FINC 3304 [QUIZ] Chapter 5

1. The future value of a series of cash flows over time can be computed by:

A. computing the future value of the middle cash flow and multiplying that amount by the number of cash flows.

B. summing the amount of each of the individual cash flows and multiplying the summation by (1 + r)t, where t equals the total number of cash flows.

C. summing the future values of each of the individual cash flows.

D. discounting each of the individual cash flows and summing the results.

E. multiplying each individual cash flow by (1 + rt) and summing the results.

2. Sue borrowed $5,000 from her bank 3 years ago. The loan term is 5 years. Each year, Sue must repay the bank $1,000 plus the annual interest. Which type of loan does Sue have?

A. amortized

B. blended discount

C. interest-only

D. pure discount

E. complex

3. You are computing the future value with annual payments of $650 each for four years. The interest rate is 4 percent. The future value of each one of these four payments at the end of year 4 is:

A. $624.00, $652.00, $676.00, and $703.24.

B. $731.16, $676.00, $652.00, and $650.00.

C. $731.16, $703.04, $676.00, and $650.00.

D. $760.41, $731.16, $703.04, and $624.00.

E. $760.41, $731.16, $703.04, and $676.00.

FV Pmt 1 = $650 × (1.04)3 = $731.16

FV Pmt 2 = $650 × (1.04)2 = $703.04

FV Pmt 3 = $650 × (1.04)1 = $676.00

FV Pmt 4 = $650 × (1.04)0 = $650.00

4. Global Enterprises has just signed a $3 million contract. The contract calls for a payment of $.5 million today, $.9 million one year from today, and $1.6 million two years from today. What is this contract really worth if Global Enterprises can earn 12 percent on its money?

A. $2.21 million

B. $2.30 million

C. $2.39 million

D. $2.49 million

E. $2.58 million

5. CNP, Inc. is considering a project that will produce cash inflows of $12,000 in year one, $27,600 in year two, and $48,100 in year three. What is the present value of these cash inflows if the company assigns the project a discount rate of 10.5 percent?

A. $58,372.13

B. $64,999.91

C. $69,113.58

D. $71,824.90

E. $76,370.51

6. The Time Clock Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $61,000 a year for seven years. Project 2 will produce cash flows of $45,000 a year for fourteen years. The company requires an 11 percent rate of return. Which project should the company select and why?

A. Project 1; because the annual cash flows are greater during the early years of the project

B. Project 1; because the present value of its cash inflows exceeds those of project 2 by approximately $111,710

C. Project 2; because the total cash inflows are $203,000 greater than those of project 1

D. Project 2; because the present value of the cash inflows exceeds those of project 1 by approximately $26,740

E. It does not matter as both projects have almost identical values as of today

YOU NEED TO FIND THE NPV FOR EACH PROJECT USING THE CASH FLOW IN THE FINANCIAL CALCULATOR, THEN TAKE THE

DIFFERENCE.

Difference = $314,183.94 − $287,443.97 = $26,739.97

7. Dustin is considering an investment that will pay $3,000 a year for 10 years, starting

1 year from today. How much should Dustin pay for this investment if he wishes to earn a 9 percent rate of return?

A. $17,985.74

B. $18,349.81

C. $19,252.97

D. $20,415.57

E. $21,213.24

CF0 = 0; C01 = 3000; F01 = 10; I = 9; CPT NPV = $19,252.97

8. How much money does Melinda need to deposit into her investment account today if she wishes to withdraw $8,000 a year for twenty years? She expects to earn an average rate of return of 8.5 percent.

A. $72,994.13

B. $73,541.32

C. $74,141.76

D. $75,706.69

E. $76,828.79

CF0 = 0; C01 = 8000; F01 = 20; I = 8.5; CPT NPV = $75,706.69

9. Steven can afford car payments of $250 a month for 60 months. The bank will lend him this money at 6.2 percent interest. How much can Steven borrow?

A. $12,568.63

B. $12,869.39

C. $13,672.38

D. $14,104.91

E. $14,770.27

Calculator: N = 60; I/Y = 6.2/12; FV = -0; CPT PV = $12,869.39

10. The Thailand Co. is considering the purchase of some new equipment. The quote consists of a quarterly payment of $4,740 for 10 years at 6.5 percent interest. What is the purchase price of the equipment?

A. $34,075.06

B. $43,425.08

C. $67,049.80

D. $105,129.30

E. $138,617.88

Enter     10×4      .5/4      -4,740                         0

                N          I/Y         PV        PMT         FV

Solve for                                      138,617.88

11. The condominium at the beach that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment?

A. $2,291.89

B. $2,809.10

C. $3,287.46

D. $3,412.67

E. $4,145.68

249500 x 20%= 49900

Amount financed = 249500-49900 = 199,600

Enter  10×12      6.75/12    199,600                  0

             N               I/Y           PV       PMT     FV

                                                        -2,291.89

12. Shannon wants to have $10,000 in an investment account three years from now. The account will pay 0.4 percent interest per month. If Shannon saves money every month, starting one month from now, how much will she have to save each month?

A. $233.22

B. $241.64

C. $258.81

D. $267.01

E. $276.16

Enter  3×12     .4        0                    10,000

             N         I/Y    PV      PMT       FV

                                           -258.81

YOU ENTER 0.4 FOR INTEREST BECAUE THE QUESTION SAYS 0.4 percent interest per month

13. High Risk Operations, Inc. owes your firm $52,800. This amount is delinquent so you have offered to arrange a payment plan in the hopes that you might at least collect a portion, if not all, of this money. Your offer will consist of weekly payments for two years at an interest rate of 4 percent. What is the amount of each payment?

A. $241.29

B. $528.47

C. $736.28

D. $884.10

E. $1,036.22

Enter        2×52      4/52      52,800                   0

                    N         I/Y          PV       PMT     FV

                                                         -528.47

14. Around Town Movers recently purchased a new truck costing $97,000. The firm financed this purchase at 8.25 percent interest with monthly payments of $2,379.45. How many years will it take the firm to pay off this debt?

A. 3.0 years

B. 3.5 years

C. 4.0 years

D. 4.5 years

E. 5.0 years

Enter             8.25/12      97,000      -2,379.45      0

             N        I/Y             PV              PMT      FV

            48

48 months / 12 = 4 years

15. You just received a credit offer in an email. The company is offering you $6,000 at 12.8 percent interest. The monthly payment is only $110. If you accept this offer, how long will it take you to pay off the loan?

A. 81.00 months

B. 82.17 months

C. 90.70 months

D. 95.00 months

E. 96.30 months

Enter                  12.8/12     6,000        -110       0

                   N       I/Y           PV          PMT    FV

               82.17

16. What is the future value of weekly payments of $25 for six years at 10 percent?

A. $10,673.90

B. $10,694.43

C. $15,180.51

D. $16,958.39

E. $17,266.38

Enter     6×52     10/52     0       -25

               N           I/Y      PV     PMT      FV

                                                              10,673.90

17. The Clark Co. is borrowing $150,000 for six years at an interest of 9 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for year 5 of this loan?

A. $25,000

B. $29,500

C. $31,750

D. $34,000

E. $36,250

                Beginning      Total             Interest        Principal        Ending

Year         Balance         Payment       Paid             Paid                Balance

 1             $150,000       $38,500         $13,500        $25,000          $125,000

 2              125,000        36,250            11,250         25,000             100,000

 3              100,000        34,000             9,000          25,000             75,000

 4              75,000          31,750             6,750          25,000             50,000

 5              50,000          29,500             4,500          25,000             25,000

18. You borrow $22,785 to purchase a car, including the sales tax. The loan terms are 48 months at 7.1 percent interest. In whole dollars, what is total amount of interest you will pay on this loan?

A. $1,618

B. $1,899

C. $3,455

D. $5,377

E. $6,560

Enter      48     7.1/12      22,785                    0

               N         I/Y          PV        PMT      FV

Solve for                                      -546.67

Total interest paid = ($546.67 × 48) − $22,7859( AMOUNT BORROWED) = $3,455 (rounded)

19. Statue Builders, Inc. has an outstanding loan that calls for equal annual payments of $7,500 over the life of the loan. The original loan amount was $45,000 at an interest of 7 percent. How much of the second payment is interest?

A. $2,845.50

B. $3,150.00

C. $4,350.00

D. $4,654.50

E. $5,021.50

               Beginning           Total               Interest               Principal                Ending

 Year        Balance             Payment            Paid                      Paid                   Balance

 1           $45,000.00        $7,500.00          $3,150.00            $4,350.00           $40,650.00

 2           $40,650.00        $7,500.00          $2,845.50            $4,654.50           $35,995.50

Review Quiz for Chapter 5

1. You want to buy another vehicle and know you can afford $330 a month for 4 years. The interest rate is 7.75 percent, compounded monthly. How much money can you afford to borrow??

a. $12,600.00 b. $13,582.63 c. $16,429.37 d. $18,500.00

2. You just found your dream car. The car will cost you $29,700. The dealer will lend you the entire amount at 5.9 percent interest, compounded monthly, for 60 months. What is the amount of the monthly payment?

a. $426.78 b. $503.19 c. $572.80 d. $604.68

3. The Corner Bank is offering you a credit card with an APR of 12.9 percent. The bank compounds the interest rate on a monthly basis. What is the effective annual rate?

a. 13.69 percent b. 13.87 percent c. 14.03 percent d. 14.14 percent

4. A preferred stock is currently valued at $62.80 a share and pays an annual dividend of $7. The par value is $100 per share. What is the rate of return on this security?

a. 8.97 percent b. 10.58 percent c. 11.15 percent d. 11.33 percent

5. Over the past 30 years your parents saved money each month for their retirement. They retired this week and expect to live another 28 years. Their investment account is currently valued at $487,300 and is expected to earn 7 percent annually in the future. How much money can they withdraw annually if they wish to spend all of their money during their lifetime? 

a. $5,158.75 b. $6,038.59 c. $39,269.75 d. $40,149.59

6. Suzie has $16,000 in her investment account today. She saves $500 a quarter and earns 8 percent interest, compounded quarterly. How much money will she have in her account three years from now?

a. $16,821.87 b. $18,509.53 c. $22,300.16 d. $26,997.91

7. Tom invested $150 at the beginning of each month for the last 14 years and earned 6 percent interest, compounded monthly. Julia invested $300 at the end of each month for the past 7 years and earned 6 percent interest, compounded monthly. Today, Tom has ______ than Julia.

a. $8,164.15 less b. $8,320.26 less c. $8,164.15 more d. $8,320.26 more

8. You just won a prize and will receive $5,000 today plus $5,000 one year from now. What is this prize worth to you today if you can earn 9 percent annually on your investments?

a. $9,174.31 b. $9,587.16 c. $10,000.00 d. $10,450.00

9. A generous benefactor invested money in a scholarship fund ten years ago at an interest rate of 8 percent. Every year, the fund awards $50,000 in scholarships to worthy college students. How much did this benefactor deposit into the account initially? Assume all interest is paid out annually but the principal amount remains untouched.

a. $400,000 b. $462,963 c. $500,000 d. $625,000

10. Even though you have no idea who you will marry, you are planning an elaborate wedding for 6 years from now. The estimated cost of the wedding is $75,000 and you expect to earn 5.5 percent on your savings. How much do you need to save each month for this purpose assuming that you have no money saved as of today? 

a. $881.59 b. $1,088.84 c. $1,557.50 d. $2,106.93