Question 1

Taggart Transcontinental currently has a bank loan outstanding that requires it to make annual payments at the end of the next three years or to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years in the amount of $3,184,000.If the interest rate on the loan is 6%,then the annual payment the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:

Accepted Answer

The answer of Taggart Transcontinental currently has a bank loan...

Question 2

You are looking for a new truck and see the following advertisement."Own a new truck! No money down.Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120.The interest rate for the deal advertised is closest to:

Accepted Answer

The present value of the payments ($8,000 per year for 5 years) should equal the dealer's price of $31,120. Using the formula for the present value of an annuity, the interest rate that equates these values is closest to 9%.

Question 3

You have an $8000 balance on your credit card,which charges 12% interest annually (1% per month).If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

Accepted Answer

The monthly interest rate is 1% (12% divided by 12 months), so the balance will increase by $80 ($8000 x 0.01) after each payment. Therefore, the equation for the number of months needed to pay off the card is: 
$8000 + ($80 x months) = $100 x months 
Simplifying the equation: 
$8000 = $20 x months 
Months = 400 
However, since payment is only $100 per month, it will take 400 months (or 33 years) to pay off the card in full. This is not a realistic or feasible option. 
To find a more reasonable payment plan, divide the balance ($8000) by the desired monthly payment ($100) to get the number of months needed to pay off the card completely: 
$8000 / $100 = 80 months 
Therefore, it will take 80 months (or 6 years and 8 months) to pay off the card in full, assuming no additional charges or interest are added during that time.

Question 4

You are saving for retirement.To live comfortably,you decide that you will need $2.5 million by the time you are 65.Today is your 30th birthday,and you decide,starting today,and on every birthday up to and including your 65th birthday,that you will deposit the same amount into your savings account.Assuming the interest rate is 5%,the amount that you must set aside each year on your birthday is closest to:

Accepted Answer

To calculate the annual deposit required, we need to use the present value of an annuity formula, where:
PV = the present value or amount we need to save
PMT = the annual deposit amount
r = the interest rate as a decimal (5% = 0.05)
n = the number of periods (years) we will save (35 years from age 30 to 65)

Using the formula, we can solve for PMT:
PV = PMT * [(1 - (1 + r)^-n) / r]
$2.5 million = PMT * [(1 - (1 + 0.05)^-35) / 0.05]
$2.5 million = PMT * 16.5839
PMT = $2.5 million / 16.5839
PMT ≈ $150,847.43

However, we are depositing this amount annually, so we need to divide by the number of years (35) to get the annual deposit required:
$150,847.43 / 35 ≈ $4,310.78

Therefore, the closest answer choice is C) $26,100, which is the annual deposit amount rounded to the nearest $100.

Question 5

You are saving for retirement.To live comfortably,you decide that you will need $2.5 million by the time you are 65.If you assume you are able to do that,and will live 20 more years (until age 85),the amount you can withdraw at the end of each of those years at an interest rate of 5% before your retirement fund is empty is closest to:

Accepted Answer

The answer of You are saving for retirement.To live comfortably,you...

Question 6

You have an $8000 balance on your credit card,which charges 18% interest annually (1.5 per month).If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

Accepted Answer

Paying $100 per month is not enough to cover the interest accrued each month, so the balance will continue to grow, and you will never pay off the card.

Question 7

You are considering investing in a zero coupon bond that will pay you its face value of $1000 in ten years.If the bond is currently selling for $485.20,then the IRR for investing in this bond is closest to:

Accepted Answer

We can use the following formula to calculate the IRR:

PV = FV / (1 + IRR)^(n)

Where PV is the present value (what we pay for the bond), FV is the future value (what we will receive in 10 years), IRR is the internal rate of return (what we are solving for), and n is the number of years.

Plug in the values given:

485.20 = 1000 / (1 + IRR)^10

Solve for IRR:

(1 + IRR)^10 = 1000 / 485.20

1 + IRR = (1000 / 485.20)^(1/10)

IRR = (1000 / 485.20)^(1/10) - 1

IRR = 0.075 or 7.5%

Therefore, the closest IRR for investing in this bond is 7.5%, which is choice C.

Question 8

You are considering investing in a security that will pay you $80 in interest-only at the end of each of the next 10 years.If this security is currently selling for $588.81,then the IRR for investing in this security is closest to:

Accepted Answer

The IRR is the rate that makes the present value of the cash flows equal to the investment. Using the formula for the present value of an annuity, the IRR is calculated to be approximately 6.0%.

Question 9

After your grandmother retired,she purchased an annuity contract for $250,000 that will pay her $25,000 at the end of every year until she dies.The appropriate interest rate for this annuity is 8%.The number of years that your grandmother must live in order to get more value out of the annuity than the purchase price is closest to:

Accepted Answer

The present value of the annuity is $250,000. The present value of the payments is $25,000 * (1 - (1 + 0.08)^-n) / 0.08. Setting this equal to $250,000 and solving for n gives n = 21.

Question 10

Use the following information to answer the question(s)below.
Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now,$450,000 two years from now,and $650,000 three years from now.
-The internal rate of return of this project is closest to:

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of the cash flows equal to zero. By trial and error or using financial calculator/Excel, the IRR for the given cash flows is closest to 14.2%.

Question 11

You have an investment opportunity that will cost you $10,000 today,but return $12,500 to you in one year.The IRR of this investment opportunity is closest to:

Accepted Answer

The IRR (Internal Rate of Return) is the rate at which the net present value of an investment is zero. Here, the investment grows from $10,000 to $12,500 in one year, which is a $2,500 gain. The IRR is calculated as ($12,500 - $10,000) / $10,000 = 0.25 or 25%.

Quiz 4: The Time Value of Money

You are looking for a new truck and see the following advertisement."Own a new truck! No money down.Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120.The interest rate for the deal advertised is closest to:

You have an $8000 balance on your credit card,which charges 12% interest annually (1% per month) .If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

You have an $8000 balance on your credit card,which charges 18% interest annually (1.5 per month) .If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

You are considering investing in a zero coupon bond that will pay you its face value of $1000 in ten years.If the bond is currently selling for $485.20,then the IRR for investing in this bond is closest to:

You are considering investing in a security that will pay you $80 in interest-only at the end of each of the next 10 years.If this security is currently selling for $588.81,then the IRR for investing in this security is closest to:

You have an investment opportunity that will cost you $10,000 today,but return $12,500 to you in one year.The IRR of this investment opportunity is closest to: