Question 1

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

Accepted Answer

A) You should accept the payments because they are worth $209,414 to you today. 
B) You should accept the payments because they are worth $247,800 to you today. 
C) You should accept the payments because they are worth $336,000 to you today. 
D) You should accept the $200,000 because the payments are only worth $189,311 to you today. 
E) You should accept the $200,000 because the payments are only worth $195,413 to you today.

Question 2

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

Accepted Answer

A) $411.09 
B) $464.04 
C) $514.28 
D) $536.05 
E) $542.50

Question 3

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

Accepted Answer

A) $141.80 
B) $151.06 
C) $154.30 
D) $159.08 
E) $162.50

Question 4

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

Accepted Answer

A) stated interest rate 
B) compound rate 
C) effective annual rate 
D) simple rate 
E) common rate

Question 5

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

Accepted Answer

A) amortized loan 
B) continuing loan 
C) balloon loan 
D) remainder loan 
E) interest-only loan

Question 6

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

Accepted Answer

A) $72,008.24 
B) $74,208.16 
C) $78,818.41 
D) $83,008.80 
E) $88,927.59

Question 7

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

Accepted Answer

A) 8.94 percent 
B) 9.23 percent 
C) 9.36 percent 
D) 9.41 percent 
E) 9.78 percent

Question 8

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?

Accepted Answer

A) 17.50 percent 
B) 18.00 percent 
C) 18.25 percent 
D) 18.64 percent 
E) 19.00 percent

Question 9

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

Accepted Answer

A) 7.67 percent 
B) 8.09 percent 
C) 9.90 percent 
D) 10.06 percent 
E) 10.54 percent

Question 10

You have just won the lottery and will receive $540,000 as your first payment one year from now.You will receive payments for 26 years.The payments will increase in value by 4 percent each year.The appropriate discount rate is 10 percent.What is the present value of your winnings?

Accepted Answer

A) $6,221,407 
B) $6,906,372 
C) $7,559,613 
D) $7,811,406 
E) $8,003.11

Question 11

You are considering two savings options.Both options offer a 7.4 percent rate of return.The first option is to save $900,$1,500,and $3,000 at the end of each year for the next three years,respectively.The other option is to save one lump sum amount today.If you want to have the same balance in your savings account at the end of the three years,regardless of the savings method you select,how much do you need to save today if you select the lump sum option?

Accepted Answer

A) $3,410 
B) $3,530 
C) $3,600 
D) $4,560 
E) $4,780

Question 12

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?

Accepted Answer

A) $1,150,000 
B) $1,200,000 
C) $1,333,333 
D) $1,500,000 
E) $1,600,000

Question 13

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

Accepted Answer

A) $8,750.00 
B) $9,348.03 
C) $9,981.06 
D) $10,266.67 
E) $10,400.00

Question 14

What is the present value of $1,100 per year,at a discount rate of 10 percent if the first payment is received 6 years from now and the last payment is received 30 years from now?

Accepted Answer

A) $6,199.74 
B) $6,238.87 
C) $6,333.33 
D) $6,420.12 
E) $6,511.08

Question 15

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

Accepted Answer

A) $42,337.00 
B) $42,969.70 
C) $43,192.05 
D) $43,419.29 
E) $43,911.08

Question 16

You just acquired a mortgage in the amount of $249,500 at 6.75 percent interest,compounded monthly.Equal payments are to be made at the end of each month for thirty years.How much of the first loan payment is interest? (Assume each month is equal to 1/12 of a year.)

Accepted Answer

A) $925.20 
B) $1,206.16 
C) $1,403.44 
D) $1,511.21 
E) $1,548.60

Question 17

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

Accepted Answer

A) $172,252.71 
B) $178,411.06 
C) $181,338.40 
D) $185,333.33 
E) $190,450.25

Question 18

You just won a national sweepstakes! For your prize,you opted to receive never-ending payments.The first payment will be $12,500 and will be paid one year from today.Every year thereafter,the payments will increase by 3.5 percent annually.What is the present value of your prize at a discount rate of 8 percent?

Accepted Answer

A) $166,666.67 
B) $248,409.19 
C) $277,777.78 
D) $291,006.12 
E) $300,000.00

Question 19

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

Accepted Answer

A)  These two annuities have equal present values but unequal futures values at the end of year five. 
B)  These two annuities have equal present values as of today and equal future values at the end of year five. 
C)  Annuity B is an annuity due. 
D)  Annuity A has a smaller future value than annuity B. 
E)  Annuity B has a smaller present value than annuity A.

Question 20

Lucas will receive $7,100,$8,700,and $12,500 each year starting at the end of year one.What is the future value of these cash flows at the end of year five if the interest rate is 9 percent?

Accepted Answer

A) $33,418 
B) $33,907 
C) $34,276 
D) $36,411 
E) $37,255

Exam 6: Discounted Cash Flow Valuation