Exam 4: Discounted Cash Flow Valuation

If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compounded interest at 7.5% for three years which one will pay more and by how much?

Your rich uncle establishes a trust in your name and deposits $150,000 in it. The trust pays a guaranteed 4% rate of return. How much will you receive each year if the trust is required to pay you all of the interest earnings on an annual basis?

What is the annual percentage rate on a loan with a stated rate of 2% per quarter?

If a business takes out a $10,000,7 year,12% loan,the decrease in principal in year 1 is: (assume annual payments).

You are buying a previously owned car today at a price of $6,890. You are paying $500 down in cash and financing the balance for 36 months at 7.9%. What is the amount of each loan payment?

One year ago,the Jenkins Family Fun Center deposited $3,600 in an investment account for the purpose of buying new equipment four years from today. Today,it is adding another $5,000 to this account. It plans on making a final deposit of $7,500 to the account next year. How much will be available when it is ready to buy the equipment,assuming it earns a 7% rate of return?

The stated rate of interest is 10%. Which form of compounding will give the highest effective rate of interest?

The McDonald Group purchased a piece of property for $1.2 million. It paid a down payment of 20% in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75% compounded monthly. What is the amount of each mortgage payment?

You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years,how much must you pay each month?

Which of the following amounts is closest to the end value of investing $7,500 for 2.5 years at an effective annual interest rate of 12.36%. Interest is compounded semiannually.

You would like to give your daughter $40,000 towards her college education thirteen years from now. How much money must you set aside today for this purpose if you can earn 6.3% on your funds?

Thornton will receive an inheritance of $500,000 three years from now. Thorton's discount rate is 10% compounded semiannually. Which of the following values is closest to the amount that Thornton should accept today for the right to his inheritance?

An S&L provides a loan with 15 yearly repayments of $8,000 with the first payment beginning immediately. Which of the following amounts comes closest to the present value of the loan if the interest rate is 7%?

A friend who owns a perpetuity that promises to pay $1,000 at the end of each year,forever,comes to you and offers to sell you all of the payments to be received after the 25^th year for a price of $1,000. At an interest rate of 10%,should you pay the $1,000 today to receive payment numbers 26 and onwards? What does this suggest to you about the value of perpetual payments?

There are three factors that affect the future value of an annuity. Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.

You are to receive $75 per year indefinitely. The market rate of interest for these types of payments is 8%. The price you would pay for this stream is:

The Robertson Firm is considering a project which costs $123,900 to undertake. The project will yield cash flows of $4,894.35 monthly for 30 months. What is the rate of return on this project?

The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 3.25% interest compounded monthly. It deposits the first $1,500 today. If the company had wanted to deposit an equivalent lump sum today,how much would it have had to deposit?

Brinker,Inc. has been investing $136,000 a year for the past 4 years into a business venture. Today,Brinker sold that venture for $685,000. What is its rate of return on this venture?

You are considering a project with the following cash flows: What is the present value of these cash flows,given a 9% discount rate?