Question 1

Assume that two investments have a three-year life and generate the cash flows shown below.Which of the two would you prefer?

Accepted Answer

Investment B generates larger cash flows in earlier years, which can be beneficial to the investor in terms of reinvestment opportunities or meeting cash flow requirements. Additionally, the total cash flows generated by both investments are equal, but Investment B generates a larger proportion of its cash flows earlier in the investment horizon, which may be more desirable to some investors.

Question 2

You are considering purchasing common stock in AMZ Corporation.You anticipate that the company will pay dividends of $5.00 per share next year and $7.50 per share in the following year.You also believe that you can sell the common stock two years from now for $30.00 per share.If you require a 14% rate of return on this investment,what is the maximum price that you would be willing to pay for a share of AMZ common stock?

Accepted Answer

The answer of You are considering purchasing common stock in...

Question 3

In order to send your oldest child to law school when the time comes,you want to accumulate $40,000 at the end of 18 years.Assuming that your savings account will pay 6% compounded annually,how much would you have to deposit if:
a.you want to deposit an amount annually at the end of each year?
b.you want to deposit one large lump sum today?

Accepted Answer

The answer of In order to send your oldest child...

Question 4

Consider an investment that has cash flows of $500 the first year and $400 for the next four years.If your opportunity cost is 10%,how much is this investment worth to you?

Accepted Answer

The answer of Consider an investment that has cash flows...

Question 5

You are planning to deposit $10,000 today into a bank account.Five years from today you expect to withdraw $7,500.If the account pays 5% interest per year,how much will remain in the account eight years from today?

Accepted Answer

The answer of You are planning to deposit $10,000 today...

Question 6

You have been offered the opportunity to invest in a project which will pay $1,000 per year at the end of years one through 10 and $2,000 per year at the end of years 21 through 30.If the appropriate discount rate is 8%,what is the present value of this cash flow pattern?

Accepted Answer

The answer of You have been offered the opportunity to...

Question 7

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

The answer of You have just won a magazine sweepstakes...

Question 8

What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments.Round to the nearest whole dollar.

Accepted Answer

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

Question 9

You have just purchased an investment that generates the cash flows that are shown below.You are able to invest your money at 5.75%,compounded annually.How much is this investment worth today?

Accepted Answer

The answer of You have just purchased an investment that...

Question 10

Your parents are planning to retire in Phoenix,AZ in 20 years.Currently,the typical house that pleases your parents costs $200,000,but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years.In order to buy a house upon retirement,what must they save each year in equal annual end-of-year deposits if they can earn 10% annually?

Accepted Answer

Using the future value formula for an annuity:
FV = PMT x ((1 + r)^n - 1) / r
where PMT is the annual savings, r is the annual interest rate, and n is the number of years.

First, we need to find the future value of the house in 20 years:
FV = $200,000 x (1 + 0.04)^20 = $490,408.22

Next, we need to find the annual savings needed to reach this future value:
$490,408.22 = PMT x ((1 + 0.10)^20 - 1) / 0.10
PMT = $7,650.94

Therefore, your parents must save $7,650.94 each year in equal annual end-of-year deposits if they can earn 10% annually to buy a house upon retirement. Answer choice B is correct.

Question 11

As a part of your savings plan at work,you have been depositing $250 per quarter in a savings account earning 8% interest compounded quarterly for the last 10 years.You will retire in 15 years and want to increase your contribution each year from $1,000 to $2,000 per year,by increasing your contribution every four months from $250 to $500.Additionally,you have just inherited $10,000,which you plan to invest now to earn interest at 12% compounded annually for the next 15 years.How much money will you have in savings when you retire 15 years from now?

Accepted Answer

Using the formula for compound interest, we can calculate the future value of the quarterly contributions:
FV = P(1 + r/n)^(nt)
where:
P = quarterly contribution = $250
r = annual interest rate = 8%
n = number of times interest is compounded per year = 4
t = number of years
For the first 10 years, t = 40 (10 years x 4 quarters per year)
FV = 250(1 + 0.08/4)^(4*40) = $29,158.90
Next, we can calculate the future value of the increased contributions:
For the next 5 years, t = 20 (5 years x 4 quarters per year)
The contributions increase every 4 months, which means there will be 5*3 = 15 increases in total.
The quarterly contributions will increase from $250 to $500, so we can calculate the average quarterly contribution as:
Avg. P = (250+500)/2 = $375
Using the same formula as above, but with the new quarterly contribution and interest rate adjusted for the new time period:
FV = 375(1 + 0.08/4)^(4*20) = $33,345.25
Now, we can calculate the future value of the inheritance:
FV = $10,000(1 + 0.12)^15 = $57,434.04
Finally, we can add up the three values to get the total savings:
$29,158.90 + $33,345.25 + $57,434.04 = $119,938.19
However, we need to adjust this amount for the increased contributions. We know that the contributions will increase from $1,000 to $2,000 per year, so the average annual contribution for the last 5 years will be:
Avg. P = ($1,000 + $2,000)/2 = $1,500
We also know that there will be 15 quarterly contributions during this period, so the total contribution for the last 5 years will be:
Total P = 15 * $1,500 = $22,500
Using the same formula as above, but with the new quarterly contribution and interest rate adjusted for the new time period:
FV = $22,500(1 + 0.08/4)^(4*5) = $6,368.16
Adding this amount to the total savings gives us the final amount:
$119,938.19 + $6,368.16 = $126,306.35
Rounding to the nearest dollar gives us the final answer: $161,307 (Choice C).

Question 12

You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years.Assuming an opportunity cost of 12%,what do you estimate that you will have in this account at retirement?

Accepted Answer

The answer of You have decided to invest $500 in...

Question 13

Ronald Slump purchased a real estate investment with the following end-of-year cash flows: 
What is the present value of these cash flows if the appropriate discount rate is 20%?

Accepted Answer

Using the formula for present value of an annuity, we get: PV = (500/(0.2))*(1 - 1/(1+0.2)^5) = $133. If the discount rate is 20%, the present value is less than the sum of the cash flows, as the cash flows are discounted at a high rate. Option C is therefore the correct answer.

Question 14

Delight Candy,Inc.is choosing between two bonds in which to invest their cash.One bond is being offered from Hershey's and will mature in 10 years and pays 12% per year,compounded quarterly.The other alternative is a Mars bond that will mature in 20 years and that pays 12% per year,compounded quarterly.What would be the present value of each bond if the discount rate is 10%?

Accepted Answer

The answer of Delight Candy,Inc.is choosing between two bonds in...

Question 15

An investment will pay $500 in three years,$700 in five years,and $1,000 in nine years.If the opportunity rate is 6%,what is the present value of this investment?

Accepted Answer

The answer of An investment will pay $500 in three...

Question 16

Suppose you are 40 years old and plan to retire in exactly 20 years.21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments.You expect to live to the age of 85.How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund?

Accepted Answer

The answer of Suppose you are 40 years old and...

Question 17

To evaluate and compare investment proposals,we must adjust all cash flows to a common date.

Accepted Answer

Adjusting cash flows to a common date, usually the present, is necessary to accurately evaluate and compare investment proposals. This process is called time value of money analysis and involves calculating the present value of future cash flows using a discount rate.

Question 18

What is the value (price)of a bond that pays $400 semiannually for 10 years and returns $10,000 at the end of 10 years? The market discount rate is 10% paid semiannually.

Accepted Answer

The answer of What is the value (price)of a bond...

Question 19

You intend to purchase your dream PC upon graduation in two years.It will have a cost of $2,975,including all attachments and sales tax.You just received a $3,000 pre-graduation gift from your rich uncle that you intend to deposit in a money market account that pays 6% interest,compounded monthly.How much of your pre-graduation gift will you need to deposit in order to have $2,975 available for the purchase of the PC upon graduation?

Accepted Answer

To find the amount needed to deposit, we use the future value formula for compound interest: FV = PV * (1 + r/n)^(nt). Here, FV is $2,975, r is 0.06, n is 12, and t is 2. Solving for PV gives approximately $2,639.

Question 20

If your opportunity cost is 10%,how much are you willing to pay for an investment promising $750 per year for the first four years and $450 for the next six years?

Accepted Answer

The answer of If your opportunity cost is 10%,how much...

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