Question 1

You are borrowing $5,200 at 7.8 percent,compounded monthly.The monthly loan payment is $141.88.How many loan payments must you make before the loan is paid in full?

Accepted Answer

A) 30 
B) 36 
C) 40 
D) 42 
E) 48

Question 2

Lois is purchasing an annuity that will pay $5,000 annually for 20 years,with the first annuity payment made on the date of purchase.What is the value of the annuity on the purchase date given a discount rate of 7 percent?

Accepted Answer

A) $54,282.98 
B) $52,970.07 
C) $56,677.98 
D) $56,191.91 
E) $66,916.21

Question 3

Annuities where the payments occur at the end of each time period are called ________,whereas ________ refer to annuity streams with payments occurring at the beginning of each time period.

Accepted Answer

A) ordinary annuities; early annuities 
B) late annuities; straight annuities 
C) straight annuities; late annuities 
D) annuities due; ordinary annuities 
E) ordinary annuities; annuities due

Question 4

You want to purchase an annuity that will pay you $1,200 a quarter for 15 years and earn a return of 5.5 percent,compounded quarterly.What is the most you should pay to purchase this annuity?

Accepted Answer

A) $52,988.16 
B) $48,811.20 
C) $47,455.33 
D) $48,450.67 
E) $52,806.30

Question 5

You are buying a car for $7,500,paying $900 down in cash,and financing the balance for 24 months at 6.5 percent,compounded monthly.What is the amount of each monthly loan payment?

Accepted Answer

A) $318.64 
B) $294.01 
C) $302.02 
D) $264.78 
E) $245.09

Question 6

Assume your employer will contribute $50 a week for twenty years to your retirement plan.At a discount rate of 5 percent,compounded weekly,what is this employee benefit worth to you today?

Accepted Answer

A) $29,144.43 
B) $35,920.55 
C) $32,861.08 
D) $26,446.34 
E) $36,519.02

Question 7

Seven years ago,Carlos took out a mortgage for $185,000 at 5.6 percent,compounded monthly,for 30 years.He has made all of the monthly payments as agreed.What is his current loan balance?

Accepted Answer

A) $ 157,308.74 
B) $141,833.33 
C) $164,621.06 
D) $148,211.09 
E) $142,779.47

Question 8

You are retired,have $264,500 in your savings,withdraw $2,000 each month,and earn 4.5 percent,compounded monthly.How long will it be until you run out of money?

Accepted Answer

A) 13.67 years 
B) 15.25 years 
C) 22.08 years 
D) 13.02 years 
E) 18.78 years

Question 9

A credit card compounds interest monthly and has an effective annual rate of 12.67 percent.What is the annual percentage rate?

Accepted Answer

A) 12.35 percent 
B) 12.00 percent 
C) 11.99 percent 
D) 11.87 percent 
E) 11.93 percent

Question 10

You are considering a project with projected annual cash flows of $32,200,$41,800,and $22,900 for the next three years,respectively.What is the present value of these cash flows at a discount rate of 14 percent?

Accepted Answer

A) $86,487.47 
B) $75,866.20 
C) $77,103.18 
D) $81,292.25 
E) $66,549.30

Question 11

Wilt has a consulting contract that calls for annual payments of $50,000 a year for five years with the first payment due today.What is the current value of this contract if the discount rate is 8.4 percent?

Accepted Answer

A) $214,142.50 
B) $201,867.47 
C) $195,618.19 
D) $197,548.43 
E) $224,267.10

Question 12

Assume an annuity will pay $1,000 a year for five years with the first payment occurring in Year 4,that is,four years from today.When you compute the present value of that annuity using the PV formula,the PV will be as of which point in time?

Accepted Answer

A) Today,Year 0 
B) Year 1 
C) Year 3 
D) Year 4 
E) Year 2

Question 13

Shawn has $2,500 invested at a guaranteed rate of 4.35 percent,compounded annually.What will his investment be worth after five years?

Accepted Answer

A) $2,997.04 
B) $3,288.00 
C) $3,321.32 
D) $3,093.16 
E) $2,857.59

Question 14

Binder and Sons borrowed $138,000 for three years from their local bank and now they are paying monthly payments that include both principal and interest.Paying off debt by making instalment payments,such as this firm is doing,is referred to as:

Accepted Answer

A) foreclosing on the debt. 
B) amortizing the debt. 
C) funding the debt. 
D) calling the debt. 
E) refunding the debt.

Question 15

A project is expected to produce cash flows of $48,000,$39,000,and $15,000 over the next three years,respectively.After three years,the project will be worthless.What is the net present value of this project if the applicable discount rate is 15.25 percent and the initial cost is $78,500?

Accepted Answer

A) −$1,201.76 
B) $2,309.09 
C) −$3,457.96 
D) $1,808.17 
E) $3,132.48

Question 16

You have been awarded an insurance settlement of $250,000 that is payable one year from today.What is the minimum amount you should accept today in exchange for this settlement if you can earn 6.7 percent on your investments?

Accepted Answer

A) $232,866.67 
B) $234,301.78 
C) $242,408.19 
D) $250,000.00 
E) $238,079.19

Question 17

What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows?

Accepted Answer

A) There will be no effect on the PV. 
B) The PV will change but the direction of the change is unknown. 
C) The PV will remain the same as the timing of the cash flows must change also. 
D) The PV will increase. 
E) The PV will decrease.

Question 18

The net present value of a project is equal to the:

Accepted Answer

A) present value of the future cash flows. 
B) present value of the future cash flows minus the initial cost. 
C) future value of the future cash flows minus the initial cost. 
D) future value of the future cash flows minus the present value of the initial cost. 
E) sum of the project's anticipated cash inflows.

Question 19

Assume mortgage rates increase to 7.5 percent and you borrow $329,000 for 30 years to purchase a house.What will your loan balance be at the end of the first 15 years of monthly payments?

Accepted Answer

A) $238,854.07 
B) $194,311.64 
C) $248,153.73 
D) $207,308.09 
E) $192,938.72

Question 20

You just paid $525,000 for a security that will pay you and your heirs $25,000 a year forever.What rate of return will you earn?

Accepted Answer

A) 4.95 percent 
B) 4.39 percent 
C) 4.76 percent 
D) 5.00 percent 
E) 4.50 percent

Exam 4: Discounted Cash Flow Valuation