Question 1

You are considering two insurance settlement offers. The ﬁrst offer includes annual payments of $5,000, $7,500, and $10,000 over the next three years, respectively. The other offer is the payment
Of one lump sum amount today. You are trying to decide which offer to accept given the fact that
Your discount rate is 5%. What is the minimum amount that you will accept today if you are to select
The lump sum offer?

Accepted Answer

The present value of the annual payments can be calculated using the formula PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + CF3 / (1+r)^3, where CF1, CF2, and CF3 are the cash flows in each year and r is the discount rate (5%). Plugging in the values, we get PV = 5000 / (1+0.05)^1 + 7500 / (1+0.05)^2 + 10000 / (1+0.05)^3 = $21,032.95. Therefore, the lump sum offer should be at least $21,032.95 to be equivalent to the annual payments. The closest option is B: $20,203.00, but it is still below the minimum amount required, so the best choice would be to reject both offers.

Question 2

You have a 25-year $400,000 mortgage with a 3.5% rate of interest (compounded monthly) that you make monthly payments on. What is the balance of the loan at the end of year 15?

Accepted Answer

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Question 3

Bandal Corporation wishes to purchase an apartment complex that provides annual cash ﬂows from rental property of $2,000,000. Rental increase is approximated at 2% per year into the foreseeable
Future. If Bandal's return requirement is 10%, determine the value of the apartment complex.

Accepted Answer

To determine the value of the apartment complex, we can use the formula for the present value of an annuity:

PV = CF / r

where PV is the present value, CF is the cash flow per period, and r is the discount rate.

In this case, the cash flow per period is $2,000,000 per year, and the discount rate is 10%. To account for the rental increase, we can use the perpetuity formula:

P = (CF / r) x (1 + g)

where P is the present value, CF is the initial cash flow, r is the discount rate, and g is the growth rate. In this case, the initial cash flow is still $2,000,000 per year, and the growth rate is 2% per year.

Plugging in the numbers, we get:

PV = $2,000,000 / 0.10 = $20,000,000

P = ($2,000,000 / 0.10) x (1 + 0.02) = $25,000,000

Therefore, the value of the apartment complex is $25,000,000. The answer is C.

Question 4

Calculate the present value of a growing annuity given the following information: annual cash ﬂows = $20,000; cash ﬂow growth rate = 12%; required rate of return = 3%; timeframe = 35 years.

Accepted Answer

The answer of Calculate the present value of a growing...

Question 5

Janet plans on saving $3,000 a year and expects to earn 8.5%. How much will Janet have at the end of twenty-ﬁve years if she earns what she expects?

Accepted Answer

The answer of Janet plans on saving $3,000 a year...

Question 6

You are expecting annual cash ﬂows of $10,000 in years 1-5; $15,000 in years 6-10; and $25,000 in years 11-25. If the rate of interest is 6% compounded annually, calculate the present value of this
Cash ﬂow stream.

Accepted Answer

The answer of You are expecting annual cash ﬂows of...

Question 7

Stevenson Interiors of Kingston has a $67,500 liability they must pay four years from today. The company is opening a savings account so that the entire amount will be available when this debt
Needs to be paid. The plan is to make an initial deposit today and then deposit an additional
$10,000 a year for the next four years, starting one year from today. The account pays a 5% rate of
Return. How much does the ﬁrm need to deposit today?

Accepted Answer

The answer of Stevenson Interiors of Kingston has a $67,500...

Question 8

Your employer contributes $50 a week to your retirement plan. Assume that you work for your employer for another 12 years and that the applicable discount rate is 8%. Given these assumptions,
What is this employee beneﬁt worth to you today?

Accepted Answer

The correct answer is A because the present value of the employee benefit is $20,046.80. This is calculated by taking the $50 weekly contribution and multiplying it by the present value factor of an annuity due for 12 years at 8%, which is 26.729.

Question 9

Today is January 1. Starting today, Sam is going to contribute $140 on the ﬁrst of each month to his retirement account. His employer contributes an additional 50% of the amount contributed by Sam.
If both Sam and his employer continue to do this and Sam can earn a monthly rate of 0.5%, how
Much will he have in his retirement account 35 years from now?

Accepted Answer

The answer of Today is January 1. Starting today, Sam...

Question 10

What is the present value of the following set of cash ﬂows if the discount rate is 5.25%?

Accepted Answer

The answer of What is the present value of the...

Question 11

You just borrowed $17,500 from the bank to use in your business. The loan terms require you to pay the interest annually with the entire principal due in four years. The interest rate is 9.5%. How much
Will you pay to the bank in year four of the loan?

Accepted Answer

The correct answer is A. The total amount of interest paid over the four years is $17,500 x 0.095 x 4 = $6,650. The total amount paid to the bank in year four is $17,500 + $6,650 = $24,150.

Question 12

You are buying a previously owned car today at a price of $6,890. You are paying $500 down in cash and ﬁnancing the balance for 36 months at 7.9%. What is the amount of each loan payment?

Accepted Answer

To calculate the loan payment, we can use the formula:
Payment = (P * r) / (1 - (1 + r)^(-n))
where
P = principal amount = $6,390 - $500 = $6,390
r = interest rate per period = 7.9% / 12 months = 0.0065833
n = total number of periods = 36 months

Putting the values in the formula, we get:
Payment = (6390 * 0.0065833) / (1 - (1 + 0.0065833)^(-36))
Payment = $199.94

Therefore, the best choice is B.

Question 13

You are comparing two annuities. Both annuities pay the same amount for the same number of months. The discount rate is also identical. If the ordinary annuity is worth $26,500, the annuity due
Is worth:

Accepted Answer

The answer of You are comparing two annuities. Both annuities...

Question 14

What would your payment be on a 10-year, $150,000 loan at 10% interest compounded semi- annually assuming the payments are made annually?

Accepted Answer

The answer of What would your payment be on a...

Question 15

You have a sub-contracting job with a local manufacturing ﬁrm. Your agreement calls for annual payments of $82,000 for the next 3 years. At a discount rate of 9.5%, what is this job worth to you
Today?

Accepted Answer

The answer of You have a sub-contracting job with a...

Question 16

Daryl wishes to save money to provide for his retirement. Beginning one month from now, he will begin depositing a ﬁxed amount into a retirement savings account that will earn 12% compounded
Monthly. He will make 360 such deposits. Then, one year after making his ﬁnal deposit, he will
Withdraw $100,000 annually for 25 years. The fund will continue to earn 12% compounded monthly.
How much should the monthly deposits be for his retirement plan?

Accepted Answer

To find the monthly deposit, we need to calculate the future value of an annuity (the deposits) and equate it to the present value of the withdrawals. The future value of the deposits can be calculated using the formula for the future value of an annuity compounded monthly. The present value of the withdrawals can be calculated using the formula for the present value of an annuity compounded monthly. Solving these equations will give the required monthly deposit amount.

Question 17

How much should be deposited now if you wish to withdraw $2,000 quarterly in perpetuity? Interest is 3.95% compounded quarterly.

Accepted Answer

The answer of How much should be deposited now if...

Question 18

You have a sub-contracting job with a local manufacturing ﬁrm. Your agreement calls for annual payments of $50,000 for the next ﬁve years. At a discount rate of 12%, what is this job worth to you
Today?

Accepted Answer

The present value of an annuity can be calculated using the formula PV = PMT × [(1 - (1 + r)^-n) / r], where PMT is the annual payment, r is the discount rate, and n is the number of periods. Plugging in the values: PV = $50,000 × [(1 - (1 + 0.12)^-5) / 0.12] = $180,238.81.

Question 19

Your parents are giving you $500 a month for ﬁve years while you attend college to earn both a bachelor's and a master's degree. At a 7% discount rate, what are these payments worth to you
When you ﬁrst enter college?

Accepted Answer

The answer of Your parents are giving you $500 a...

Question 20

You are considering a project with the following cash ﬂows:  What is the present value of these cash ﬂows, given a 7.75% discount rate?

Accepted Answer

The answer of You are considering a project with the...

Quiz 6: Discounted Cash Flow Valuation

You have a 25-year $400,000 mortgage with a 3.5% rate of interest (compounded monthly) that you make monthly payments on. What is the balance of the loan at the end of year 15?

Bandal Corporation wishes to purchase an apartment complex that provides annual cash ﬂows from rental property of $2,000,000. Rental increase is approximated at 2% per year into the foreseeable Future. If Bandal's return requirement is 10%, determine the value of the apartment complex.

Calculate the present value of a growing annuity given the following information: annual cash ﬂows = $20,000; cash ﬂow growth rate = 12%; required rate of return = 3%; timeframe = 35 years.

Janet plans on saving $3,000 a year and expects to earn 8.5%. How much will Janet have at the end of twenty-ﬁve years if she earns what she expects?

You are expecting annual cash ﬂows of $10,000 in years 1-5; $15,000 in years 6-10; and $25,000 in years 11-25. If the rate of interest is 6% compounded annually, calculate the present value of this Cash ﬂow stream.

Your employer contributes $50 a week to your retirement plan. Assume that you work for your employer for another 12 years and that the applicable discount rate is 8%. Given these assumptions, What is this employee beneﬁt worth to you today?

What is the present value of the following set of cash ﬂows if the discount rate is 5.25%?

You just borrowed $17,500 from the bank to use in your business. The loan terms require you to pay the interest annually with the entire principal due in four years. The interest rate is 9.5%. How much Will you pay to the bank in year four of the loan?

You are buying a previously owned car today at a price of $6,890. You are paying $500 down in cash and ﬁnancing the balance for 36 months at 7.9%. What is the amount of each loan payment?

You are comparing two annuities. Both annuities pay the same amount for the same number of months. The discount rate is also identical. If the ordinary annuity is worth $26,500, the annuity due Is worth:

What would your payment be on a 10-year, $150,000 loan at 10% interest compounded semi- annually assuming the payments are made annually?

You have a sub-contracting job with a local manufacturing ﬁrm. Your agreement calls for annual payments of $82,000 for the next 3 years. At a discount rate of 9.5%, what is this job worth to you Today?

How much should be deposited now if you wish to withdraw $2,000 quarterly in perpetuity? Interest is 3.95% compounded quarterly.

You have a sub-contracting job with a local manufacturing ﬁrm. Your agreement calls for annual payments of $50,000 for the next ﬁve years. At a discount rate of 12%, what is this job worth to you Today?

Your parents are giving you $500 a month for ﬁve years while you attend college to earn both a bachelor's and a master's degree. At a 7% discount rate, what are these payments worth to you When you ﬁrst enter college?

You are considering a project with the following cash ﬂows: What is the present value of these cash ﬂows, given a 7.75% discount rate?