Question 1

In terms of present value (PV),how much will Joe receive for selling the family business?

Accepted Answer

PV = $100,000 + $50,000 / (1.06)¹ + $50,000 / (1.06)² + $75,000 / (1.06)³ = $254,641

Question 2

Consider the following timeline detailing a stream of cash flows:  If the current market rate of interest is 8%,then the future value (FV)of this stream of cash flows is closest to:

Accepted Answer

A

Question 3

What is the total future value of these cash flows in year 4,given that the interest rate is 10%?

Accepted Answer

D

Question 4

Consider the following timeline detailing a stream of cash flows:  If the current market rate of interest is 10%,then the present value (PV)of this stream of cash flows is closest to:

Accepted Answer

The answer of Consider the following timeline detailing a stream...

Question 5

A perpetuity will pay $1000 per year,starting five years after the perpetuity is purchased.What is the present value (PV)of this perpetuity on the date that it is purchased,given that the interest rate is 4%?

Accepted Answer

We can calculate the present value of the perpetuity using the formula PV = C/r, where PV is the present value, C is the yearly cash flow and r is the interest rate. Plugging in the numbers, we get PV = 1000/0.04 = $25,000. However, since the payments start 5 years after the perpetuity is purchased, we need to discount the present value by 1/(1+0.04)^5 = 0.8227. Thus, the present value is PV = $25,000 x 0.8227 = $20,547.95, which is closest to answer choice C, $20,548.

Question 6

Suppose the current interest rate is 8.5%,what is the future value of a $15 million investment in 10 years?

Accepted Answer

We can use the formula for future value of a single sum:

FV = PV x (1 + r)^n

where PV is present value, r is the interest rate, and n is the number of periods.

In this case, PV = $15 million, r = 8.5%, and n = 10.

FV = 15,000,000 x (1 + 0.085)^10

FV = 33,915,256

Therefore, the future value of the investment is $33.915 million, so the best choice is B.

Question 7

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2400.After installation the solar water heater will produce a small amount of hot water every day,forever,and will require no maintenance.How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 9% per year.)

Accepted Answer

The answer of A homeowner in a sunny climate has...

Question 8

When evaluating investment opportunities,we can compare and combine cash flows that occur at different points in time.

Accepted Answer

To accurately compare or combine cash flows occurring at different points in time, they must first be adjusted for the time value of money, typically through discounting or compounding to a common point in time.

Question 9

Consider the following timeline detailing a stream of cash flows:  If the current market rate of interest is 8%,then the present value (PV)of this stream of cash flows is closest to:

Accepted Answer

To find the present value of the cash flow stream we need to discount each cash flow to its present value and then sum them up. Using a financial calculator or Excel, we can calculate the present value to be $21,211, which is closest to choice (B).

Question 10

Consider the following timeline detailing a stream of cash flows:  If the current market rate of interest is 6%,then the future value (FV)of this stream of cash flows is closest to:

Accepted Answer

The answer of Consider the following timeline detailing a stream...

Question 11

To calculate the future value of an annuity,we divide the annuity formula by the appropriate discount factor.

Accepted Answer

To calculate the future value of an annuity, we multiply the annuity payment by the future value annuity factor, not divide by the discount factor.

Question 12

An investor receives $250,000 at the end of each of the next 5 years.What is the present value of her investment,given that the interest rate is 5%?

Accepted Answer

The present value of an annuity can be calculated using the formula PV = C * [(1 - (1 + r)^-n) / r], where C is the cash flow per period, r is the interest rate, and n is the number of periods. Plugging in the values: PV = $250,000 * [(1 - (1 + 0.05)^-5) / 0.05] = $1,082,369.17.

Question 13

Cash flows from an annuity occur every year in the future.

Accepted Answer

The answer of Cash flows from an annuity occur every...

Question 14

If a few intermediate cash flows in valuing a stream of cash flows are zero,can we delete those points on the timeline and squeeze the timeline to show only nonzero cash flows?

Accepted Answer

The answer of If a few intermediate cash flows in...

Question 15

Which of the following investments has a higher present value,assuming the same (strictly positive)interest rate applies to both investments?

Accepted Answer

The answer of Which of the following investments has a...

Question 16

You are given two choices of investments,Investment A and Investment B.Both investments have the same future cash flows.Investment A has a discount rate of 4%,and Investment B has a discount rate of 5%.Which of the following is TRUE?

Accepted Answer

Since Investment A has a lower discount rate than Investment B, its present value of cash flows will be higher. This is because a lower discount rate means that future cash flows are discounted less, resulting in a higher present value.

Question 17

Given that the interest rate is 10% per annum,what is the present value of an investment that has 5 equal payments of $50,000 each year for 5 years,starting today?

Accepted Answer

To find the present value of the investment, we need to discount each payment back to the present time. We can use the formula for the present value of an annuity:

PV = PMT x [1 - (1 + r)^(-n)] / r

Where:
PMT = Payment of $50,000
r = Interest rate of 10%
n = Number of payments, which is 5

Plugging in the numbers, we get:

PV = $50,000 x [1 - (1 + 0.1)^(-5)] / 0.1 = $208,493.27

Therefore, the present value of the investment is $208,493.27.

Question 18

The present value (PV)of a stream of cash flows is just the sum of the present values of each individual cash flow.

Accepted Answer

This statement is true. The present value of a stream of cash flows is found by discounting each individual cash flow back to its present value and then summing up all the present values.

Question 19

What is the PV of an investment that will pay you $1,500 every year,forever,starting in one year's time,if the interest rate is 8%?

Accepted Answer

The investment described is a perpetuity, which pays a fixed amount annually. The present value (PV) of a perpetuity can be calculated using the formula PV = C / r, where C is the annual payment and r is the interest rate. Here, C = $1,500 and r = 0.08 (8%). Thus, PV = $1,500 / 0.08 = $18,750.

Question 20

Jessica deposits her $2,500 bonus cheque into the bank at the end of 2015.At the end of 2016,she deposits another bonus cheque,which is double the amount of last year's cheque.Given that the interest rate is 5%,what is the total future value of these two bonuses at the end of 2017?

Accepted Answer

The future value of the first deposit is $2,500 * (1 + 0.05)^2 = $2,756.25. The second deposit is $5,000 * (1 + 0.05) = $5,250. The total future value is $2,756.25 + $5,250 = $8,006.25.

Quiz 4: The Time Value of Money

In terms of present value (PV),how much will Joe receive for selling the family business?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 8%,then the future value (FV) of this stream of cash flows is closest to: