Question 1

Francis Peabody just won the $89,000,000 California State Lottery.The lottery offers the winner a choice of receiving the winnings in a lump sum or in 26 equal annual installments to be made at the beginning of each year.Assume that funds would be invested at 7.65%.Francis is trying to decide whether to take the lump sum or the annual installments.What is the amount of the lump sum that would be exactly equal to the present value of the annual installments? Round off to the nearest $1.

Accepted Answer

A) $89,000,000 
B) $38,163,612 
C) $13,092,576 
D) $41,083,128

Question 2

Ronald Slump purchased a real estate investment with the following end-of-year cash flows:
Year EOY Cash Flow
1 $200
2 $-350
3 $-430
4 $950
What is the present value of these cash flows if the appropriate discount rate is 20%?

Accepted Answer

A) $178 
B) $160 
C) $133 
D) $767

Question 3

Harold Hawkins bought a home for $320,000.He made a down payment of $45,000;the balance will be paid off over 30 years at a 6.775% rate of interest.How much will Harold's monthly payments be? Round off to the nearest $1.

Accepted Answer

A) $1,450 
B) $1,788 
C) $3,200 
D) $1,682

Question 4

How much would an investor be willing to pay today for an investment that returns $1,000 every year at year-end for five years if he wants to earn a 10% annual return on the investment?

Accepted Answer

A) $1,000 
B) $3,791 
C) $5,000 
D) $7,700

Question 5

You have just received an endowment of $32,976.You plan to put the entire amount in an account earning 8 percent compounded annually and to withdraw $4000 at the end of each year.How many years can you continue to make the withdrawals?

Accepted Answer

The answer of You have just received an endowment of...

Question 6

You have just won a magazine sweepstakes and have a choice of three alternatives.You can get $100,000 now,or $10,000 per year in perpetuity,or $50,000 now and $150,000 at the end of 10 years.If the appropriate discount rate is 12%,which option should you choose?

Accepted Answer

A) $100,000 now 
B) $10,000 perpetuity 
C) $50,000 now and $150,000 in 10 years

Question 7

Which of the following statements is true?

Accepted Answer

A) The future value of an annuity would be greater if funds are invested at the beginning of each period instead of at the end of each period. 
B) An annuity is a series of equal payments that are made,or received,forever. 
C) The effective annual rate (APR)of a loan is higher the less frequently payments are made. 
D) The future value of an annuity would be greater if funds are invested at the end of each period rather than at the beginning of each period.

Question 8

You have a credit card with a balance of $18,000.The annual interest rate on the card is 18% compounded monthly,and the minimum payment is $400 per month.If you pay only the minimum payment each month and do not make any new charges on the card,how many years will it take for you to pay off the $18,000 balance?

Accepted Answer

The answer of You have a credit card with a...

Question 9

Horace and Myrtle want to buy a house.Their banker offered them a fully amortizing $95,000 loan at a 12% annual rate for 20 years.What will their monthly payment be if they make equal monthly installments over the next 20 years?

Accepted Answer

A) $1,046 
B) $749 
C) $1,722 
D) $1,346

Question 10

You buy a race horse,which has a winning streak for four years,bringing in $500,000 per year,and then it dies of a heart attack.If you paid $1,518,675 for the horse four years ago,what was your annual return over this four-year period?

Accepted Answer

A) 8% 
B) 33% 
C) 18% 
D) 12%

Question 11

A friend of yours borrows $19,500 from the bank at 8% annually to be repaid in 10 equal annual end-of-year installments.The interest paid on this loan in year three is

Accepted Answer

A) $1,336.01. 
B) $1,560.00. 
C) $2,906.11. 
D) $1,947.10.

Question 12

A perpetuity is an investment that continues forever but pays a different dollar amount each year.

Accepted Answer

A) True 
 B)False

Question 13

Charlie Stone wants to retire in 30 years,and he wants to have an annuity of $1,000 a year for 20 years after retirement.Charlie wants to receive the first annuity payment at the end of the 30th year.Using an interest rate of 10%,how much must Charlie invest today in order to have his retirement annuity (round to the nearest $10)?

Accepted Answer

A) $500 
B) $490 
C) $540 
D) $570

Question 14

If your opportunity cost is 12%,how much will you pay for a bond that pays $100 per year forever?

Accepted Answer

The answer of If your opportunity cost is 12%,how much...

Question 15

If you have an opportunity cost of 10%,how much must you invest each year to have $4,000 accumulated in 10 years?

Accepted Answer

The answer of If you have an opportunity cost of...

Question 16

When comparing annuity due to ordinary annuities,annuity due annuities will have higher

Accepted Answer

A) present values. 
B) annuity payments. 
C) future values. 
D) both A and C. 
E) all of the above.

Question 17

You have just purchased a car from Friendly Sam.The selling price of the car is $6,500.If you pay $500 down,then your monthly payments are $317.22.The annual interest rate is 24%.How many payments must you make?

Accepted Answer

The answer of You have just purchased a car from...

Question 18

Edward Johnson decided to open up a Roth IRA.He will invest $1,800 per year for the next 35 years.Deposits to the Roth IRA will be made via a $150 payroll deduction at the end of each month.Assume that Edward will earn 8.75% annual interest compounded monthly over the life of the IRA.How much will he have at the end of 35 years?

Accepted Answer

A) $125,250 
B) $250,321 
C) $363,000 
D) $414,405

Question 19

If you have $375,000 in an account earning 9% annually,what constant amount could you withdraw each year and have nothing remaining at the end of 20 years?

Accepted Answer

A) $7,500 
B) $18,750 
C) $66,912 
D) $5,575 
E) $41,080

Question 20

You have borrowed $70,000 to buy rental property.You plan to make monthly payments over a 15-year period.The bank has offered you a 9% interest rate compounded monthly.Calculate the principal paid to the bank in month two of the loan.Assume end-of-period payments.

Accepted Answer

A) $184.01 
B) $186.38 
C) $188.46 
D) $190.64 
E) $192.73

Exam 6: The Time Value of Money-Annuities and Other Topics

Ronald Slump purchased a real estate investment with the following end-of-year cash flows: Year EOY Cash Flow 1 $200 2 $-350 3 $-430 4 $950 What is the present value of these cash flows if the appropriate discount rate is 20%?