 C.500 each year starting at the end of year one.000 to this account. What is the future value of these cash flows at the end of year five if the interest rate is 7 percent? A.50 E. $53. $36.418 B.408 B. it is adding another $12. $13. and $12.com/doc/M3SH7KwE/preview.411 E.883 D.5 interest? A.211 D. $13.779.500 the following year.255 78. $53.800. $14.4shared. Deltona Motor Parts deposited $16. $32. assuming the account pays 5. $35.907 C. $58. $56.12 B. What will your investment account be worth at the end of year three if you can earn 8. How much will be available when it is ready to buy the equipment. Lucas will receive $6. and $7. $8.792 E.621. nothing next year. $56. $32. $989.000.000.311 D.875.000.78 E. and $50.497. $24. The plan is to make an initial deposit today and then deposit an additional $15.776 80.231. The fine calls for annual payments of $150. has a $75.06 B. The government plans to invest the funds until the final payment is collected and then donate the entire amount.000.006. $422.509 E.457 C.147.000. to help the local community shelter.com/doc/M3SH7KwE/preview.00 C.076. $18.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 79. How much will the community shelter receive four years from today? A. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. $75. $21. If she can earn an average of 10.71 E. $366.572. $1. starting one year from today. Inc.000.91 C. how much will she have in her account 25 years after making her first deposit? A. Year 2 = $35.487. including the investment earnings.67 http://dc620. over the next four years. $515. $458. $20.4shared. All of this money will be saved for her retirement.373 B.56 81. $1. $972. respectively. $100.000 liability it must pay three years from today.737. The account pays a 4. The first payment is due one year from today.56 D.400.95 B.072.000 each year for the next three years. $31.000.33 D. The government will earn 6.5 percent on her investments.25 percent on the funds held. $1. Blackwell.674. Miley expects to receive the following payments: Year 1 = $60. The government has imposed a fine on the Corner Tavern.5 percent rate of return. Year 3 = $12.html 26/147 .299. $349. How much does the firm need to deposit today? A. 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 82. Wicker Imports established a trust fund that provides $90,000 in scholarships each year for needy students. The trust fund earns a fixed 6 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest income is distributed? A. $1,150,000 B. $1,200,000 C. $1,333,333 D. $1,500,000 E. $1,600,000 83. A preferred stock pays an annual dividend of $2.60. What is one share of this stock worth today if the rate of return is 11.75 percent? A. $18.48 B. $20.00 C. $22.13 D. $28.80 E. $30.55 84. You would like to establish a trust fund that will provide $120,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 5.75 percent. How much money must you deposit today to fund this gift for your heirs? A. $2,086,957 B. $2,121,212 C. $2,300,000 D. $2,458,122 E. $2,500,000 85. You just paid $750,000 for an annuity that will pay you and your heirs $45,000 a year forever. What rate of return are you earning on this policy? A. 5.25 percent B. 5.50 percent C. 5.75 percent D. 6.00 percent E. 6.25 percent http://dc620.4shared.com/doc/M3SH7KwE/preview.html 27/147 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 86. You grandfather won a lottery years ago. The value of his winnings at the time was $50,000. He invested this money such that it will provide annual payments of $2,400 a year to his heirs forever. What is the rate of return? A. 4.75 percent B. 4.80 percent C. 5.00 percent D. 5.10 percent E. 5.15 percent 87. The preferred stock of Casco has a 5.48 percent dividend yield. The stock is currently priced at $59.30 per share. What is the amount of the annual dividend? A. $2.80 B. $2.95 C. $3.10 D. $3.25 E. $3.40 88. Your credit card company charges you 1.65 percent interest per month. What is the annual percentage rate on your account? A. 18.95 percent B. 19.80 percent C. 20.90 percent D. 21.25 percent E. 21.70 percent 89. What is the annual percentage rate on a loan with a stated rate of 2.25 percent per quarter? A. 9.00 percent B. 9.09 percent C. 9.18 percent D. 9.27 percent E. 9.31 percent http://dc620.4shared.com/doc/M3SH7KwE/preview.html 28/147 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 90. You are paying an effective annual rate of 18.974 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account? A. 17.50 percent B. 18.00 percent C. 18.25 percent D. 18.64 percent E. 19.00 percent 91. What is the effective annual rate if a bank charges you 9.50 percent compounded quarterly? A. 9.62 percent B. 9.68 percent C. 9.72 percent D. 9.84 percent E. 9.91 percent 92. Your credit card company quotes you a rate of 17.9 percent. Interest is billed monthly. What is the actual rate of interest you are paying? A. 19.03 percent B. 19.21 percent C. 19.44 percent D. 19.57 percent E. 19.72 percent 93. The Pawn Shop loans money at an annual rate of 21 percent and compounds interest weekly. What is the actual rate being charged on these loans? A. 23.16 percent B. 23.32 percent C. 23.49 percent D. 23.56 percent E. 23.64 percent http://dc620.4shared.com/doc/M3SH7KwE/preview.html 29/147 26 percent.06 percent.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 94. compounded continuously E. 16. 3. 95. compounded quarterly 96.10 percent. 3. compounded monthly C.68 percent. compounded semi-annually D.24 percent C. Loan B offers a rate of 8 percent. compounded semi-annually.33 percent E. Which loan should you select and why? A.html 30/147 . E. Which bank should you select if your goal is to maximize your interest income? A.9 percent compounded continuously? A.25 percent.84 percent E. 10. 15. The rates paid by banks A through E. There are five banks located in your area. 10. the effective annual rate is 8.17 percent B. 3.69 percent D.20 percent. compounded annually B. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7. 3.600 that you want to use to open a savings account.16 percent. B. C.47 percent http://dc620. You have $5. 10.75 percent. are given below. You are considering two loans. The loans are equivalent offers so you can select either one.59 percent B.75 percent compounded continuously? A.75 percent. 15. What is the effective annual rate of 14.4shared. B. 15. 3.15 percent. 10.62 percent C. compounded daily. A. 15. respectively. A. What is the effective annual rate of 9. 10. the effective annual rate is 8. D. the annual percentage rate is 7.com/doc/M3SH7KwE/preview.29 percent D.07 percent 97. the annual percentage rate is 7. B. 8. $13.006.441.41 100. $1.16 C.21 percent D.00 101.401.20 http://dc620. City Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.23 D.36 E. You are going to loan a friend $900 for one year at a 5 percent rate of interest. 8. 8.08 E.html 31/147 .92 B.58 percent 99.00 B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 98. $12. compounded annually.250. $0.757.808. What is the maximum rate the bank can actually earn based on the quoted rate? A.14 percent C. 8. This morning.911. $1.4shared.97 B. $12. 8. $1.com/doc/M3SH7KwE/preview. You will repay the principal plus all the interest in one lump sum of $12.48 percent. compounded annually.14 C.800 two years from today.16 E. $11.26 percent E. How much additional interest could you have earned if you had compounded the rate continuously rather than annually? A. How much are you borrowing? A. $10. You are borrowing money today at 8.500 at 7. How much will you have to repay? A. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today.13 C.89 D.900.211. $1. you borrowed $9. $10. $13.04 D. $9.877. $12.65 percent annual interest.75 percent annual percentage rate on its loans. $11.06 percent B. 25 percent from your local bank.000 from your local bank. On this date last year. 8 percent.000. you borrowed $18.html 32/147 . Interest is to be paid annually at the end of each year.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 102. The terms stipulate that the principal is due in full one year after you graduate. On the day you entered college you borrowed $25. 10-year. $5.93 percent 103.600 D.47 percent E. Assume that you complete college in four years.850 C. John's Auto Repair just took out an $89.106 E.000 on an interest-only.78 percent D. $3. four-year loan at 5.266.120 104.250 105. What is the amount of your loan payment in year 2? A. $7.11 http://dc620.45 percent C. What is the amount of the loan payment in year 10? A. 9.67 B.00 E. $13.50 D. $96. $5. You have to repay the loan principal plus all of the interest six years from today.400.890 C. 8. 9. $945 B. How much total interest will you pay on this loan? A. On the day you entered college. $89.937. $6.01 percent B. What is the interest rate on this loan? A. Payments are to be paid annually.4shared.00 C. you borrowed $3. The payment that is required at that time is $6. $6.000 E. $1.529.75 percent.com/doc/M3SH7KwE/preview.400. $5.264 D.000. $5. interest-only loan from the bank. $8.607.120 B. $6. Payments are made annually. 8. 8. The terms of the loan include an interest rate of 4. 16 C.60 107.html 33/147 . $1. This morning.) A.548. $1.403. compounded monthly. $1. $277. $1.056.25 percent. $268. $917.511. $2.06 D. The loan is to be repaid in equal monthly payments over 15 years.35 percent. The first payment is due on July 1.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 106.358. The mortgage rate is 7. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.000 to buy a house.56 D. $925.84 B.000 to buy a house. The mortgage rate is 8.61 C.83 E.194.38 E.21 E. Equal payments are to be made at the end of each month for thirty years. $1. $925. $603. On June 1. The loan is to be repaid in equal monthly payments over 20 years.14 C.20 B.com/doc/M3SH7KwE/preview.70 108. $698.44 D. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.32 B.75 percent interest.67 http://dc620. $1.) A. $1. You just acquired a mortgage in the amount of $249. The first payment is due one month from today.453.) A.500 at 6.4shared. you borrowed $150. How much of the first loan payment is interest? (Assume each month is equal to 1/12 of a year. you borrowed $212.206. 2/11/2014 Chapter 06 Discounted Cash Flow Valuation Essay Questions 109. Explain the difference between the effective annual rate (EAR) and the annual percentage rate (APR). Of the two, which one has the greater importance and why? 110. You are considering two annuities, both of which pay a total of $20,000 over the life of the annuity. Annuity A pays $2,000 at the end of each year for the next 10 years. Annuity B pays $1,000 at the end of each year for the next 20 years. Which annuity has the greater value today? Is there any circumstance where the two annuities would have equal values as of today? Explain. http://dc620.4shared.com/doc/M3SH7KwE/preview.html 34/147 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 111. Why might a borrower select an interest-only loan instead of an amortized loan, which would be cheaper? 112. Kristie owns a perpetuity which pays $12,000 at the end of each year. She comes to you and offers to sell you all of the payments to be received after the 10th year. Explain how you can determine the value of this offer. http://dc620.4shared.com/doc/M3SH7KwE/preview.html 35/147 2/11/2014 Chapter 06 Discounted Cash Flow Valuation Multiple Choice Questions 113. Western Bank offers you a $21,000, 6-year term loan at 8 percent annual interest. What is the amount of your annual loan payment? A. $4,228.50 B. $4,542.62 C. $4,666.67 D. $4,901.18 E. $5,311.07 114. First Century Bank wants to earn an effective annual return on its consumer loans of 10 percent per year. The bank uses daily compounding on its loans. By law, what interest rate is the bank required to report to potential borrowers? A. 9.23 percent B. 9.38 percent C. 9.53 percent D. 9.72 percent E. 10.00 percent 115. Downtown Bank is offering 3.4 percent compounded daily on its savings accounts. You deposit $8,000 today. How much will you have in your account 11 years from now? A. $11,628.09 B. $11,714.06 C. $12,204.50 D. $12,336.81 E. $12,414.14 116. You want to buy a new sports coupe for $41,750, and the finance office at the dealership has quoted you an 8.6 percent APR loan compounded monthly for 48 months to buy the car. What is the effective interest rate on this loan? A. 8.28 percent B. 8.41 percent C. 8.72 percent D. 8.87 percent E. 8.95 percent http://dc620.4shared.com/doc/M3SH7KwE/preview.html 36/147 html 37/147 .4shared.com/doc/M3SH7KwE/preview.2/11/2014 Chapter 06 Discounted Cash Flow Valuation http://dc620. 11 C. You can earn an 11 percent annual return. you will combine your money into an account with a 5 percent return. $114.847. How much can you withdraw each month during retirement assuming a 20-year withdrawal period? A. $3.04 E. $2.630. Beginning three months from now.15 C.008.500 each quarter from your bank account to cover college expenses over the next 4 years.09 E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 117.22 B.00 D.454. $21. You want to be a millionaire when you retire in 40 years.25 percent interest per quarter. The return on the stock account is expected to be 7 percent. The account pays 1. $79. you will invest $1.44 B.html 38/147 . You are planning to save for retirement over the next 15 years. $22.15 E.711. How much do you need to have in your account today to meet your expense needs over the next 4 years? A.com/doc/M3SH7KwE/preview. $168. $3.13 C.100 a month in a stock account and $500 a month in a bond account.4shared. When you retire.636. $3. $240. To do this.406. $21. you want to be able to withdraw $1.113.29 http://dc620. $2. $22.068.21 D.47 D. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month? A.97 119. $22. $201. and the bond account will pay 4 percent.904.18 118.19 B. You are preparing to make monthly payments of $65.11 121.18 percent http://dc620. 119 D.407 B.000 as your first payment one year from now. $8. What is the present value of your winnings? A.160. Assume monthly compounding. 8. 97 B. What is the highest rate you can afford on a 48-month APR loan? A. 9.com/doc/M3SH7KwE/preview. $6. You can afford to make monthly payments of $1. The payments will increase in value by 4 percent each year. How many payments will you have made when your account balance reaches $9.170 from your local bank to buy a new sailboat.406 E.278? A. but no more.38 percent B. $6. $7.221. 9. 8.4shared. You will receive payments for 26 years. 8.67 percent C. You want to borrow $47.003.613 D.811. 124 E.372 C. You have just won the lottery and will receive $540.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 120.html 39/147 .01 percent E. into an account that pays 6 percent interest compounded monthly.82 percent D. 131 122. The appropriate discount rate is 10 percent. 108 C. beginning at the end of this month.906. $7.559. 50 percent http://dc620. The monthly payment on this loan will be $11.4shared.600. $2.html 40/147 .500 B.com/doc/M3SH7KwE/preview. The present value of the following cash flow stream is $5.750 C. 4.464 B.5 percent APR for this 300-month loan.25 percent C. you've arranged for a 30year mortgage loan for 80 percent of the $2.98 percent B. 5.933.01 percent E. What is the effective annual rate on this loan? A. $2.500 125. $847.000 D.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 123.480 D. so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment. $767.000. $1. To finance the purchase.46 percent D. $738.000 purchase price. $810. What will be the amount of the balloon payment if you are to keep your monthly payments at $850? A. 6.250 E. However.86 when discounted at 11 percent annually.000. you can only afford monthly payments of $850. You need a 25-year.315 124.316 C. Your mortgage bank will lend you the money at a 7.220 E. fixed-rate mortgage to buy a new home for $240. You have just purchased a new warehouse. $1. with interest compounded monthly. $2. 5. $745. What is the value of the missing cash flow? A. 6. 81 B.12 E. You have your choice of two investment accounts. $6.08 D.511.5 percent continuously compounded lump sum investment. Investment A is a 5-year annuity that features end-of-month $2.17 E. also good for five years.08 128.15 129. How much would you need to invest in B today for it to be worth as much as investment A five years from now? A.333.000 to produce today.com/doc/M3SH7KwE/preview. $6.html 41/147 .500 payments and has an interest rate of 11.250. Given an interest rate of 8 percent per year.420. Investment B is a 10.206.57 percent E. $119.138.307.06 C. $131. $108. 8. What is the present value of $1. $129.5 percent compounded monthly. 7.487.109. $6. $6. $6. $4.78 D. $4. $124.67 B.33 D. what is the value at date t = 9 of a perpetual stream of $500 annual payments that begins at date t = 17? A.008.000. $6.23 percent D. 8. The asset costs $71.17 http://dc620.646.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 126.00 E.4shared.19 C. At what rate will the firm just break even on this contract? A.36 B.90 percent 127. at a discount rate of 10 percent if the first payment is received 6 years from now and the last payment is received 28 years from now? A.01 percent C.067. 8. Consider a firm with a contract to sell an asset 3 years from now for $90. $3.176.87 percent B.100 per year. 8. $6.407.87 C.318. 79 percent E.47 percent C. $1.00 percent B. 15. 15.55 percent D.11 131. The interest rate is quoted as 10 percent plus 5 points. You just received an offer in the mail to transfer your $5.4 percent. What is the actual rate you are paying on this loan? A. A point on a loan is simply 1 percent (one percentage point) of the loan amount.047.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 130.000. $1. All is not lost.30 E. 15. 15. Your holiday ski vacation was great. How many less payments will you have to make to pay off this debt if you transfer the balance to the new card? A. You are looking at a one-year loan of $10. 0.90 B.000.49 payments http://dc620. 1. You plan to make payments of $510 a month on this debt.87 C. $1. You want to buy a new sports car for $55. The contract is in the form of a 60-month annuity due at a 6 percent APR.84 percent 132. $1.072.7 percent. compounded monthly.053. The interest rate quotation in this example requires the borrower to pay 5 points to the lender up front and repay the loan later with 10 percent interest.com/doc/M3SH7KwE/preview.48 payments C. 1.10 payments D. which charges an annual rate of 18.058.html 42/147 .4shared.000 balance from your current credit card.23 payments E.01 D. 0. $1.063. What will your monthly payment be? A.36 payments B. 15. Quotes similar to this one are very common with home mortgages. to a new credit card charging a rate of 9. 2. but it unfortunately ran a bit over budget. varying amounts that are paid at even intervals forever D. unequal payments that occur at set intervals for a limited period of time Refer to section 6. equal payments paid at regular intervals of time on an ongoing basis E.html 43/147 .2 Topic: Perpetuity http://dc620.2 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-2 Section: 6.2 Topic: Annuity 2.2/11/2014 Chapter 06 Discounted Cash Flow Valuation Chapter 06 Discounted Cash Flow Valuation Answer Key Multiple Choice Questions 1.com/doc/M3SH7KwE/preview. increasing payments paid forever C. equal payments paid at regular intervals over a stated time period D. increasing payments paid for a definitive period of time B. Which one of the following accurately defines a perpetuity? A. unending equal payments paid at either equal or unequal time intervals Refer to section 6. An ordinary annuity is best defined by which one of the following? A. a limited number of equal payments paid in even time increments B.2 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-2 Section: 6.4shared. payments of equal amounts that are paid irregularly but indefinitely C. unending equal payments paid at equal time intervals E. html 44/147 . Which one of the following terms is used to identify a British perpetuity? A.3 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-4 Section: 6. common rate Refer to section 6. stated interest rate B. ordinary annuity B.com/doc/M3SH7KwE/preview. effective annual rate D. discounted loan E. consol Refer to section 6.2 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-2 Section: 6.4shared. simple rate E.2 Topic: Consol 4.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 3. amortized cash flow C. annuity due D.3 Topic: Stated rate http://dc620. The interest rate that is quoted by a lender is referred to as which one of the following? A. compound rate C. What is the interest rate charged per period multiplied by the number of periods per year called? A. consolidated monthly rate Refer to section 6.3 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-4 Section: 6. stated rate B. daily interest rate Refer to section 6. effective annual rate D.3 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-4 Section: 6. compound interest rate E. A monthly interest rate expressed as an annual rate would be an example of which one of the following rates? A. periodic interest rate D.com/doc/M3SH7KwE/preview.3 Topic: Effective annual rate 6.html 45/147 .2/11/2014 Chapter 06 Discounted Cash Flow Valuation 5.3 Topic: Annual percentage rate http://dc620. periodic monthly rate E.4shared. annual percentage rate C. discounted annual rate C. effective annual rate B. pure discount loan E. continuous C.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 7.4shared. 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. interest-only loan Refer to section 6. balloon D. amortized B.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6.com/doc/M3SH7KwE/preview.4 Topic: Pure discount loan 8. balloon loan D. interest-only Refer to section 6.html 46/147 . A.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. amortized loan B.4 Topic: Interest-only loan http://dc620. pure discount E. modified loan C. A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. balloon loan D.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 9. interest-only loan Refer to section 6. remainder loan E. modified loan C. including both interest and principal amounts. are insufficient to retire the entire loan amount. Which one of the following terms is defined as a loan wherein the regular payments. 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. balloon loan D.4shared.4 Topic: Balloon loan http://dc620.4 Topic: Amortized loan 10.html 47/147 .com/doc/M3SH7KwE/preview. continuing loan C. amortized loan B. interest-only loan Refer to section 6. pure discount loan E. which then must be repaid in one lump sum? A. amortized loan B.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. D.2 Topic: Present and future values http://dc620.2 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-2 Section: 6. Refer to section 6. D. B. Annuity B is an annuity due.com/doc/M3SH7KwE/preview. You are comparing two investment options that each pay 5 percent interest.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 11. These two annuities have equal present values as of today and equal future values at the end of year five. Option A has the higher future value at the end of year three. B. Option A pays three annual payments starting with $2.4shared. Both options are of equal value given that they both provide $12. C. You are comparing two annuities which offer quarterly payments of $2.000 of income.1 and 6.2 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-2 Section: 6. Option B has a higher present value at time zero than does option A.000 each. Both options will provide you with $12. compounded annually. Option B is a perpetuity. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Option A is an annuity.html 48/147 .2 Topic: Annuity present and future values 12.000 each. E. Annuity A has a smaller future value than annuity B. Refer to sections 6. Which one of the following statements is correct given these two investment options? A.000 of income.500 for five years and pay 0. Which one of the following statements is correct concerning these two annuities? A. Option B pays three annual payments of $4. Annuity B has a smaller present value than annuity A. These two annuities have equal present values but unequal futures values at the end of year five. C.75 percent interest per month. E.000 the first year followed by two annual payments of $5.1 and 6. 4shared.1 Topic: Present and future values http://dc620. Both projects have the same future value at the end of year 4. Both projects have the same future value given a zero rate of return. II only B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 13. given a positive rate of return.1 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-1 Section: 6. given a positive discount rate. Project X has a higher present value than Project Y. Project Y has a higher present value than Project X. II and IV only E. II. You are considering two projects with the following cash flows: Which of the following statements are true concerning these two projects? I. A. IV.html 49/147 . II and III only D.com/doc/M3SH7KwE/preview. and IV only Refer to section 6. II. III. given a positive discount rate. I and III only C. I. Refer to section 6.html 50/147 . As long as the discount rate is positive. Project B will always be worth less today than will Project A.1 Topic: Present value http://dc620. E. Both sets of cash flows have equal present values as of time zero given a positive discount rate. The present value of Project A cannot be computed because the second cash flow is equal to zero. but those of Project A are not. C. D.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 14.1 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-1 Section: 6. B. The cash flows for Project B are an annuity.com/doc/M3SH7KwE/preview. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three.4shared. Which one of the following statements is correct given the following two sets of project cash flows? A. 4shared. A. III. The present value of a perpetuity cannot be computed. compounded annually. When comparing loans. D. Annual interest rates consider the effect of interest earned on reinvested interest payments.3 Topic: Interest rate http://dc620.3 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-4 Section: 6. I and II only B. E. C. II. you should compare the effective annual rates. II. An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest. Annual and effective interest rates are equal when interest is compounded annually.html 51/147 . IV. III. B.com/doc/M3SH7KwE/preview.2 Topic: Annuities and perpetuities 16. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. Which of the following statements related to interest rates are correct? I. but the future value can. and IV only Refer to section 6. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments. Perpetuities are finite but annuities are not. I. Refer to section 6. II and IV only D.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 15.2 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-2 Section: 6. II and III only C. and III only E. given an interest rate of 12 percent. Which one of the following statements related to annuities and perpetuities is correct? A. II. compounded monthly. Most loans are a form of a perpetuity. 3 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-4 Section: 6. Which one of the following statements concerning interest rates is correct? A.3 Topic: Interest rate 18. The effective annual rate decreases as the number of compounding periods per year increases. Which one of these statements related to growing annuities and perpetuities is correct? A.2 Topic: Growing annuities and perpetuities http://dc620.com/doc/M3SH7KwE/preview. An increase in the rate of growth will decrease the present value of an annuity. E. E.4shared. Borrowers would prefer monthly compounding over annual compounding. C. Refer to section 6.html 52/147 . The present value of a growing perpetuity will decrease if the discount rate is increased. Refer to section 6. D. Growth rates cannot be applied to perpetuities if you wish to compute the present value. D. For any positive rate of interest. B. The future value of an annuity will decrease if the growth rate is increased. the effective annual rate will always exceed the annual percentage rate.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 17. C. The effective annual rate equals the annual percentage rate when interest is compounded annually. The cash flow used in the growing annuity formula is the initial cash flow at time zero.2 AACSB: N/A Bloom's: Comprehension Difficulty: Intermediate Learning Objective: 6-1 Section: 6. Savers would prefer annual compounding over monthly compounding. B. 3 Topic: Interest compounding http://dc620. daily E. annual B.com/doc/M3SH7KwE/preview. An increase in time increases the future value given a zero rate of interest.3 AACSB: N/A Bloom's: Comprehension Difficulty: Intermediate Learning Objective: 6-2 Section: 6. semi-annual C. Time and future values are inversely related. E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 19. Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate? A.3 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-2 Section: 6. continuous Refer to section 6. all else held constant. B. monthly D. Time and present value are inversely related. Refer to section 6. Interest rates and time are positively related. An increase in the discount rate increases the present value.3 Topic: Time value relationships 20.html 53/147 . D. all else held constant. C. Which one of the following statements correctly states a relationship? A. all else held constant. given positive rates.4shared. The principal is repaid in a lump sum at the end of the loan period. The principal is repaid in equal annual payments. bullet loan Refer to section 6.4 Topic: Pure discount loan 22. How is the principal amount of an interest-only loan repaid? A. D. The entire repayment of which one of the following loans is computed simply by computing a single future value? A. interest-only loan B.4 Topic: Interest-only loan http://dc620. pure discount loan E. The principal is forgiven over the loan period so does not have to be repaid.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 21. B. C.4shared. Refer to section 6. The principal is repaid in equal increments and included in each loan payment. The principal is repaid in increasing increments through regular monthly payments. amortized loan D.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6.html 54/147 . E. balloon loan C.com/doc/M3SH7KwE/preview. 4 Topic: Amortized loan 24. interest-only loan B. 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.com/doc/M3SH7KwE/preview.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. balloon loan where 50 percent of the principal is repaid as a balloon payment Refer to section 6. An amortized loan: A. D.4shared. A. repays both the principal and the interest in one lump sum at the end of the loan term. may have equal or increasing amounts applied to the principal from each loan payment. discount loan E. C.4 Topic: Loan types http://dc620. requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term.4 AACSB: N/A Bloom's: Comprehension Difficulty: Intermediate Learning Objective: 6-3 Section: 6.html 55/147 . You need $25. requires that all payments be equal in amount and include both principal and interest.000 today and have decided to take out a loan at 7 percent for five years. amortized loan with equal loan payments D. amortized loan with equal principal payments C.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 23. requires the principal amount to be repaid in even increments over the life of the loan. E. Refer to section 6. B. 201.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 25.19 D. what are these payments worth to you on the day you enter college? A.00 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.608. $4.87 E. $4.2 Topic: Annuity present value http://dc620.800. $4.88 C.html 56/147 . At a 5.4shared.com/doc/M3SH7KwE/preview.16 B. $4. $4.299. Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree.509.5 percent discount rate. 40 D.html 57/147 . $181. you will receive $2.333. If you can earn 7 percent on your money. $185. You just won the grand prize in a national writing contest! As your prize.252. $190.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 26.4shared.338.71 B.411.450.33 E.2 Topic: Annuity present value http://dc620. $178. what is this prize worth to you today? A.25 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.com/doc/M3SH7KwE/preview. $172.06 C.000 a month for ten years. If the interest rate is 8.67 E. $9.84 D.6 percent.348. Phil can afford $180 a month for 5 years for a car loan. $7.2 Topic: Loan amount http://dc620.00 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.266.750.com/doc/M3SH7KwE/preview.400. $8. how much can he afford to borrow to purchase a car? A. $9.03 C.00 B.4shared.html 58/147 .752.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 27. $8. html 59/147 .414 to you today.4shared.311 to you today. C. You are the beneficiary of a life insurance policy. AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. You should accept the payments because they are worth $247.000 today or receive payments of $1.400 a month for 20 years. You should accept the payments because they are worth $209.2 Topic: Annuity present value http://dc620.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 28.413 to you today.000 to you today. E. Which option should you take and why? A. B.800 to you today. You should accept the $200. You should accept the payments because they are worth $336.com/doc/M3SH7KwE/preview.000 because the payments are only worth $195. You should accept the $200.000 because the payments are only worth $189. The insurance company informs you that you have two options for receiving the insurance proceeds. You can earn 6 percent on your money. D. You can receive a lump sum of $200. what is this employee benefit worth to you today? A.html 60/147 . $44. $42. Your employer contributes $75 a week to your retirement plan.987. $40.4shared.618.2 Topic: Present value http://dc620. Given these assumptions. $44.5 percent.384.com/doc/M3SH7KwE/preview.211.46 C.306.69 B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 29.11 D.74 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.16 E. $44. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7. The money will be set aside in a separate savings account which pays 4.548. $81. $81. $81. 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.333.068.500 a month for the next 5 years as a safety net for recessionary periods.33 E.2 Topic: Annuity due present value http://dc620.html 61/147 .07 B.760.20 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. The Design Team just decided to save $1.18 D. $80.4shared.459.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 30.com/doc/M3SH7KwE/preview. The first deposit will be made today. $80.79 C.5 percent interest compounded monthly. 68 E.09 B. if you make payments of $25 a month for the next six months.22 C. $139.com/doc/M3SH7KwE/preview.html 62/147 . In keeping with his reputation. He also charges you 1.5 percent interest per month. $138.4shared. $144. 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.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 31.2 Topic: Loan present value http://dc620. $134. How much money are you borrowing? A.57 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $142. he requires that the first payment be paid today.50 D. com/doc/M3SH7KwE/preview.498 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $266. $241.2 Topic: Annuity due present value http://dc620.409 D. What is the value of this annuity today if the discount rate is 8.621 C.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 32.5 percent? A.000 a year for 25 years. You buy an annuity that will pay you $24. $251.309 B.319 E. $258.4shared. $245.html 63/147 . The payments are paid on the first day of each year. com/doc/M3SH7KwE/preview. $2.991 = $1. You are scheduled to receive annual payments of $4.221 D.990 . $2.08 ´ $24.991 = $1. 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? A.$24.2 Topic: Annuity present value http://dc620.999 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-1 Section: 6. $2.227 E.999 Note: The difference = 0.013 C. $2. The discount rate is 8 percent. $1.304 Difference = $26.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 33.html 64/147 .999 B.4shared.800 for each of the next 7 years. How much does the second annuity pay each year for 20 years if it pays at the end of each year? A. $5.309 D.4shared.75 percent. $5.000 ´ (1 + 0.2 Topic: Annuity comparison http://dc620. then the cash flow has to equal: $5. The applicable discount rate is 8. You are comparing two annuities with equal present values. $5.0875) = $5. $5.438 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6.211 B.html 65/147 . $5.267 C.438 Because each payment is received one year later.390 E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 34.com/doc/M3SH7KwE/preview. One annuity pays $5.000 on the first day of each year for 20 years. 06 C. $121. $124. Trish receives $480 on the first of each month. Both Trish and Josh will receive payments for next three years.08 E. $129.5 percent discount rate. what is the difference in the present value of these two sets of payments? A.63 B.com/doc/M3SH7KwE/preview. Josh receives $480 on the last day of each month. At a 9.30 D. $118.2 Topic: Annuity comparison http://dc620.50 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6.html 66/147 . $132.4shared.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 35. 878. $306. $3.414 D. $3. $2.476 E.115 B.908 E.2 Topic: Annuity future value 37.200 a year for 40 years at 8 percent interest? Assume annual compounding.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 36.619.868 D. $3.990 C.989.com/doc/M3SH7KwE/preview. $301.711. What is the future value of $1. $347.492 C.406 B. $310.html 67/147 . What is the future value of $15.000 a year for 30 years at 12 percent interest? A. $4. A.4shared.223 http://dc620.267 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.021. $342. 2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.com/doc/M3SH7KwE/preview.4shared.2 Topic: Future value http://dc620.html 68/147 . 429 B.html 69/147 .com/doc/M3SH7KwE/preview.806.508.2 Topic: Annuity future value http://dc620. Alexa plans on saving $3.316 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $1. $2.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 38.000 a year and expects to earn an annual rate of 10.369 C.211. $2.25 percent. How much will she have in her account at the end of 45 years? A.4shared. $1.838.333.407 D. $2.572 E. 065 = $8.69 = $8.html 70/147 .062 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6. Theresa adds $1. $8.4shared.211 E.034.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 39.062 B. Marcus adds $1.127 D. $8.113 C.034.096.000 to her savings account on the first day of each year.69 ´ 0.062 Note: Difference = $124. They both earn 6. $8.219 Difference = $132.5 percent annual interest.95 .2 Topic: Annuity comparison http://dc620.com/doc/M3SH7KwE/preview. What is the difference in their savings account balances at the end of 35 years? A.$124. $8.000 to his savings account on the last day of each year. $8. 76 E. The terms of the loan call for monthly payments for 5 years at 8.05 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. What is the amount of each payment? A.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 40.4shared. You are borrowing $17.800 to buy a car. $287.html 71/147 . $301.com/doc/M3SH7KwE/preview.6 percent interest.2 Topic: Loan payment http://dc620.12 D. $366. $342. $291.71 B.40 C. html 72/147 . Payments are made monthly.319 E. If you pay the mortgage according to the loan agreement. how much total interest will you pay? A. You borrow $165. $291. $229. $250. $206.000 to buy a house. The mortgage rate is 7.079 C.com/doc/M3SH7KwE/preview.5 percent and the loan period is 30 years. $264.408 B.332 D.2 Topic: Loan interest http://dc620.406 AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 6-2 Section: 6.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 41.4shared. 65 percent on the funds. 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. $3.973 C.4 million be paid to the CEO upon the successful completion of her first three years of service.2 Topic: Annuity payment http://dc620.277. $3. Holiday Tours (HT) has an employment contract with its newly hired CEO.409 D.006. The contract requires a lump sum payment of $10. $3. $3.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 42.4shared.190 E.html 73/147 . How much must HT set aside each year for this purpose? A.667 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.318.466.467 B.184. $3.com/doc/M3SH7KwE/preview. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. $1.com/doc/M3SH7KwE/preview.219 in her retirement savings account.919. 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? A. Nadine is retiring at age 62 and expects to live to age 85.116.92 B. $1. $1.html 74/147 . $2. On the day she retires.4shared. she has $348.46 D.329.847. $2.609.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 43.2 Topic: Annuity payment http://dc620.78 C.08 E.05 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. 15 E.301.2 Topic: Loan payment http://dc620.15) = $2.000 ´ (1 . $22.79 million.35 B.878.75 percent. $25. compounded monthly.16 Amount financed = $2.371. The loan terms require monthly payments for 15 years at an annual percentage rate of 7. $24.790. The firm paid a down payment of 15 percent in cash and financed the balance.607.97 C. What is the amount of each mortgage payment? A. $23.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 44. $23.11 D.322.com/doc/M3SH7KwE/preview.419. Kingston Development Corp. purchased a piece of property for $2.500 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.html 75/147 .0.4shared. $611.com/doc/M3SH7KwE/preview. how much must you pay each month? A. $736.25 percent.09 B.800 in student loans by the time you graduate. The interest rate is 4.05 E.50 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.50 C. If you want to have this debt paid in full within six years. $742.4shared.html 76/147 . $714.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 45. You estimate that you will owe $42.28 D. $674.2 Topic: Loan payment http://dc620. 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 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? A. $101.02 B. $112.23 C. $118.47 D. $121.60 E. $124.40 Amount financed = $3,500 - $300 = $3,200 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.2 Topic: Loan payment http://dc620.4shared.com/doc/M3SH7KwE/preview.html 77/147 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 47. Atlas Insurance wants to sell you an annuity which will pay you $3,400 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. $151,008.24 B. $154,208.16 C. $167,489.11 D. $173,008.80 E. $178,927.59 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.2 Topic: Annuity present value http://dc620.4shared.com/doc/M3SH7KwE/preview.html 78/147 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 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 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.2 Topic: Annuity present value http://dc620.4shared.com/doc/M3SH7KwE/preview.html 79/147 516. $42. starting immediately and continuing for 20 years. $41.01 D.890.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 49.2 Topic: Annuity due present value http://dc620. $43.4shared.333.29 E.600 on the first day of each year.75 percent? A.311. $38.16 C.com/doc/M3SH7KwE/preview.33 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $40. Your great aunt left you an inheritance in the form of a trust.html 80/147 .88 B. The trust agreement states that you are to receive $3. What is the value of this inheritance today if the applicable discount rate is 6.909. Option C is the best choice since it has the largest present value. http://dc620.16 at 7. D. Option C has a present value of $100.514. B. Option C is the best choice because it is has the largest current value. The offer gives you a choice of one of the following three offers: You can earn 7.255. Option B is the best choice because you will receive the most payments. Option A is the best choice as it provides the largest monthly payment. E. Option B is the best choice because it pays the largest total amount. C.68 at 7.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 50.5 percent. You are indifferent to the three options as they are all equal in value.000. You just received an insurance settlement offer related to an accident you had six years ago. Which one of the following statements is correct given this information? A. 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.html 81/147 . Option A has a present value of $90. Option B has a present value of $85.5 percent on your investments.5 percent.4shared.com/doc/M3SH7KwE/preview. The plan is to set aside an equal amount of money on the first day of each quarter starting today.4shared.70 C. $26. Samuelson Engines wants to save $750.75 percent on its savings.419.911.2 Topic: Annuity due payment http://dc620.08 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.29 E.05 D. $27. $27.com/doc/M3SH7KwE/preview. $26.html 82/147 .2 Topic: Annuity present value 51. How much does the firm have to save each quarter to achieve its goal? A.94 B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6.872.192. $27.000 to buy some new equipment six years from now.969. The firm can earn 4. how much will she have in her retirement account 35 years from now? A.2 Topic: Annuity future value http://dc620. $2. Her employer will provide a 50 percent match. $1.312 D.90 percent.286 C. In other words.007 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.123. $1.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 52. starting today. Stephanie is going to contribute $300 on the first of each month.989. $2.4shared.418 E.html 83/147 . $1. to her retirement account.com/doc/M3SH7KwE/preview.943.264 B.936. If both Stephanie and her employer continue to do this and she can earn a monthly rate of 0.068. her employer will contribute 50 percent of the amount Stephanie saves. com/doc/M3SH7KwE/preview. 13 years C. 16 years AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.html 84/147 .4shared. 15 years E. What is the length of the annuity time period? A.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 53. You are considering an annuity which costs $160.50 percent. 14 years D.2 Topic: Annuity time period http://dc620. The annuity pays $18. 12 years B.126 a year at an annual interest rate of 7.000 today. 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.2 Topic: Annuity payment http://dc620. 7. 7.4shared.87 years B. The interest rate is 14.23 years E.31 years 83.9 percent. 5.html 85/147 .93 years D.40 years C.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 54.com/doc/M3SH7KwE/preview.200 on your credit card to purchase some furniture.14 months/12 = 6.93 years AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. you borrowed $6. 6. 6. compounded monthly. Today. 32 years C. 4. 4.28292 quarters/4 = 4.html 86/147 . Meadow Brook Manor would like to buy some additional land and build a new assisted living center.2 Topic: Annuity time period http://dc620.com/doc/M3SH7KwE/preview.46 years D.6 million.82 years E.25 percent. 4. 4.4shared. The anticipated total cost is $23.32 years AACSB: Analytic Bloom's: Application Difficulty: Intermediate Learning Objective: 6-2 Section: 6. 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. The firm earns 6.91 years t = 17.2 million a quarter for this purpose.09 years B. How long does the company have to wait before expanding its operations? A. on the funds it saves. Management has decided to save $1. 4. compounded quarterly.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 55. compounded monthly. How long will it be until you run out of money? A. You have a total of $411. You want to withdraw $2.html 87/147 . starting today. 34.19 years E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 56.4shared.19 years AACSB: Analytic Bloom's: Application Difficulty: Intermediate Learning Objective: 6-2 Section: 6. You will never run out of money. 31. Today.500 at the beginning of every month.33688 months/12 = 48.56 years C.10 percent.2 Topic: Annuity time period http://dc620. 48. on this money throughout your retirement years.97 years B. t = 578.com/doc/M3SH7KwE/preview.016 in your retirement savings and have the funds invested such that you expect to earn an average of 7. you are retiring. 42.03 year D. com/doc/M3SH7KwE/preview. The terms of the loan call for daily payments of $100.html 88/147 .46 days E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 57. 300.9 percent. 341. What is the time period of this loan? Assume a 365 day year. The interest rate is 21. 316.09 days AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.81 days C.4shared. The firm currently needs to borrow $27. 264. compounded daily.36 days B.2 Topic: Annuity time period http://dc620. Gene's Art Gallery is notoriously known as a slow-payer. A. The first payment is due today.43 days D. 280.500 and only one company will even deal with them. 41 percent E.400. 6. 7.56 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 58. What is the rate of return on this project? A. 7.28 percent D.2 Topic: Interest rate http://dc620.4shared. 7.html 89/147 .97 percent B.04 percent C.com/doc/M3SH7KwE/preview. The Wine Press is considering a project which has an initial cash requirement of $187. The project will yield cash flows of $2.832 monthly for 84 months. 7. 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 59.4shared.67 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.97 percent C.20 percent D. your agent promises that you will receive payments of $1.2 Topic: Interest rate http://dc620. 6. Your insurance agent is trying to sell you an annuity that costs $200.45 percent E. By buying this annuity. What is the rate of return on this investment? A.com/doc/M3SH7KwE/preview. 6.000 today. 5. 5.html 90/147 . 6.225 a month for the next 30 years.75 percent B. 78 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. 9.94 percent B.com/doc/M3SH7KwE/preview. You have been investing $250 a month for the last 13 years.html 91/147 . 9. Today.36 percent D. 9. 8. 9.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 60.262.41 percent E.4shared. What is your average rate of return on your investments? A.2 Topic: Interest rate http://dc620. your investment account is worth $73.23 percent C. 2/11/2014 Chapter 06 Discounted Cash Flow Valuation 61. His holdings are now worth $598. 14.37 percent E.000 worth of New Tek stock annually for the past 11 years.24 percent C. 14.13 percent B. 14.100.29 percent D.68 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.4shared.html 92/147 . Will has been purchasing $25. 14. 14. What is his annual rate of return on this stock? A.com/doc/M3SH7KwE/preview.2 Topic: Interest rate http://dc620. Your father helped you start saving $20 a month beginning on your 5th birthday.12 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. 5.2 Topic: Interest rate http://dc620. 5. 6. What is the rate of return on your savings? A.91 in this account.4shared.15 percent B.30 percent C. 5.html 93/147 .com/doc/M3SH7KwE/preview.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 62.528." Today completes your 17th year of saving and you now have $6.47 percent D. 5. 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.98 percent E. 11. Today.90 percent D.54 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.com/doc/M3SH7KwE/preview.06 percent E. 10.4shared.67 percent B. you decide to save $50 a day. 12. In an attempt to reach this goal. You open an investment account and deposit your first $50 today. every day until you turn 40. you turn 23.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 63. 13.85 percent C. What rate of return must you earn to achieve your goal? A.2 Topic: Interest rate http://dc620.html 94/147 . Your birthday wish is that you will be a millionaire by your 40th birthday. 13. html 95/147 . $80.4shared. $82.141. $85. What is the value of this settlement to you today if you can earn 8 percent on your investments? A. The settlement calls for increasing payments over a 10-year period.16 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. The first payment will be paid one year from now in the amount of $10.2 Topic: Growing annuity http://dc620.192.000. You just settled an insurance claim.05 D.com/doc/M3SH7KwE/preview. $76.023.28 B. $84.14 E.408.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 64.5 percent annually.008. The following payments will increase by 4.76 C. $166.5 percent on your investments? A.4shared. You just won a national sweepstakes! For your prize. What is your inheritance worth to you today if you can earn 9.000.000. You will receive the first payment one year from now in the amount of $4.78 D. $46. $291.500 and will be paid one year from today.67 C. $300. Your grandfather left you an inheritance that will provide an annual income for the next 10 years. Every year after that.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 65.19 C. $36.464. $43.00 http://dc620. $31.67 B. the payments will increase by 3.121. $277.5 percent annually.699.908. you opted to receive never-ending payments. What is the present value of your prize at a discount rate of 8 percent? A.21 D.777.409. $41.12 E.2 Topic: Growing annuity 66. Every year thereafter.006.12 E.com/doc/M3SH7KwE/preview.17 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.15 B.666. the payment amount will increase by 6 percent. $248. The first payment will be $12.666.html 96/147 . 2 Topic: Growing perpetuity http://dc620.2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.com/doc/M3SH7KwE/preview.4shared.html 97/147 . 000 E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 67. This gift was established to provide scholarships for worthy students. the scholarship amount will be increased by 5.750 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. Southern Tours has determined that a 13.615 C. $220. $538.000 D.4shared.5 percent rate of return is applicable to this potential acquisition.400.226 E. they feel the business will be worthless. After that time. $601. $1.098 B. A wealthy benefactor just donated some money to the local college. $1. $545.html 98/147 .2 Topic: Growing perpetuity 68.000. $437.000 C.000.000 over the next three years.200. and $245. $503. The scholarship fund will last indefinitely. $1.000.450. Southern Tours is considering acquiring Holiday Vacations.com/doc/M3SH7KwE/preview. Annually thereafter.500 B. Management believes Holiday Vacations can generate cash flows of $187. $638. respectively. $750.5 percent to help offset the effects of inflation. What is Southern Tours willing to pay today to acquire Holiday Vacations? A.407 http://dc620. The first scholarships will be granted one year from now for a total of $35.920 D. What is the value of this gift today at a discount rate of 8 percent? A. 1 Topic: Present value http://dc620.4shared.2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.com/doc/M3SH7KwE/preview.html 99/147 . $4.4shared. $5.1 Topic: Present value http://dc620. If you want to have the same balance in your savings account at the end of the three years. $5.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 69.410 B.com/doc/M3SH7KwE/preview. $4. respectively.530 C.000 at the end of each year for the next three years. $4. The first option is to save $900. how much do you need to save today if you select the lump sum option? A.4 percent rate of return. $2.260 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.600 D. You are considering two savings options. regardless of the savings method you select.html 100/147 . The other option is to save one lump sum amount today.080 E. and $3.100. Both options offer a 7. 691 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.com/doc/M3SH7KwE/preview. What is the minimum amount that you will accept today if you are to select the lump sum offer? A. $29.000.407 C. $29. $30.439 E. The other offer is the payment of one lump sum amount today. $30.367 D.216 B.1 Topic: Present value http://dc620.4shared. $11.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 70. $28.html 101/147 . respectively. Your parents have made you two offers.000 at the end of each of the next three years. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. and $12.000. The first offer includes annual gifts of $10. $16.com/doc/M3SH7KwE/preview. $121.500 payable immediately. respectively.000 at the end of each year for the next three years.103 C. $117. and $46.333 D.388 E. What is this offer worth to you today at a discount rate of 6.877 B.500. $14.697 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.75 percent? A. $134.1 Topic: Present value 72.html 102/147 . A potential employer just offered you an annual salary of $41. All salary payments are made as lump sum payments at the end of each year. $16. Your goal is to work for three years and then return to school full-time in pursuit of an advanced degree. $44.406 B.847 http://dc620. and $8. You are considering a project which will provide annual cash inflows of $4. The offer also includes a starting bonus of $2. You are considering changing jobs. $15. $115.700.000. What is the present value of these cash flows.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 71.429 D. given a 9 percent discount rate? A.212 E.000. $112. $5. respectively.545 C. $15.000 a year for the next three years.4shared. 4shared.2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.1 Topic: Present value http://dc620.com/doc/M3SH7KwE/preview.html 103/147 . You should accept the $89.500 today in cash. E.1 Topic: Present value 74. $142. You should accept the second offer because it has the larger net present value.html 104/147 .554 B. respectively.880 D. which offer should you accept and why? A. You should accept the $89.131 E. $151. $148. You have some property for sale and have received two offers. You just signed a consulting contract that will pay you $35.500 today because it has the higher net present value. You should accept the first offer as it has the greatest value to you. B.000 annually at the end of the next three years.000.000 today and an additional $70.5 percent discount rate? A. C.000 two years from today.500 today because it has the lower future value. $52. $156.000. The second offer is the payment of $35. It does not matter which offer you accept as they are equally valuable.307 C.1 Topic: Present value http://dc620. What is the present value of these cash flows given a 10.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 73. $133. D.4shared. The first offer is for $89. If the applicable discount rate is 11.910 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. and $80.com/doc/M3SH7KwE/preview. AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.5 percent. 75 percent? A. it is adding another $12. Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica.478 AACSB: Analytic Bloom's: Application Difficulty: Intermediate Learning Objective: 6-1 Section: 6. $58. $30.com/doc/M3SH7KwE/preview.000 today. The company plans on making a final deposit of $20.1 Topic: Present value 76. One year ago. $53. $93.4shared.792 E. $89. $91.000 to this account.211 D. Deltona Motor Parts deposited $16.408 B.000 on the day you depart three years from today.5 interest? A.html 105/147 .695 C. Today. How much will be available when it is ready to buy the equipment.376 B.219 D. and a final payment of $45. The package requires that you pay $25. $86. $53.021 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-1 Section: 6.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 75. assuming the account pays 5.000 one year from today.1 Topic: Future value http://dc620. $56. $56.919 C.407 E. $91. What is the cost of this vacation in today's dollars if the discount rate is 9.500 in an investment account for the purpose of buying new equipment three years from today.000 to the account one year from today. $13.418 B. $36. nothing next year.883 D.50 E.1 Topic: Future value http://dc620.526.700. and $12.255 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-1 Section: 6.907. $13.5 percent on your funds? A.12 B. $32.779. $14.621.com/doc/M3SH7KwE/preview. $32. and $7.528. What will your investment account be worth at the end of year three if you can earn 8. What is the future value of these cash flows at the end of year five if the interest rate is 7 percent? A. $35.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 77.800.4shared. You plan on saving $5.57 C.907 C.200 this year.500 the following year.500 each year starting at the end of year one.11 D. $13.1 Topic: Future value 78. $14.html 106/147 .411 E. $8.40 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-1 Section: 6. $33. Lucas will receive $6. You will deposit these amounts into your investment account at the end of each year. All of this money will be saved for her retirement. $989. Year 3 = $12.html 107/147 .509 E.000. $1. Year 2 = $35.147.com/doc/M3SH7KwE/preview. $972.5 percent on her investments.1 Topic: Future value http://dc620.776 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.000.4shared. If she can earn an average of 10.373 B.457 C.311 D.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 79. $1.231.000. $1.006. how much will she have in her account 25 years after making her first deposit? A. Miley expects to receive the following payments: Year 1 = $60. $18.076.000 each year for the next three years. How much does the firm need to deposit today? A.299. Inc.95 B. starting one year from today. has a $75. The account pays a 4. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid.072.56 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. $21.5 percent rate of return.487.com/doc/M3SH7KwE/preview. $20. $31. The plan is to make an initial deposit today and then deposit an additional $15.000 liability it must pay three years from today.400.1 Topic: Future value http://dc620.html 108/147 .2/11/2014 Chapter 06 Discounted Cash Flow Valuation 80.4shared.33 D. $24. Blackwell.78 E.91 C. 875.67 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. $1.500. How much will the community shelter receive four years from today? A.html 109/147 .2/11/2014 Chapter 06 Discounted Cash Flow Valuation 81. $1.333 D.674. The fine calls for annual payments of $150.000. over the next four years.56 D.25 percent on the funds held. and $50. The government plans to invest the funds until the final payment is collected and then donate the entire amount. $515. $1.00 C. $1.000 C.572.600.150.71 E. $422.000. $458.000.4shared. to help the local community shelter. $100. including the investment earnings.1 Topic: Future value 82.200. The trust fund earns a fixed 6 percent rate of return. The first payment is due one year from today.000 B.497.000. How much money did the firm contribute to the fund assuming that only the interest income is distributed? A. respectively.333.com/doc/M3SH7KwE/preview. The government has imposed a fine on the Corner Tavern.000 http://dc620. $75. $1.737. $366.000 in scholarships each year for needy students. The government will earn 6. $349.000 E.06 B. Wicker Imports established a trust fund that provides $90. 2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.com/doc/M3SH7KwE/preview.2 Topic: Perpetuity present value http://dc620.html 110/147 .4shared. 500. $20.122 E.458. $28.000 a year forever for your heirs.212 C.55 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.html 111/147 . The trust fund is going to be invested very conservatively so the expected rate of return is only 5.48 B.000 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.300. $2.00 C. $2.121. $30.2 Topic: Perpetuity present value 84.80 E. $2. $2.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 83.60.13 D. $18.086. A preferred stock pays an annual dividend of $2. What is one share of this stock worth today if the rate of return is 11. $2.000 D.957 B.2 Topic: Perpetuity present value http://dc620.75 percent? A. You would like to establish a trust fund that will provide $120.75 percent.4shared.com/doc/M3SH7KwE/preview. $22. How much money must you deposit today to fund this gift for your heirs? A. 5.2 Topic: Perpetuity 86.10 percent E. What is the rate of return? A.75 percent B.15 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.00 percent E.2 Topic: Perpetuity rate http://dc620.000 a year forever. He invested this money such that it will provide annual payments of $2.000 for an annuity that will pay you and your heirs $45.80 percent C.00 percent D.75 percent D. 5. 6. The value of his winnings at the time was $50. 5. You grandfather won a lottery years ago.000. 6.25 percent B. 5.50 percent C. 4.com/doc/M3SH7KwE/preview.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 85.html 112/147 .400 a year to his heirs forever. What rate of return are you earning on this policy? A. 5. 4.25 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. 5. You just paid $750.4shared. $3.3 Topic: Annual percentage rate http://dc620.70 percent APR = 0. 21.com/doc/M3SH7KwE/preview.80 B. $3.65 percent interest per month.4shared.95 C.10 D. $3. The stock is currently priced at $59. The preferred stock of Casco has a 5. What is the amount of the annual dividend? A.2 Topic: Annuity payment 88. $2.30 ´ 0. 20. What is the annual percentage rate on your account? A. 18.25 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 87.0548 = $3. 19.html 113/147 .80 percent C.30 per share.80 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6.40 C = $59.48 percent dividend yield.25 E.0165 ´ 12 = 19. 21.25 percent E.90 percent D.95 percent B. Your credit card company charges you 1. $2. You are paying an effective annual rate of 18.18 percent D.html 114/147 .3 Topic: Annual percentage rate 90.4shared. 9.64 percent E.3 Topic: Annual percentage rate http://dc620. What is the annual percentage rate on a loan with a stated rate of 2. The interest is compounded monthly.00 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. 18.00 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6.50 percent B.0225 ´ 4 = 9.00 percent B. 9. 17.09 percent C.25 percent D. 9. 19. 18. What is the annual percentage rate on this account? A. 9.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 89.com/doc/M3SH7KwE/preview.00 percent C.25 percent per quarter? A.31 percent APR = 0.974 percent on your credit card.27 percent E. 9. 18. com/doc/M3SH7KwE/preview. 9.57 percent E.44 percent D. 9.68 percent C.91 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6.62 percent B.72 percent D. 19. 19. 9. Your credit card company quotes you a rate of 17. 19.9 percent. 19.3 Topic: Effective interest rate http://dc620. 9.4shared.03 percent B.3 Topic: Effective annual rate 92.72 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6.84 percent E.21 percent C. 19. What is the effective annual rate if a bank charges you 9.50 percent compounded quarterly? A.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 91. 9. Interest is billed monthly.html 115/147 . What is the actual rate of interest you are paying? A. the effective annual rate is 8. D. 23. A.68 percent. 23. C. Loan A offers a rate of 7.64 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. The Pawn Shop loans money at an annual rate of 21 percent and compounds interest weekly. AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-4 Section: 6. the annual percentage rate is 7. B. 23. compounded semi-annually.49 percent D. The terms of the two loans are equivalent with the exception of the interest rates. What is the actual rate being charged on these loans? A.3 Topic: Effective annual rate http://dc620. Which loan should you select and why? A.16 percent B. the effective annual rate is 8.32 percent C.html 116/147 . the annual percentage rate is 7. B.75 percent. The loans are equivalent offers so you can select either one. E.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 93. You are considering two loans. compounded daily. A. 23.06 percent.4shared. Loan B offers a rate of 8 percent. B.com/doc/M3SH7KwE/preview.16 percent.75 percent. 23.3 Topic: Effective annual rate 94.56 percent E. compounded monthly C.10 percent.4shared. compounded quarterly EARA = 3. 3. 3.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 95.html 117/147 .26 percent.25 percent. compounded semi-annually D. 3. You have $5.15 percent. AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-4 Section: 6.3 Topic: Effective annual rate http://dc620.com/doc/M3SH7KwE/preview. are given below. compounded annually B. respectively. There are five banks located in your area. 3. 3.26 percent Bank C offers the highest effective annual rate at 3.20 percent.276 percent.600 that you want to use to open a savings account. compounded continuously E. The rates paid by banks A through E. Which bank should you select if your goal is to maximize your interest income? A. 10.59 percent B.75 percent compounded continuously? A. 15. 16.17 percent B.3 Topic: Continuous compounding http://dc620. 15.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 96. 10.29 percent D.47 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. 10.62 percent C.84 percent E. 15. What is the effective annual rate of 14.3 Topic: Continuous compounding 97.4shared.69 percent D.24 percent C.07 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. 10.33 percent E. What is the effective annual rate of 9.html 118/147 .com/doc/M3SH7KwE/preview. 15.9 percent compounded continuously? A. 10. $0.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 98. You are going to loan a friend $900 for one year at a 5 percent rate of interest.0512711 .23 D.14 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-4 Section: 6. $1. $1.21 percent D.14 C.26 percent E.3 Topic: Continuous compounding 99. $1.05) = $1.com/doc/M3SH7KwE/preview.41 Additional interest = $900 ´ (0. What is the maximum rate the bank can actually earn based on the quoted rate? A.3 Topic: Interest compounding http://dc620.97 B. City Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.06 percent B.0. 8.4shared.75 percent annual percentage rate on its loans.36 E.58 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. 8. 8.html 119/147 . How much additional interest could you have earned if you had compounded the rate continuously rather than annually? A.14 percent C. $1. 8. 8. compounded annually. $9.00 B. You will repay the principal plus all the interest in one lump sum of $12. How much are you borrowing? A.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 100.48 percent.401.211. $11.800 two years from today. $10.250.html 120/147 . $10. You are borrowing money today at 8.877. compounded annually. $11.00 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.com/doc/M3SH7KwE/preview.16 E.16 C.04 D.900.4shared.4 Topic: Pure discount loan http://dc620. $13.441. 8.93 percent http://dc620.47 percent E.com/doc/M3SH7KwE/preview. $12.4 Topic: Pure discount loan 102. 9. How much will you have to repay? A. This morning.757.400. you borrowed $9.500 at 7.89 D. You have to repay the loan principal plus all of the interest six years from today.000.html 121/147 .45 percent C. On this date last year.65 percent annual interest. 8. $12.08 E. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 101. 8.92 B. $13. $12.13 C. 9.01 percent B.4shared.78 percent D.808.006. The payment that is required at that time is $6. you borrowed $3.20 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6.911. What is the interest rate on this loan? A. com/doc/M3SH7KwE/preview.4 Topic: Pure discount loan http://dc620.html 122/147 .4shared.2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6. 850 C.4 Topic: Interest-only loan 104. Payments are made annually. $3.600 D.250 Payment in year 2 = $18. $8.html 123/147 . $89. $1.000 ´ 0. What is the amount of your loan payment in year 2? A.000. $96.264 D.000 on an interest-only.000 + ($89. 10-year.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 103. $13.4 Topic: Interest-only loan http://dc620.com/doc/M3SH7KwE/preview. John's Auto Repair just took out an $89. What is the amount of the loan payment in year 10? A. $7.890 C.120 B.120 Payment in year 10 = $89.08) = $96.106 E. 8 percent. $945 B.4shared. interest-only loan from the bank.000 E. $6. On the day you entered college. $5. four-year loan at 5.120 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6.25 percent from your local bank. Payments are to be paid annually.000 ´ 0.0525 = $945 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6. you borrowed $18. $5. You just acquired a mortgage in the amount of $249. Interest is to be paid annually at the end of each year. $5. Equal payments are to be made at the end of each month for thirty years.44 D. $1. $925.00 E. $5.937. $1. $6.266.21 E. compounded monthly.511. On the day you entered college you borrowed $25.com/doc/M3SH7KwE/preview.4 Topic: Amortized loan http://dc620.11 Total interest paid = $25.937.60 Interest portion of first loan payment = AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-3 Section: 6.50 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6.html 124/147 .16 C. $6.500 at 6.0475 ´ 5 = $5.67 B.000 ´ 0.206. How much of the first loan payment is interest? (Assume each month is equal to 1/12 of a year. The terms of the loan include an interest rate of 4.529.20 B.403. How much total interest will you pay on this loan? A. $1.4 Topic: Interest-only loan 106.400.00 C.75 percent.000 from your local bank.548.) A.607. Assume that you complete college in four years. The terms stipulate that the principal is due in full one year after you graduate.50 D.4shared.75 percent interest.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 105. $1. 38 E. $698. $1. The first payment is due on July 1.453.2 Topic: Amortized loan http://dc620.25 percent. $2. The loan is to be repaid in equal monthly payments over 15 years.000 to buy a house. $603.32 B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 107.358.4shared. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.56 D.) A. $1.com/doc/M3SH7KwE/preview.14 C.056. On June 1.html 125/147 . you borrowed $212. The mortgage rate is 8.70 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-3 Section: 6. 83 E.61 C. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year. $268. The first payment is due one month from today. $917.67 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-3 Section: 6.com/doc/M3SH7KwE/preview.194.) A.2 Topic: Amortized loan http://dc620. The mortgage rate is 7. $1.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 108. This morning. $277.html 126/147 .4shared.35 percent. The loan is to be repaid in equal monthly payments over 20 years.000 to buy a house.06 D.84 B. $925. you borrowed $150. Feedback: Refer to section 6. The EAR considers compounding and is computed as (1 + r)n .1. Annuity A pays $2. Which annuity has the greater value today? Is there any circumstance where the two annuities would have equal values as of today? Explain.2 Topic: Annuity present value http://dc620.html 127/147 . The effective annual rate will always be higher than the annual percentage rate as long as the account is compounded more than once a year and the interest rate is greater than zero.com/doc/M3SH7KwE/preview. both of which pay a total of $20. where r is the rate per period and n is the number of periods per year. Annuity B pays $1.2/11/2014 Chapter 06 Discounted Cash Flow Valuation Essay Questions 109. where r is the rate per period and n is the number of periods per year. You are considering two annuities.000. If the discount rate is zero. Annuity A will have the greater value.000 at the end of each year for the next 10 years. Feedback: Refer to section 6.3 Topic: Annual and effective rates 110.3 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-4 Section: 6.2 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6.000 at the end of each year for the next 20 years. The EAR is the equivalent rate based on annual compounding. Of the two. Explain the difference between the effective annual rate (EAR) and the annual percentage rate (APR). then both annuities have equal values as both would have a current value of $20. which one has the greater importance and why? The APR is a stated rate and is computed as (r ´ n).000 over the life of the annuity.4shared. The EAR has greater importance because it is the actual cost of a loan. As long as the discount rate is positive. 4 AACSB: Reflective thinking Bloom's: Synthesis Difficulty: Intermediate Learning Objective: 6-3 Section: 6.4shared.html 128/147 . the principal amount is repaid over the loan term and thus the borrower does not have all of the loan proceeds available for his or her use during the loan term. which would be cheaper? The borrower might need the entire principal amount for the length of the loan period. Why might a borrower select an interest-only loan instead of an amortized loan.com/doc/M3SH7KwE/preview.4 Topic: Loan repayment http://dc620.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 111. Feedback: Refer to section 6. With an amortized loan. 2 AACSB: Analytic and reflective thinking Bloom's: Evaluation Difficulty: Intermediate Learning Objective: 6-2 Section: 6.com/doc/M3SH7KwE/preview. Kristie owns a perpetuity which pays $12. The difference between the two values is the maximum amount you should pay for this offer. Value of offer at 8 percent = $150. (Assuming a normal rate of interest.) Here's an example that can be used to explain this answer using an assumed 8 percent rate of interest. You should determine the present value of the perpetuity and also the present value of the first 10 payments at your discount rate. the offer will most likely be worth less than 50 percent of the perpetuity's total value.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 112.02 Feedback: Refer to section 6.000 .479.4shared.2 Topic: Perpetuity and annuity values http://dc620. Explain how you can determine the value of this offer.520.html 129/147 . She comes to you and offers to sell you all of the payments to be received after the 10th year.$80.98 = $69.000 at the end of each year. html 130/147 . $4.000. 6-year term loan at 8 percent annual interest.10)1/365 .53 percent http://dc620. 9. By law.07 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 6-9 Learning Objective: 6-2 Section: 6. 10. Western Bank offers you a $21. $4. First Century Bank wants to earn an effective annual return on its consumer loans of 10 percent per year.1] = 9.38 percent C.666. what interest rate is the bank required to report to potential borrowers? A.2 Topic: Loan payment 114.542.50 B.com/doc/M3SH7KwE/preview.2/11/2014 Chapter 06 Discounted Cash Flow Valuation Multiple Choice Questions 113.901. $4.00 percent APR = 365 ´ [(1 + 0. $5.67 D.23 percent B. $4.311.4shared.18 E. 9. 9.53 percent D.228. The bank uses daily compounding on its loans.72 percent E. 9.62 C. What is the amount of your annual loan payment? A. 3 Topic: Interest rate http://dc620.html 131/147 .2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-15 Learning Objective: 6-4 Section: 6.4shared.com/doc/M3SH7KwE/preview. 95 percent AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 6-20 Learning Objective: 6-4 Section: 6.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 115.414. What is the effective interest rate on this loan? A.086/12)]12 . $12.714. $12.336.81 E.28 percent B.html 132/147 .95 percent EAR = [1 + (.750.1 = 8.1 Topic: Future value 116.41 percent C.6 percent APR loan compounded monthly for 48 months to buy the car.50 D. 8.4shared. 8. and the finance office at the dealership has quoted you an 8. 8.628. 8.034/365)]11 ´ 365 = $11.06 C.204. How much will you have in your account 11 years from now? A.000 ´ [1 + (0.com/doc/M3SH7KwE/preview.628.4 percent compounded daily on its savings accounts. $12.3 Topic: Effective interest rate http://dc620.14 FV = $8. 8.09 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 6-17 Learning Objective: 6-1 Section: 6. You deposit $8. $11.09 B. You want to buy a new sports coupe for $41.87 percent E. Downtown Bank is offering 3.72 percent D. $11.000 today. 847.454.com/doc/M3SH7KwE/preview. Beginning three months from now.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 117. The account pays 1. $21.00 D.25 percent interest per quarter.711.15 C. you want to be able to withdraw $1. $22.068.4shared.1 Topic: Present value http://dc620. How much do you need to have in your account today to meet your expense needs over the next 4 years? A.500 each quarter from your bank account to cover college expenses over the next 4 years. $21.18 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 6-26 Learning Objective: 6-1 Section: 6.630. $22. $22.html 133/147 .09 E.44 B. 97 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-32 Learning Objective: 6-2 Section: 6. $3. $2. $3. $2.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 118.113.2 Topic: Annuity payment http://dc620.904. When you retire. The return on the stock account is expected to be 7 percent.11 C. $3.008.04 E. How much can you withdraw each month during retirement assuming a 20-year withdrawal period? A.636. and the bond account will pay 4 percent.21 D.4shared.com/doc/M3SH7KwE/preview. You are planning to save for retirement over the next 15 years. you will invest $1.19 B.100 a month in a stock account and $500 a month in a bond account. you will combine your money into an account with a 5 percent return.406. To do this.html 134/147 . 28 = $240. The appropriate discount rate is 10 percent.000 = C ´ [{[1 + (0.13 C.000 as your first payment one year from now.003.000 = C ´ [{[1 + (0.com/doc/M3SH7KwE/preview. $7. $8.15 E. What is the present value of your winnings? A.html 135/147 . $114.57 .811. $168. You will receive payments for 26 years. The payments will increase in value by 4 percent each year.613 D. You can earn an 11 percent annual return.4shared. You want to be a millionaire when you retire in 40 years. C = $356. $201. $6.2 Topic: Annuity payment 120.22 B. $6.906.11/12)]30 ´ 12.57 Difference = $356.47 D. $240.406 E.11/12)]40 ´ 12. You have just won the lottery and will receive $540.$116. C = $116.29 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-34 Learning Objective: 6-2 Section: 6. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month? A.11 http://dc620.221.372 C.000.559. $7.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 119.28 FVA30 years = $1.000.29 FVA40 years = $1. $79.407 B. com/doc/M3SH7KwE/preview.2 Topic: Growing annuity http://dc620.2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-37 Learning Objective: 6-2 Section: 6.4shared.html 136/147 . 2 Topic: Number of payments 122.005.170 from your local bank to buy a new sailboat. You want to borrow $47. into an account that pays 6 percent interest compounded monthly. beginning at the end of this month.278? A. You are preparing to make monthly payments of $65. 8. How many payments will you have made when your account balance reaches $9. t = 108 payments AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-40 Learning Objective: 6-2 Section: 6. 9. You can afford to make monthly payments of $1. 108 C.67 percent C. 124 E. 97 B.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 121. but no more. 131 t = ln 1.01 percent E.7137/ln 1.html 137/147 . 9.160.38 percent B.18 percent http://dc620. 8.82 percent D.com/doc/M3SH7KwE/preview. Assume monthly compounding.4shared. What is the highest rate you can afford on a 48-month APR loan? A. 119 D. 8. 2 Topic: Interest rate http://dc620.4shared.html 138/147 .2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-41 Learning Objective: 6-2 Section: 6.com/doc/M3SH7KwE/preview. 316 C.315 Remaining principal = $240. $810. with interest compounded monthly.33 ´ [1 + (0.978. $738. fixed-rate mortgage to buy a new home for $240.000. so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment. What will be the amount of the balloon payment if you are to keep your monthly payments at $850? A. you can only afford monthly payments of $850. However.220 E.480 D.464 B. $745.html 139/147 .220 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-42 Learning Objective: 6-2 Section: 6.com/doc/M3SH7KwE/preview.978.021.2 Topic: Loan payment http://dc620. Your mortgage bank will lend you the money at a 7.4shared.33 Balloon payment = $124. $767.5 percent APR for this 300-month loan. $847.67 = $124.075/12)]25 ´ 12 = $810.$115. You need a 25-year.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 123.000 . 250/1.4shared. $1.86 .86 when discounted at 11 percent annually.11) .113) .750/1.000 D.500 PV of missing cash flow = $5.029. $1.com/doc/M3SH7KwE/preview.250 E. What is the value of the missing cash flow? A. The present value of the following cash flow stream is $5.($2.06 CF2 = $2.750 C.($1.114) = $2.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 124.933.06 ´ 1.112 = $2.029. $2.933.1 Topic: Present and future values http://dc620.000/1. $2.html 140/147 . $2.500 B.($1.500 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-43 Learning Objective: 6-1 Section: 6. 000 to produce today.25 percent C.46 percent D.98 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-45 Learning Objective: 6-4 Section: 6.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 125.23 percent D. The monthly payment on this loan will be $11. 8.600. 7. What is the effective annual rate on this loan? A. r = 8. 6. you've arranged for a 30year mortgage loan for 80 percent of the $2.600.000 ´ (1 + r)3.4shared.01 percent C.01 percent E. 4.080.23 percent http://dc620.57 percent E. 6.3 Topic: Effective annual rate 126. 8.000 purchase price.1 = 4. To finance the purchase.50 percent Loan amount = $2.html 141/147 .87 percent B. 8.com/doc/M3SH7KwE/preview. The asset costs $71.0487/12)]12 .000 EAR = [1 + (. 5.000 ´ 0. You have just purchased a new warehouse.000. 8. At what rate will the firm just break even on this contract? A. Consider a firm with a contract to sell an asset 3 years from now for $90. 5.80 = $2.000.90 percent $90.98 percent B.000 = $71. 2 Topic: Break-even interest http://dc620.html 142/147 .com/doc/M3SH7KwE/preview.2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-46 Learning Objective: 6-2 Section: 6.4shared. 511.html 143/147 .333.462. $108.com/doc/M3SH7KwE/preview.15 FVA = $2.36 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-47 Learning Objective: 6-1 Section: 6.771.500 payments and has an interest rate of 11.36 B.318.067.462.23 e-1 ´ 0. Investment A is a 5-year annuity that features end-of-month $2.4shared.2 Topic: Present value 128.100 per year. $6.105 ´ 5 = $119.176.115/12)]5 ´ 12 -1}/(0.23 PV = $201. You have your choice of two investment accounts. also good for five years. $6.420. $6.176. $6.33 D.15 = $6.06 http://dc620.87 C. $124.500 ´ [{[1 + (0.138.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 127. $6.08 PV = $9.115/12)] = $201. What is the present value of $1.67 B.5 percent continuously compounded lump sum investment. Investment B is a 10.206.067. $131.407.54/1. at a discount rate of 10 percent if the first payment is received 6 years from now and the last payment is received 28 years from now? A. $129.08 D.17 E. $119. How much would you need to invest in B today for it to be worth as much as investment A five years from now? A.12 E.008.5 percent compounded monthly.06 C. 3 Topic: Present value http://dc620.html 144/147 .2/11/2014 Chapter 06 Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-49 Learning Objective: 6-1 Section: 6.com/doc/M3SH7KwE/preview.4shared. $4.com/doc/M3SH7KwE/preview.81 B.250 PVt = 9 = $6.30 E.78 D. $6.250/1.058.0816-9 = $3.08 = $6. What will your monthly payment be? A. $1.053.00 E. $1. The contract is in the form of a 60-month annuity due at a 6 percent APR.81 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-50 Learning Objective: 6-1 Section: 6.2 Topic: Annuity due http://dc620. $6.646.01 D.90 B.html 145/147 . $1.063. $4.047.2 Topic: Perpetuity present value 130.307.646. what is the value at date t = 9 of a perpetual stream of $500 annual payments that begins at date t = 17? A. $1. $1.11 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-54 Learning Objective: 6-2 Section: 6.87 C.19 C.487. You want to buy a new sports car for $55. compounded monthly. Given an interest rate of 8 percent per year.4shared.000.109.17 PVt = 16 = $500/.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 129. $3.072.250. 000.com/doc/M3SH7KwE/preview.55 percent D.500 Loan repayment amount = $10.00 percent B.000 $11.101 = $11. Quotes similar to this one are very common with home mortgages.4 Topic: Effective rate with points http://dc620.500 ´ (1 + r)1.4shared. 15.000 = $9. A point on a loan is simply 1 percent (one percentage point) of the loan amount.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 131.html 146/147 .05) = $9. r = 15. 15.000 ´ 1.84 percent Loan amount received = $10. 15.000 ´ (1 .79 percent E.79 percent AACSB: Analytic Bloom's: Synthesis Difficulty: Challenge EOC #: 6-62 Learning Objective: 6-4 Section: 6.. What is the actual rate you are paying on this loan? A. 15. You are looking at a one-year loan of $10. The interest rate quotation in this example requires the borrower to pay 5 points to the lender up front and repay the loan later with 10 percent interest. The interest rate is quoted as 10 percent plus 5 points. 15.47 percent C. 1. 0. You plan to make payments of $510 a month on this debt.49 payments $5.{1 + (0. to a new credit card charging a rate of 9.10.4shared.23 payments E.7 percent.000 balance from your current credit card.094/12)] t = ln (1/0.10 payments D.48 payments C.36 payments B.24 payments Difference = 10.2 Topic: Number of periods 6-133 http://dc620. t = 10. How many less payments will you have to make to pay off this debt if you transfer the balance to the new card? A. 0.9232)/ln 1.4 percent. but it unfortunately ran a bit over budget.72 .000 = $510 ´ [(1 . which charges an annual rate of 18.24 = 0. You just received an offer in the mail to transfer your $5. 2.48 payments AACSB: Analytic Bloom's: Analysis Difficulty: Challenge EOC #: 6-67 Learning Objective: 6-2 Section: 6. Your holiday ski vacation was great. All is not lost.2/11/2014 Chapter 06 Discounted Cash Flow Valuation 132.007833.html 147/147 . 1.com/doc/M3SH7KwE/preview.094/12)]}t)/(0.