Chap 006 Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation
Chapter 06 Discounted Cash Flow Valuation

Multiple Choice Questions
1. An ordinary annuity is best defined by which one of the following? A. increasing pay ents paid for a definiti!e period of ti e ". increasing pay ents paid fore!er C. e#ual pay ents paid at regular inter!als o!er a stated ti e period D. e#ual pay ents paid at regular inter!als of ti e on an ongoing basis $. une#ual pay ents that occur at set inter!als for a li ited period of ti e
%. &hich one of the following accurately defines a perpetuity? A. a li ited nu ber of e#ual pay ents paid in e!en ti e incre ents ". pay ents of e#ual a ounts that are paid irregularly but indefinitely C. !arying a ounts that are paid at e!en inter!als fore!er D. unending e#ual pay ents paid at e#ual ti e inter!als $. unending e#ual pay ents paid at either e#ual or une#ual ti e inter!als
'. &hich one of the following ter s is used to identify a "ritish perpetuity? A. ordinary annuity ". a orti(ed cash flow C. annuity due D. discounted loan $. consol
). *he interest rate that is #uoted by a lender is referred to as which one of the following? A. stated interest rate ". co pound rate C. effecti!e annual rate D. si ple rate $. co on rate
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+. A onthly interest rate e,pressed as an annual rate would be an e,a ple of which one of the following rates? A. stated rate ". discounted annual rate C. effecti!e annual rate D. periodic onthly rate $. consolidated onthly rate
6. &hat is the interest rate charged per period called? A. effecti!e annual rate ". annual percentage rate C. periodic interest rate D. co pound interest rate $. daily interest rate
ultiplied by the nu ber of periods per year
-. A loan where the borrower recei!es date is called a.n/ 00000 loan. A. a orti(ed ". continuous C. balloon D. pure discount $. interest-only
oney today and repays a single lu p su
on a future
1. &hich one of the following ter s is used to describe a loan that calls for periodic interest pay ents and a lu p su principal pay ent? A. a orti(ed loan ". odified loan C. balloon loan D. pure discount loan $. interest-only loan
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2. &hich one of the following ter s is used to describe a loan wherein each pay ent is e#ual in a ount and includes both interest and principal? A. a orti(ed loan ". odified loan C. balloon loan D. pure discount loan $. interest-only loan
10. &hich one of the following ter s is defined as a loan wherein the regular pay ents3 including both interest and principal a ounts3 are insufficient to retire the entire loan a ount3 which then ust be repaid in one lu p su ? A. a orti(ed loan ". continuing loan C. balloon loan D. re ainder loan $. interest-only loan
11. 4ou are co paring two annuities which offer #uarterly pay ents of 5%3+00 for fi!e years and pay 0.-+ percent interest per onth. Annuity A will pay you on the first of each onth while annuity " will pay you on the last day of each onth. &hich one of the following state ents is correct concerning these two annuities? A. *hese two annuities ha!e e#ual present !alues but une#ual futures !alues at the end of year fi!e. ". *hese two annuities ha!e e#ual present !alues as of today and e#ual future !alues at the end of year fi!e. C. Annuity " is an annuity due. D. Annuity A has a s aller future !alue than annuity ". $. Annuity " has a s aller present !alue than annuity A.
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1%. 4ou are co paring two in!est ent options that each pay + percent interest3 co pounded annually. "oth options will pro!ide you with 51%3000 of inco e. 6ption A pays three annual pay ents starting with 5%3000 the first year followed by two annual pay ents of 5+3000 each. 6ption " pays three annual pay ents of 5)3000 each. &hich one of the following state ents is correct gi!en these two in!est ent options? A. "oth options are of e#ual !alue gi!en that they both pro!ide 51%3000 of inco e. ". 6ption A has the higher future !alue at the end of year three. C. 6ption " has a higher present !alue at ti e (ero than does option A. D. 6ption " is a perpetuity. $. 6ption A is an annuity.
1'. 4ou are considering two pro7ects with the following cash flows8
&hich of the following state ents are true concerning these two pro7ects? 9. "oth pro7ects ha!e the sa e future !alue at the end of year )3 gi!en a positi!e rate of return. 99. "oth pro7ects ha!e the sa e future !alue gi!en a (ero rate of return. 999. :ro7ect ; has a higher present !alue than :ro7ect 43 gi!en a positi!e discount rate. 9V. :ro7ect 4 has a higher present !alue than :ro7ect ;3 gi!en a positi!e discount rate. A. 99 only ". 9 and 999 only C. 99 and 999 only D. 99 and 9V only $. 93 993 and 9V only
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1). &hich one of the following state ents is correct gi!en the following two sets of pro7ect cash flows?
A. *he cash flows for :ro7ect " are an annuity3 but those of :ro7ect A are not. ". "oth sets of cash flows ha!e e#ual present !alues as of ti e (ero gi!en a positi!e discount rate. C. *he present !alue at ti e (ero of the final cash flow for :ro7ect A will be discounted using an e,ponent of three. D. *he present !alue of :ro7ect A cannot be co puted because the second cash flow is e#ual to (ero. $. As long as the discount rate is positi!e3 :ro7ect " will always be worth less today than will :ro7ect A.
1+. &hich one of the following state ents related to annuities and perpetuities is correct? A. An ordinary annuity is worth ore than an annuity due gi!en e#ual annual cash flows for ten years at - percent interest3 co pounded annually. ". A perpetuity co prised of 5100 onthly pay ents is worth ore than an annuity co prised of 5100 onthly pay ents3 gi!en an interest rate of 1% percent3 co pounded onthly. C. <ost loans are a for of a perpetuity. D. *he present !alue of a perpetuity cannot be co puted3 but the future !alue can. $. :erpetuities are finite but annuities are not.
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16. &hich of the following state ents related to interest rates are correct? 9. Annual interest rates consider the effect of interest earned on rein!ested interest pay ents. 99. &hen co paring loans3 you should co pare the effecti!e annual rates. 999. =enders are re#uired by law to disclose the effecti!e annual rate of a loan to prospecti!e borrowers. 9V. Annual and effecti!e interest rates are e#ual when interest is co pounded annually. A. 9 and 99 only ". 99 and 999 only C. 99 and 9V only D. 93 993 and 999 only $. 993 9993 and 9V only
1-. &hich one of the following state ents concerning interest rates is correct? A. >a!ers would prefer annual co pounding o!er onthly co pounding. ". *he effecti!e annual rate decreases as the nu ber of co pounding periods per year increases. C. *he effecti!e annual rate e#uals the annual percentage rate when interest is co pounded annually. D. "orrowers would prefer onthly co pounding o!er annual co pounding. $. For any positi!e rate of interest3 the effecti!e annual rate will always e,ceed the annual percentage rate.
11. &hich one of these state ents related to growing annuities and perpetuities is correct? A. *he cash flow used in the growing annuity for ula is the initial cash flow at ti e (ero. ". ?rowth rates cannot be applied to perpetuities if you wish to co pute the present !alue. C. *he future !alue of an annuity will decrease if the growth rate is increased. D. An increase in the rate of growth will decrease the present !alue of an annuity. $. *he present !alue of a growing perpetuity will decrease if the discount rate is increased.
12. &hich one of the following state ents correctly states a relationship? A. *i e and future !alues are in!ersely related3 all else held constant. ". 9nterest rates and ti e are positi!ely related3 all else held constant. C. An increase in the discount rate increases the present !alue3 gi!en positi!e rates. D. An increase in ti e increases the future !alue gi!en a (ero rate of interest. $. *i e and present !alue are in!ersely related3 all else held constant.
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%0. &hich one of the following co pounding periods will yield the s allest present !alue gi!en a stated future !alue and annual percentage rate? A. annual ". se i-annual C. onthly D. daily $. continuous
%1. *he entire repay ent of which one of the following loans is co puted si ply by co puting a single future !alue? A. interest-only loan ". balloon loan C. a orti(ed loan D. pure discount loan $. bullet loan
%%. @ow is the principal a ount of an interest-only loan repaid? A. *he principal is forgi!en o!er the loan period so does not ha!e to be repaid. ". *he principal is repaid in e#ual incre ents and included in each loan pay ent. C. *he principal is repaid in a lu p su at the end of the loan period. D. *he principal is repaid in e#ual annual pay ents. $. *he principal is repaid in increasing incre ents through regular onthly pay ents.
%'. An a orti(ed loan8 A. re#uires the principal a ount to be repaid in e!en incre ents o!er the life of the loan. ". ay ha!e e#ual or increasing a ounts applied to the principal fro each loan pay ent. C. re#uires that all interest be repaid on a onthly basis while the principal is repaid at the end of the loan ter . D. re#uires that all pay ents be e#ual in a ount and include both principal and interest. $. repays both the principal and the interest in one lu p su at the end of the loan ter .
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%). 4ou need 5%+3000 today and ha!e decided to taAe out a loan at - percent for fi!e years. &hich one of the following loans would be the least e,pensi!e? Assu e all loans re#uire onthly pay ents and that interest is co pounded on a onthly basis. A. interest-only loan ". a orti(ed loan with e#ual principal pay ents C. a orti(ed loan with e#ual loan pay ents D. discount loan $. balloon loan where +0 percent of the principal is repaid as a balloon pay ent
%+. 4our grand other is gifting you 5100 a onth for four years while you attend college to earn your bachelorBs degree. At a +.+ percent discount rate3 what are these pay ents worth to you on the day you enter college? A. 5)3%01.16 ". 5)3%22.11 C. 5)3+02.12 D. 5)3601.1$. 5)3100.00
%6. 4ou 7ust won the grand pri(e in a national writing contestC As your pri(e3 you will recei!e 5%3000 a onth for ten years. 9f you can earn - percent on your oney3 what is this pri(e worth to you today? A. 51-%3%+%.-1 ". 51-13)11.06 C. 51113''1.)0 D. 511+3'''.'' $. 51203)+0.%+
%-. :hil can afford 5110 a onth for + years for a car loan. 9f the interest rate is 1.6 percent3 how uch can he afford to borrow to purchase a car? A. 5-3-+0.00 ". 513')1.0' C. 513-+%.1) D. 523%66.6$. 523)00.00
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%1. 4ou are the beneficiary of a life insurance policy. *he insurance co pany infor s you that you ha!e two options for recei!ing the insurance proceeds. 4ou can recei!e a lu p su of 5%003000 today or recei!e pay ents of 513)00 a onth for %0 years. 4ou can earn 6 percent on your oney. &hich option should you taAe and why? A. 4ou should accept the pay ents because they are worth 5%023)1) to you today. ". 4ou should accept the pay ents because they are worth 5%)-3100 to you today. C. 4ou should accept the pay ents because they are worth 5''63000 to you today. D. 4ou should accept the 5%003000 because the pay ents are only worth 51123'11 to you today. $. 4ou should accept the 5%003000 because the pay ents are only worth 512+3)1' to you today.
%2. 4our e ployer contributes 5-+ a weeA to your retire ent plan. Assu e that you worA for your e ployer for another %0 years and that the applicable discount rate is -.+ percent. ?i!en these assu ptions3 what is this e ployee benefit worth to you today? A. 5)03'1).62 ". 5)%3611.)6 C. 5))3%11.11 D. 5))3'06.16 $. 5))321-.-)
'0. *he Design *ea 7ust decided to sa!e 513+00 a onth for the ne,t + years as a safety net for recessionary periods. *he oney will be set aside in a separate sa!ings account which pays ).+ percent interest co pounded onthly. *he first deposit will be ade today. &hat would todayBs deposit a ount ha!e to be if the fir opted for one lu p su deposit today that would yield the sa e a ount of sa!ings as the onthly deposits after + years? A. 5103)+2.0". 5103-60.-2 C. 5113061.11 D. 5113'''.'' $. 5113+)1.%0
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'1. 4ou need so e oney today and the only friend you ha!e that has any is your iserly friend. @e agrees to loan you the oney you need3 if you aAe pay ents of 5%+ a onth for the ne,t si, onths. 9n Aeeping with his reputation3 he re#uires that the first pay ent be paid today. @e also charges you 1.+ percent interest per onth. @ow uch oney are you borrowing? A. 51').02 ". 51'1.%% C. 51'2.+0 D. 51)%.61 $. 51)).+-
'%. 4ou buy an annuity that will pay you 5%)3000 a year for %+ years. *he pay ents are paid on the first day of each year. &hat is the !alue of this annuity today if the discount rate is 1.+ percent? A. 5%)13'02 ". 5%)+36%1 C. 5%+13)02 D. 5%+13'12 $. 5%663)21
''. 4ou are scheduled to recei!e annual pay ents of 5)3100 for each of the ne,t - years. *he discount rate is 1 percent. &hat is the difference in the present !alue if you recei!e these pay ents at the beginning of each year rather than at the end of each year? A. 513222 ". 5%301' C. 5%3%%1 D. 5%3%%$. 5%3'0)
'). 4ou are co paring two annuities with e#ual present !alues. *he applicable discount rate is 1.-+ percent. 6ne annuity pays 5+3000 on the first day of each year for %0 years. @ow uch does the second annuity pay each year for %0 years if it pays at the end of each year? A. 5+3%11 ". 5+3%6C. 5+3'02 D. 5+3'20 $. 5+3)'1
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'+. *rish recei!es 5)10 on the first of each onth. Dosh recei!es 5)10 on the last day of each onth. "oth *rish and Dosh will recei!e pay ents for ne,t three years. At a 2.+ percent discount rate3 what is the difference in the present !alue of these two sets of pay ents? A. 5111.6' ". 51%1.06 C. 51%).'0 D. 51%2.01 $. 51'%.+0
'6. &hat is the future !alue of 513%00 a year for )0 years at 1 percent interest? Assu e annual co pounding. A. 5'01311+ ". 5'063)2% C. 5'103161 D. 5')%3201 $. 5')-3%6-
'-. &hat is the future !alue of 51+3000 a year for '0 years at 1% percent interest? A. 5%31-13)06 ". 5'36123220 C. 5'3-113)1) D. 5'32123)-6 $. 5)30%13%%'
'1. Ale,a plans on sa!ing 5'3000 a year and e,pects to earn an annual rate of 10.%+ percent. @ow uch will she ha!e in her account at the end of )+ years? A. 5131063)%2 ". 5131'13'62 C. 5%3%113)0D. 5%3'''3+-% $. 5%3+013'16
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'2. *heresa adds 513000 to her sa!ings account on the first day of each year. <arcus adds 513000 to his sa!ings account on the last day of each year. *hey both earn 6.+ percent annual interest. &hat is the difference in their sa!ings account balances at the end of '+ years? A. 51306% ". 51311' C. 5131%D. 513%11 $. 513%12
)0. 4ou are borrowing 51-3100 to buy a car. *he ter s of the loan call for for + years at 1.6 percent interest. &hat is the a ount of each pay ent? A. 5%1-.-1 ". 5%21.)0 C. 5'01.1% D. 5')%.-6 $. 5'66.0+
onthly pay ents
)1. 4ou borrow 516+3000 to buy a house. *he ortgage rate is -.+ percent and the loan period is '0 years. :ay ents are ade onthly. 9f you pay the ortgage according to the loan agree ent3 how uch total interest will you pay? A. 5%063)01 ". 5%%230-2 C. 5%+03''% D. 5%6)3'12 $. 5%213)06
)%. @oliday *ours .@*/ has an e ploy ent contract with its newly hired C$6. *he contract re#uires a lu p su pay ent of 510.) illion be paid to the C$6 upon the successful co pletion of her first three years of ser!ice. @* wants to set aside an e#ual a ount of oney at the end of each year to co!er this anticipated cash outflow and will earn +.6+ percent on the funds. @ow uch ust @* set aside each year for this purpose? A. 5'311)3)6". 5'3%--32-' C. 5'30063)02 D. 5'3'113120 $. 5'3)66366-
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)'. Eadine is retiring at age 6% and e,pects to li!e to age 1+. 6n the day she retires3 she has 5')13%12 in her retire ent sa!ings account. >he is so ewhat conser!ati!e with her oney and e,pects to earn 6 percent during her retire ent years. @ow uch can she withdraw fro her retire ent sa!ings each onth if she plans to spend her last penny on the orning of her death? A. 513602.2% ". 5131)-.-1 C. 513212.)6 D. 5%3116.01 $. 5%3'%2.0+
)). Fingston De!elop ent Corp. purchased a piece of property for 5%.-2 illion. *he fir paid a down pay ent of 1+ percent in cash and financed the balance. *he loan ter s re#uire onthly pay ents for 1+ years at an annual percentage rate of -.-+ percent3 co pounded onthly. &hat is the a ount of each ortgage pay ent? A. 5%%3'%%.'+ ". 5%'3)12.2C. 5%'360-.11 D. 5%)31-1.1+ $. 5%+3'01.16
)+. 4ou esti ate that you will owe 5)%3100 in student loans by the ti e you graduate. *he interest rate is ).%+ percent. 9f you want to ha!e this debt paid in full within si, years3 how uch ust you pay each onth? A. 5611.02 ". 56-).+0 C. 5-1).%1 D. 5-'6.0+ $. 5-)%.+0
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)6. 4ou are buying a pre!iously owned car today at a price of 5'3+00. 4ou are paying 5'00 down in cash and financing the balance for '6 onths at 1.+ percent. &hat is the a ount of each loan pay ent? A. 5101.0% ". 511%.%' C. 5111.)D. 51%1.60 $. 51%).)0
)-. Atlas 9nsurance wants to sell you an annuity which will pay you 5'3)00 per #uarter for %+ years. 4ou want to earn a ini u rate of return of 6.+ percent. &hat is the ost you are willing to pay as a lu p su today to buy this annuity? A. 51+13001.%) ". 51+)3%01.16 C. 516-3)12.11 D. 51-'3001.10 $. 51-132%-.+2
)1. 4our car dealer is willing to lease you a new car for 5%)+ a onth for )1 onths. :ay ents are due on the first day of each onth starting with the day you sign the lease contract. 9f your cost of oney is 6.+ percent3 what is the current !alue of the lease? A. 5103''1.0' ". 5103'16.22 C. 51%312-.-) D. 51%3%0'.1) $. 51'3001.'1
)2. 4our great aunt left you an inheritance in the for of a trust. *he trust agree ent states that you are to recei!e 5'3600 on the first day of each year3 starting i ediately and continuing for %0 years. &hat is the !alue of this inheritance today if the applicable discount rate is 6.-+ percent? A. 5'13120.11 ". 5)03'11.16 C. 5)13+16.01 D. 5)%3202.%2 $. 5)'3'''.''
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+0. 4ou 7ust recei!ed an insurance settle ent offer related to an accident you had si, years ago. *he offer gi!es you a choice of one of the following three offers8
4ou can earn -.+ percent on your in!est ents. 4ou do not care if you personally recei!e the funds or if they are paid to your heirs should you die within the settle ent period. &hich one of the following state ents is correct gi!en this infor ation? A. 6ption A is the best choice as it pro!ides the largest onthly pay ent. ". 6ption " is the best choice because it pays the largest total a ount. C. 6ption C is the best choice because it is has the largest current !alue. D. 6ption " is the best choice because you will recei!e the ost pay ents. $. 4ou are indifferent to the three options as they are all e#ual in !alue.
+1. >a uelson $ngines wants to sa!e 5-+03000 to buy so e new e#uip ent si, years fro now. *he plan is to set aside an e#ual a ount of oney on the first day of each #uarter starting today. *he fir can earn ).-+ percent on its sa!ings. @ow uch does the fir ha!e to sa!e each #uarter to achie!e its goal? A. 5%631-%.2) ". 5%63262.-0 C. 5%-312%.0+ D. 5%-3)12.%2 $. 5%-3211.01
+%. >tephanie is going to contribute 5'00 on the first of each onth3 starting today3 to her retire ent account. @er e ployer will pro!ide a +0 percent atch. 9n other words3 her e ployer will contribute +0 percent of the a ount >tephanie sa!es. 9f both >tephanie and her e ployer continue to do this and she can earn a onthly rate of 0.20 percent3 how uch will she ha!e in her retire ent account '+ years fro now? A. 5132'63%6) ". 5132)'3%16 C. 5132123'1% D. 5%30613)11 $. 5%31%'300-
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+'. 4ou are considering an annuity which costs 51603000 today. *he annuity pays 51131%6 a year at an annual interest rate of -.+0 percent. &hat is the length of the annuity ti e period? A. 1% years ". 1' years C. 1) years D. 1+ years $. 16 years
+). *oday3 you borrowed 563%00 on your credit card to purchase so e furniture. *he interest rate is 1).2 percent3 co pounded onthly. @ow long will it taAe you to pay off this debt assu ing that you do not charge anything else and aAe regular onthly pay ents of 51%0? A. +.1- years ". 6.)0 years C. 6.2' years D. -.%' years $. -.'1 years
++. <eadow "rooA <anor would liAe to buy so e additional land and build a new assisted li!ing center. *he anticipated total cost is 5%'.6 illion. *he C$6 of the fir is #uite conser!ati!e and will only do this when the co pany has sufficient funds to pay cash for the entire construction pro7ect. <anage ent has decided to sa!e 51.% illion a #uarter for this purpose. *he fir earns 6.%+ percent3 co pounded #uarterly3 on the funds it sa!es. @ow long does the co pany ha!e to wait before e,panding its operations? A. ).02 years ". ).'% years C. ).)6 years D. ).1% years $. ).21 years
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+6. *oday3 you are retiring. 4ou ha!e a total of 5)113016 in your retire ent sa!ings and ha!e the funds in!ested such that you e,pect to earn an a!erage of -.10 percent3 co pounded onthly3 on this oney throughout your retire ent years. 4ou want to withdraw 5%3+00 at the beginning of e!ery onth3 starting today. @ow long will it be until you run out of oney? A. '1.2- years ". ').+6 years C. )%.0' year D. )1.12 years $. 4ou will ne!er run out of oney.
+-. ?eneBs Art ?allery is notoriously Anown as a slow-payer. *he fir currently needs to borrow 5%-3+00 and only one co pany will e!en deal with the . *he ter s of the loan call for daily pay ents of 5100. *he first pay ent is due today. *he interest rate is %1.2 percent3 co pounded daily. &hat is the ti e period of this loan? Assu e a '6+ day year. A. %6).'6 days ". %10.11 days C. '00.)' days D. '16.)6 days $. ')1.02 days
+1. *he &ine :ress is considering a pro7ect which has an initial cash re#uire ent of 511-3)00. *he pro7ect will yield cash flows of 5%31'% onthly for 1) onths. &hat is the rate of return on this pro7ect? A. 6.2- percent ". -.0) percent C. -.%1 percent D. -.)1 percent $. -.+6 percent
+2. 4our insurance agent is trying to sell you an annuity that costs 5%003000 today. "y buying this annuity3 your agent pro ises that you will recei!e pay ents of 513%%+ a onth for the ne,t '0 years. &hat is the rate of return on this in!est ent? A. +.-+ percent ". +.2- percent C. 6.%0 percent D. 6.)+ percent $. 6.6- percent
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60. 4ou ha!e been in!esting 5%+0 a onth for the last 1' years. *oday3 your in!est ent account is worth 5-'3%6%. &hat is your a!erage rate of return on your in!est ents? A. 1.2) percent ". 2.%' percent C. 2.'6 percent D. 2.)1 percent $. 2.-1 percent
61. &ill has been purchasing 5%+3000 worth of Eew *eA stocA annually for the past 11 years. @is holdings are now worth 5+213100. &hat is his annual rate of return on this stocA? A. 1).1' percent ". 1).%) percent C. 1).%2 percent D. 1).'- percent $. 1).61 percent
6%. 4our father helped you start sa!ing 5%0 a onth beginning on your +th birthday. @e always ade you deposit the oney into your sa!ings account on the first day of each onth 7ust to Gstart the onth out right.G *oday co pletes your 1-th year of sa!ing and you now ha!e 563+%1.21 in this account. &hat is the rate of return on your sa!ings? A. +.1+ percent ". +.'0 percent C. +.)- percent D. +.21 percent $. 6.1% percent
6'. *oday3 you turn %'. 4our birthday wish is that you will be a illionaire by your )0th birthday. 9n an atte pt to reach this goal3 you decide to sa!e 5+0 a day3 e!ery day until you turn )0. 4ou open an in!est ent account and deposit your first 5+0 today. &hat rate of return ust you earn to achie!e your goal? A. 10.6- percent ". 11.1+ percent C. 1%.20 percent D. 1'.06 percent $. 1'.+) percent
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6). 4ou 7ust settled an insurance clai . *he settle ent calls for increasing pay ents o!er a 10-year period. *he first pay ent will be paid one year fro now in the a ount of 5103000. *he following pay ents will increase by ).+ percent annually. &hat is the !alue of this settle ent to you today if you can earn 1 percent on your in!est ents? A. 5-63)01.%1 ". 510312%.-6 C. 51%30%'.0+ D. 51)31)1.1) $. 51+3001.16
6+. 4our grandfather left you an inheritance that will pro!ide an annual inco e for the ne,t 10 years. 4ou will recei!e the first pay ent one year fro now in the a ount of 5)3000. $!ery year after that3 the pay ent a ount will increase by 6 percent. &hat is your inheritance worth to you today if you can earn 2.+ percent on your in!est ents? A. 5'13622.1+ ". 5'63666.6C. 5)131%1.%1 D. 5)'3)6).1% $. 5)63201.1-
66. 4ou 7ust won a national sweepstaAesC For your pri(e3 you opted to recei!e ne!er-ending pay ents. *he first pay ent will be 51%3+00 and will be paid one year fro today. $!ery year thereafter3 the pay ents will increase by '.+ percent annually. &hat is the present !alue of your pri(e at a discount rate of 1 percent? A. 51663666.6". 5%)13)02.12 C. 5%--3---.-1 D. 5%213006.1% $. 5'003000.00
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6-. A wealthy benefactor 7ust donated so e oney to the local college. *his gift was established to pro!ide scholarships for worthy students. *he first scholarships will be granted one year fro now for a total of 5'+3000. Annually thereafter3 the scholarship a ount will be increased by +.+ percent to help offset the effects of inflation. *he scholarship fund will last indefinitely. &hat is the !alue of this gift today at a discount rate of 1 percent? A. 5)'-3+00 ". 5-+03000 C. 513%003000 D. 513)003000 $. 513)+03-+0
61. >outhern *ours is considering ac#uiring @oliday Vacations. <anage ent belie!es @oliday Vacations can generate cash flows of 511-30003 5%%030003 and 5%)+3000 o!er the ne,t three years3 respecti!ely. After that ti e3 they feel the business will be worthless. >outhern *ours has deter ined that a 1'.+ percent rate of return is applicable to this potential ac#uisition. &hat is >outhern *ours willing to pay today to ac#uire @oliday Vacations? A. 5+0'3021 ". 5+'1361+ C. 5+)+32%0 D. 56013%%6 $. 56'13)0-
62. 4ou are considering two sa!ings options. "oth options offer a -.) percent rate of return. *he first option is to sa!e 52003 5%31003 and 5'3000 at the end of each year for the ne,t three years3 respecti!ely. *he other option is to sa!e one lu p su a ount today. 9f you want to ha!e the sa e balance in your sa!ings account at the end of the three years3 regardless of the sa!ings ethod you select3 how uch do you need to sa!e today if you select the lu p su option? A. 5)3)10 ". 5)3+'0 C. 5)3600 D. 5+3010 $. 5+3%60
6-%0
-0. 4our parents ha!e ade you two offers. *he first offer includes annual gifts of 51030003 51130003 and 51%3000 at the end of each of the ne,t three years3 respecti!ely. *he other offer is the pay ent of one lu p su a ount today. 4ou are trying to decide which offer to accept gi!en the fact that your discount rate is 1 percent. &hat is the ini u a ount that you will accept today if you are to select the lu p su offer? A. 5%13%16 ". 5%23)0C. 5%23'6D. 5'03)'2 $. 5'03621
-1. 4ou are considering changing 7obs. 4our goal is to worA for three years and then return to school full-ti e in pursuit of an ad!anced degree. A potential e ployer 7ust offered you an annual salary of 5)130003 5))30003 and 5)63000 a year for the ne,t three years3 respecti!ely. All salary pay ents are ade as lu p su pay ents at the end of each year. *he offer also includes a starting bonus of 5%3+00 payable i ediately. &hat is this offer worth to you today at a discount rate of 6.-+ percent? A. 511%3)06 ". 511+3+)+ C. 511-3''' D. 51%13%1% $. 51')362-
-%. 4ou are considering a pro7ect which will pro!ide annual cash inflows of 5)3+003 5+3-003 and 513000 at the end of each year for the ne,t three years3 respecti!ely. &hat is the present !alue of these cash flows3 gi!en a 2 percent discount rate? A. 51)31-". 51+310' C. 51+3)%2 D. 5163'11 $. 51631)-
6-%1
-'. 4ou 7ust signed a consulting contract that will pay you 5'+30003 5+%30003 and 5103000 annually at the end of the ne,t three years3 respecti!ely. &hat is the present !alue of these cash flows gi!en a 10.+ percent discount rate? A. 51''3++) ". 51)%3'0C. 51)13110 D. 51+131'1 $. 51+63210
-). 4ou ha!e so e property for sale and ha!e recei!ed two offers. *he first offer is for 5123+00 today in cash. *he second offer is the pay ent of 5'+3000 today and an additional 5-03000 two years fro today. 9f the applicable discount rate is 11.+ percent3 which offer should you accept and why? A. 4ou should accept the 5123+00 today because it has the higher net present !alue. ". 4ou should accept the 5123+00 today because it has the lower future !alue. C. 4ou should accept the first offer as it has the greatest !alue to you. D. 4ou should accept the second offer because it has the larger net present !alue. $. 9t does not atter which offer you accept as they are e#ually !aluable.
-+. 4our local tra!el agent is ad!ertising an upscale winter !acation pacAage for tra!el three years fro now to Antarctica. *he pacAage re#uires that you pay 5%+3000 today3 5'03000 one year fro today3 and a final pay ent of 5)+3000 on the day you depart three years fro today. &hat is the cost of this !acation in todayBs dollars if the discount rate is 2.-+ percent? A. 5163'-6 ". 512362+ C. 5213%12 D. 5213)0$. 52'3)-1
6-%%
-6. 6ne year ago3 Deltona <otor :arts deposited 5163+00 in an in!est ent account for the purpose of buying new e#uip ent three years fro today. *oday3 it is adding another 51%3000 to this account. *he co pany plans on aAing a final deposit of 5%03000 to the account one year fro today. @ow uch will be a!ailable when it is ready to buy the e#uip ent3 assu ing the account pays +.+ interest? A. 5+'3)01 ". 5+'3212 C. 5+63%11 D. 5+63-2% $. 5+130%1
--. =ucas will recei!e 5631003 513-003 and 51%3+00 each year starting at the end of year one. &hat is the future !alue of these cash flows at the end of year fi!e if the interest rate is percent? A. 5'%3)11 ". 5'%320C. 5''311' D. 5'+3)11 $. 5'63%++
-1. 4ou plan on sa!ing 5+3%00 this year3 nothing ne,t year3 and 5-3+00 the following year. 4ou will deposit these a ounts into your in!est ent account at the end of each year. &hat will your in!est ent account be worth at the end of year three if you can earn 1.+ percent on your funds? A. 51'3+%1.1% ". 51'36%1.+C. 51'320-.11 D. 51)3+%6.+0 $. 51)3--2.)0
6-%'
-2. <iley e,pects to recei!e the following pay ents8 4ear 1 H 5603000I 4ear % H 5'+3000I 4ear ' H 51%3000. All of this oney will be sa!ed for her retire ent. 9f she can earn an a!erage of 10.+ percent on her in!est ents3 how uch will she ha!e in her account %+ years after aAing her first deposit? A. 52-%3'-' ". 52123)+C. 5130063'11 D. 5131)-3+02 $. 513%'13--6
10. "lacAwell3 9nc. has a 5-+3000 liability it ust pay three years fro today. *he co pany is opening a sa!ings account so that the entire a ount will be a!ailable when this debt needs to be paid. *he plan is to aAe an initial deposit today and then deposit an additional 51+3000 each year for the ne,t three years3 starting one year fro today. *he account pays a ).+ percent rate of return. @ow uch does the fir need to deposit today? A. 5113%22.2+ ". 5%030-%.21 C. 5%13)00.'' D. 5%)3)1-.-1 $. 5'130-6.+6
11. *he go!ern ent has i posed a fine on the Corner *a!ern. *he fine calls for annual pay ents of 51+030003 510030003 5-+30003 and 5+030003 respecti!ely3 o!er the ne,t four years. *he first pay ent is due one year fro today. *he go!ern ent plans to in!est the funds until the final pay ent is collected and then donate the entire a ount3 including the in!est ent earnings3 to help the local co unity shelter. *he go!ern ent will earn 6.%+ percent on the funds held. @ow uch will the co unity shelter recei!e four years fro today? A. 5')236-).06 ". 5'6631-+.00 C. 5)%%3)2-.+6 D. 5)+13+-%.-1 $. 5+1+3-'-.6-
6-%)
1%. &icAer 9 ports established a trust fund that pro!ides 5203000 in scholarships each year for needy students. *he trust fund earns a fi,ed 6 percent rate of return. @ow uch oney did the fir contribute to the fund assu ing that only the interest inco e is distributed? A. 5131+03000 ". 513%003000 C. 513'''3''' D. 513+003000 $. 5136003000
1'. A preferred stocA pays an annual di!idend of 5%.60. &hat is one share of this stocA worth today if the rate of return is 11.-+ percent? A. 511.)1 ". 5%0.00 C. 5%%.1' D. 5%1.10 $. 5'0.++
1). 4ou would liAe to establish a trust fund that will pro!ide 51%03000 a year fore!er for your heirs. *he trust fund is going to be in!ested !ery conser!ati!ely so the e,pected rate of return is only +.-+ percent. @ow uch oney ust you deposit today to fund this gift for your heirs? A. 5%301632+". 5%31%13%1% C. 5%3'003000 D. 5%3)+131%% $. 5%3+003000
1+. 4ou 7ust paid 5-+03000 for an annuity that will pay you and your heirs 5)+3000 a year fore!er. &hat rate of return are you earning on this policy? A. +.%+ percent ". +.+0 percent C. +.-+ percent D. 6.00 percent $. 6.%+ percent
6-%+
16. 4ou grandfather won a lottery years ago. *he !alue of his winnings at the ti e was 5+03000. @e in!ested this oney such that it will pro!ide annual pay ents of 5%3)00 a year to his heirs fore!er. &hat is the rate of return? A. ).-+ percent ". ).10 percent C. +.00 percent D. +.10 percent $. +.1+ percent
1-. *he preferred stocA of Casco has a +.)1 percent di!idend yield. *he stocA is currently priced at 5+2.'0 per share. &hat is the a ount of the annual di!idend? A. 5%.10 ". 5%.2+ C. 5'.10 D. 5'.%+ $. 5'.)0
11. 4our credit card co pany charges you 1.6+ percent interest per percentage rate on your account? A. 11.2+ percent ". 12.10 percent C. %0.20 percent D. %1.%+ percent $. %1.-0 percent
onth. &hat is the annual
12. &hat is the annual percentage rate on a loan with a stated rate of %.%+ percent per #uarter? A. 2.00 percent ". 2.02 percent C. 2.11 percent D. 2.%- percent $. 2.'1 percent
6-%6
20. 4ou are paying an effecti!e annual rate of 11.2-) percent on your credit card. *he interest is co pounded onthly. &hat is the annual percentage rate on this account? A. 1-.+0 percent ". 11.00 percent C. 11.%+ percent D. 11.6) percent $. 12.00 percent
21. &hat is the effecti!e annual rate if a banA charges you 2.+0 percent co pounded #uarterly? A. 2.6% percent ". 2.61 percent C. 2.-% percent D. 2.1) percent $. 2.21 percent
2%. 4our credit card co pany #uotes you a rate of 1-.2 percent. 9nterest is billed &hat is the actual rate of interest you are paying? A. 12.0' percent ". 12.%1 percent C. 12.)) percent D. 12.+- percent $. 12.-% percent
onthly.
2'. *he :awn >hop loans oney at an annual rate of %1 percent and co pounds interest weeAly. &hat is the actual rate being charged on these loans? A. %'.16 percent ". %'.'% percent C. %'.)2 percent D. %'.+6 percent $. %'.6) percent
6-%-
2). 4ou are considering two loans. *he ter s of the two loans are e#ui!alent with the e,ception of the interest rates. =oan A offers a rate of -.-+ percent3 co pounded daily. =oan " offers a rate of 1 percent3 co pounded se i-annually. &hich loan should you select and why? A. AI the effecti!e annual rate is 1.06 percent. ". AI the annual percentage rate is -.-+ percent. C. "I the annual percentage rate is -.61 percent. D. "I the effecti!e annual rate is 1.16 percent. $. *he loans are e#ui!alent offers so you can select either one.
2+. 4ou ha!e 5+3600 that you want to use to open a sa!ings account. *here are fi!e banAs located in your area. *he rates paid by banAs A through $3 respecti!ely3 are gi!en below. &hich banA should you select if your goal is to a,i i(e your interest inco e? A. '.%6 percent3 co pounded annually ". '.%0 percent3 co pounded onthly C. '.%+ percent3 co pounded se i-annually D. '.10 percent3 co pounded continuously $. '.1+ percent3 co pounded #uarterly
26. &hat is the effecti!e annual rate of 1).2 percent co pounded continuously? A. 1+.+2 percent ". 1+.6% percent C. 1+.62 percent D. 1+.1) percent $. 16.0- percent
2-. &hat is the effecti!e annual rate of 2.-+ percent co pounded continuously? A. 10.1- percent ". 10.%) percent C. 10.%2 percent D. 10.'' percent $. 10.)- percent
6-%1
21. City "anA wants to appear co petiti!e based on #uoted loan rates and thus ust offer a -.-+ percent annual percentage rate on its loans. &hat is the a,i u rate the banA can actually earn based on the #uoted rate? A. 1.06 percent ". 1.1) percent C. 1.%1 percent D. 1.%6 percent $. 1.+1 percent
22. 4ou are going to loan a friend 5200 for one year at a + percent rate of interest3 co pounded annually. @ow uch additional interest could you ha!e earned if you had co pounded the rate continuously rather than annually? A. 50.2". 51.1) C. 51.%' D. 51.'6 $. 51.)1
100. 4ou are borrowing oney today at 1.)1 percent3 co pounded annually. 4ou will repay the principal plus all the interest in one lu p su of 51%3100 two years fro today. @ow uch are you borrowing? A. 523200.00 ". 5103%11.16 C. 51031--.0) D. 5113)01.16 $. 5113%+0.00
101. *his orning3 you borrowed 523+00 at -.6+ percent annual interest. 4ou are to repay the loan principal plus all of the loan interest in one lu p su four years fro today. @ow uch will you ha!e to repay? A. 51%3-+-.2% ". 51%3101.1' C. 51%3211.12 D. 51'3006.01 $. 51'3))1.%0
6-%2
10%. 6n this date last year3 you borrowed 5'3)00. 4ou ha!e to repay the loan principal plus all of the interest si, years fro today. *he pay ent that is re#uired at that ti e is 563000. &hat is the interest rate on this loan? A. 1.01 percent ". 1.)+ percent C. 1.-1 percent D. 2.)- percent $. 2.2' percent
10'. DohnBs Auto Jepair 7ust tooA out an 51230003 10-year3 1 percent3 interest-only loan fro the banA. :ay ents are ade annually. &hat is the a ount of the loan pay ent in year 10? A. 5-31%0 ". 5131+0 C. 51'3%6) D. 5123000 $. 52631%0
10). 6n the day you entered college3 you borrowed 5113000 on an interest-only3 four-year loan at +.%+ percent fro your local banA. :ay ents are to be paid annually. &hat is the a ount of your loan pay ent in year %? A. 52)+ ". 513120 C. 5'3600 D. 5+3106 $. 563%+0
10+. 6n the day you entered college you borrowed 5%+3000 fro your local banA. *he ter s of the loan include an interest rate of ).-+ percent. *he ter s stipulate that the principal is due in full one year after you graduate. 9nterest is to be paid annually at the end of each year. Assu e that you co plete college in four years. @ow uch total interest will you pay on this loan? A. 5+3%66.6". 5+3)00.00 C. 5+32'-.+0 D. 563+%2.00 $. 56360-.11
6-'0
106. 4ou 7ust ac#uired a ortgage in the a ount of 5%)23+00 at 6.-+ percent interest3 co pounded onthly. $#ual pay ents are to be ade at the end of each onth for thirty years. @ow uch of the first loan pay ent is interest? .Assu e each onth is e#ual to 1K1% of a year./ A. 52%+.%0 ". 513%06.16 C. 513)0'.)) D. 513+11.%1 $. 513+)1.60
10-. 6n Dune 13 you borrowed 5%1%3000 to buy a house. *he ortgage rate is 1.%+ percent. *he loan is to be repaid in e#ual onthly pay ents o!er 1+ years. *he first pay ent is due on Duly 1. @ow uch of the second pay ent applies to the principal balance? .Assu e that each onth is e#ual to 1K1% of a year./ A. 560'.'% ". 5621.1) C. 513'+1.+6 D. 513)+'.'1 $. 5%30+6.-0
101. *his orning3 you borrowed 51+03000 to buy a house. *he ortgage rate is -.'+ percent. *he loan is to be repaid in e#ual onthly pay ents o!er %0 years. *he first pay ent is due one onth fro today. @ow uch of the second pay ent applies to the principal balance? .Assu e that each onth is e#ual to 1K1% of a year./ A. 5%61.1) ". 5%--.61 C. 521-.06 D. 52%+.1' $. 51312).6-
6-'1

Essay Questions
102. $,plain the difference between the effecti!e annual rate .$AJ/ and the annual percentage rate .A:J/. 6f the two3 which one has the greater i portance and why?
110. 4ou are considering two annuities3 both of which pay a total of 5%03000 o!er the life of the annuity. Annuity A pays 5%3000 at the end of each year for the ne,t 10 years. Annuity " pays 513000 at the end of each year for the ne,t %0 years. &hich annuity has the greater !alue today? 9s there any circu stance where the two annuities would ha!e e#ual !alues as of today? $,plain.
6-'%
111. &hy ight a borrower select an interest-only loan instead of an a orti(ed loan3 which would be cheaper?
11%. Fristie owns a perpetuity which pays 51%3000 at the end of each year. >he co es to you and offers to sell you all of the pay ents to be recei!ed after the 10th year. $,plain how you can deter ine the !alue of this offer.
6-''
11'. &estern "anA offers you a 5%130003 6-year ter is the a ount of your annual loan pay ent? A. 5)3%%1.+0 ". 5)3+)%.6% C. 5)3666.6D. 5)3201.11 $. 5+3'11.0-
loan at 1 percent annual interest. &hat
11). First Century "anA wants to earn an effecti!e annual return on its consu er loans of 10 percent per year. *he banA uses daily co pounding on its loans. "y law3 what interest rate is the banA re#uired to report to potential borrowers? A. 2.%' percent ". 2.'1 percent C. 2.+' percent D. 2.-% percent $. 10.00 percent
11+. Downtown "anA is offering '.) percent co pounded daily on its sa!ings accounts. 4ou deposit 513000 today. @ow uch will you ha!e in your account 11 years fro now? A. 51136%1.02 ". 5113-1).06 C. 51%3%0).+0 D. 51%3''6.11 $. 51%3)1).1)
116. 4ou want to buy a new sports coupe for 5)13-+03 and the finance office at the dealership has #uoted you an 1.6 percent A:J loan co pounded onthly for )1 onths to buy the car. &hat is the effecti!e interest rate on this loan? A. 1.%1 percent ". 1.)1 percent C. 1.-% percent D. 1.1- percent $. 1.2+ percent
6-')
11-. "eginning three onths fro now3 you want to be able to withdraw 513+00 each #uarter fro your banA account to co!er college e,penses o!er the ne,t ) years. *he account pays 1.%+ percent interest per #uarter. @ow uch do you need to ha!e in your account today to eet your e,pense needs o!er the ne,t ) years? A. 5%136'0.)) ". 5%131)-.1+ C. 5%%3061.00 D. 5%%3)+).02 $. 5%%3-11.11
111. 4ou are planning to sa!e for retire ent o!er the ne,t 1+ years. *o do this3 you will in!est 513100 a onth in a stocA account and 5+00 a onth in a bond account. *he return on the stocA account is e,pected to be - percent3 and the bond account will pay ) percent. &hen you retire3 you will co bine your oney into an account with a + percent return. @ow uch can you withdraw each onth during retire ent assu ing a %0-year withdrawal period? A. 5%36'6.12 ". 5%320).11 C. 5'3001.%1 D. 5'311'.0) $. 5'3)06.2-
112. 4ou want to be a illionaire when you retire in )0 years. 4ou can earn an 11 percent annual return. @ow uch ore will you ha!e to sa!e each onth if you wait 10 years to start sa!ing !ersus if you start sa!ing at the end of this onth? A. 5-2.%% ". 511).1' C. 5161.)D. 5%01.1+ $. 5%)0.%2
6-'+
1%0. 4ou ha!e 7ust won the lottery and will recei!e 5+)03000 as your first pay ent one year fro now. 4ou will recei!e pay ents for %6 years. *he pay ents will increase in !alue by ) percent each year. *he appropriate discount rate is 10 percent. &hat is the present !alue of your winnings? A. 563%%13)0". 5632063'-% C. 5-3++2361' D. 5-31113)06 $. 51300'.11
1%1. 4ou are preparing to aAe onthly pay ents of 56+3 beginning at the end of this onth3 into an account that pays 6 percent interest co pounded onthly. @ow any pay ents will you ha!e ade when your account balance reaches 523%-1? A. 2". 101 C. 112 D. 1%) $. 1'1
1%%. 4ou want to borrow 5)-31-0 fro your local banA to buy a new sailboat. 4ou can afford to aAe onthly pay ents of 5131603 but no ore. Assu e onthly co pounding. &hat is the highest rate you can afford on a )1- onth A:J loan? A. 1.'1 percent ". 1.6- percent C. 1.1% percent D. 2.01 percent $. 2.11 percent
6-'6
1%'. 4ou need a %+-year3 fi,ed-rate ortgage to buy a new ho e for 5%)03000. 4our ortgage banA will lend you the oney at a -.+ percent A:J for this '00- onth loan3 with interest co pounded onthly. @owe!er3 you can only afford onthly pay ents of 51+03 so you offer to pay off any re aining loan balance at the end of the loan in the for of a single balloon pay ent. &hat will be the a ount of the balloon pay ent if you are to Aeep your onthly pay ents at 51+0? A. 5-'13)6) ". 5-)+3'16 C. 5-6-3)10 D. 51103%%0 $. 51)-3'1+
1%). *he present !alue of the following cash flow strea is 5+32''.16 when discounted at 11 percent annually. &hat is the !alue of the issing cash flow?
A. 513+00 ". 513-+0 C. 5%3000 D. 5%3%+0 $. 5%3+00
1%+. 4ou ha!e 7ust purchased a new warehouse. *o finance the purchase3 youB!e arranged for a '0-year ortgage loan for 10 percent of the 5%36003000 purchase price. *he onthly pay ent on this loan will be 5113000. &hat is the effecti!e annual rate on this loan? A. ).21 percent ". +.%+ percent C. +.)6 percent D. 6.01 percent $. 6.+0 percent
6-'-
1%6. Consider a fir with a contract to sell an asset ' years fro now for 5203000. *he asset costs 5-13000 to produce today. At what rate will the fir 7ust breaA e!en on this contract? A. -.1- percent ". 1.01 percent C. 1.%' percent D. 1.+- percent $. 1.20 percent
1%-. &hat is the present !alue of 513100 per year3 at a discount rate of 10 percent if the first pay ent is recei!ed 6 years fro now and the last pay ent is recei!ed %1 years fro now? A. 56306-.'6 ". 5631'1.1C. 563'''.'' D. 563)%0.1% $. 563+11.01
1%1. 4ou ha!e your choice of two in!est ent accounts. 9n!est ent A is a +-year annuity that features end-of- onth 5%3+00 pay ents and has an interest rate of 11.+ percent co pounded onthly. 9n!est ent " is a 10.+ percent continuously co pounded lu p su in!est ent3 also good for fi!e years. @ow uch would you need to in!est in " today for it to be worth as uch as in!est ent A fi!e years fro now? A. 51013%06.6". 511231-6.06 C. 51%)3'11.01 D. 51%23)0-.1$. 51'13001.1+
1%2. ?i!en an interest rate of 1 percent per year3 what is the !alue at date t H 2 of a perpetual strea of 5+00 annual pay ents that begins at date t H 1-? A. 5'36)6.11 ". 5)3102.12 C. 5)3'0-.-1 D. 563%+0.00 $. 563)1-.1-
6-'1
1'0. 4ou want to buy a new sports car for 5++3000. *he contract is in the for of a 60- onth annuity due at a 6 percent A:J3 co pounded onthly. &hat will your onthly pay ent be? A. 5130)-.20 ". 5130+'.1C. 5130+1.01 D. 51306'.'0 $. 5130-%.11
1'1. 4ou are looAing at a one-year loan of 5103000. *he interest rate is #uoted as 10 percent plus + points. A point on a loan is si ply 1 percent .one percentage point/ of the loan a ount. Luotes si ilar to this one are !ery co on with ho e ortgages. *he interest rate #uotation in this e,a ple re#uires the borrower to pay + points to the lender up front and repay the loan later with 10 percent interest. &hat is the actual rate you are paying on this loan? A. 1+.00 percent ". 1+.)- percent C. 1+.++ percent D. 1+.-2 percent $. 1+.1) percent
1'%. 4our holiday sAi !acation was great3 but it unfortunately ran a bit o!er budget. All is not lost. 4ou 7ust recei!ed an offer in the ail to transfer your 5+3000 balance fro your current credit card3 which charges an annual rate of 11.- percent3 to a new credit card charging a rate of 2.) percent. 4ou plan to aAe pay ents of 5+10 a onth on this debt. @ow any less pay ents will you ha!e to aAe to pay off this debt if you transfer the balance to the new card? A. 0.'6 pay ents ". 0.)1 pay ents C. 1.10 pay ents D. 1.%' pay ents $. %.)2 pay ents
6-'2
Chapter 06 Discounted Cash Flow Valuation Answer Fey
1. An ordinary annuity is best defined by which one of the following? A. increasing pay ents paid for a definiti!e period of ti e ". increasing pay ents paid fore!er C. e#ual pay ents paid at regular inter!als o!er a stated ti e period D. e#ual pay ents paid at regular inter!als of ti e on an ongoing basis $. une#ual pay ents that occur at set inter!als for a li ited period of ti e Jefer to section 6.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity
%. &hich one of the following accurately defines a perpetuity? A. a li ited nu ber of e#ual pay ents paid in e!en ti e incre ents ". pay ents of e#ual a ounts that are paid irregularly but indefinitely C. !arying a ounts that are paid at e!en inter!als fore!er D. unending e#ual pay ents paid at e#ual ti e inter!als $. unending e#ual pay ents paid at either e#ual or une#ual ti e inter!als Jefer to section 6.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: (er'etuity
6-)0
'. &hich one of the following ter s is used to identify a "ritish perpetuity? A. ordinary annuity ". a orti(ed cash flow C. annuity due D. discounted loan E. consol Jefer to section 6.%
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Consol
). *he interest rate that is #uoted by a lender is referred to as which one of the following? A. stated interest rate ". co pound rate C. effecti!e annual rate D. si ple rate $. co on rate Jefer to section 6.'
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: Stated rate
6-)1
+. A onthly interest rate e,pressed as an annual rate would be an e,a ple of which one of the following rates? A. stated rate ". discounted annual rate C. effecti!e annual rate D. periodic onthly rate $. consolidated onthly rate Jefer to section 6.'
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: +ffecti!e annual rate
6. &hat is the interest rate charged per period called? A. effecti!e annual rate B. annual percentage rate C. periodic interest rate D. co pound interest rate $. daily interest rate Jefer to section 6.'
ultiplied by the nu ber of periods per year
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: Annual 'ercentage rate
6-)%
-. A loan where the borrower recei!es date is called a.n/ 00000 loan. A. a orti(ed ". continuous C. balloon D. pure discount $. interest-only Jefer to section 6.)
oney today and repays a single lu p su
on a future
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: (ure discount loan
1. &hich one of the following ter s is used to describe a loan that calls for periodic interest pay ents and a lu p su principal pay ent? A. a orti(ed loan ". odified loan C. balloon loan D. pure discount loan E. interest-only loan Jefer to section 6.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: ,nterest#only loan
6-)'
2. &hich one of the following ter s is used to describe a loan wherein each pay ent is e#ual in a ount and includes both interest and principal? A. a orti(ed loan ". odified loan C. balloon loan D. pure discount loan $. interest-only loan Jefer to section 6.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: Amorti-ed loan
10. &hich one of the following ter s is defined as a loan wherein the regular pay ents3 including both interest and principal a ounts3 are insufficient to retire the entire loan a ount3 which then ust be repaid in one lu p su ? A. a orti(ed loan ". continuing loan C. balloon loan D. re ainder loan $. interest-only loan Jefer to section 6.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: Balloon loan
6-))
11. 4ou are co paring two annuities which offer #uarterly pay ents of 5%3+00 for fi!e years and pay 0.-+ percent interest per onth. Annuity A will pay you on the first of each onth while annuity " will pay you on the last day of each onth. &hich one of the following state ents is correct concerning these two annuities? A. *hese two annuities ha!e e#ual present !alues but une#ual futures !alues at the end of year fi!e. ". *hese two annuities ha!e e#ual present !alues as of today and e#ual future !alues at the end of year fi!e. C. Annuity " is an annuity due. D. Annuity A has a s aller future !alue than annuity ". E. Annuity " has a s aller present !alue than annuity A. Jefer to section 6.%
AACSB: N/A Bloom's: Com're.ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity 'resent and future !alues
1%. 4ou are co paring two in!est ent options that each pay + percent interest3 co pounded annually. "oth options will pro!ide you with 51%3000 of inco e. 6ption A pays three annual pay ents starting with 5%3000 the first year followed by two annual pay ents of 5+3000 each. 6ption " pays three annual pay ents of 5)3000 each. &hich one of the following state ents is correct gi!en these two in!est ent options? A. "oth options are of e#ual !alue gi!en that they both pro!ide 51%3000 of inco e. ". 6ption A has the higher future !alue at the end of year three. C. 6ption " has a higher present !alue at ti e (ero than does option A. D. 6ption " is a perpetuity. $. 6ption A is an annuity. Jefer to sections 6.1 and 6.%
AACSB: N/A Bloom's: Com're.ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%/ and "%$ &o'ic: (resent and future !alues
6-)+
1'. 4ou are considering two pro7ects with the following cash flows8
&hich of the following state ents are true concerning these two pro7ects? 9. "oth pro7ects ha!e the sa e future !alue at the end of year )3 gi!en a positi!e rate of return. 99. "oth pro7ects ha!e the sa e future !alue gi!en a (ero rate of return. 999. :ro7ect ; has a higher present !alue than :ro7ect 43 gi!en a positi!e discount rate. 9V. :ro7ect 4 has a higher present !alue than :ro7ect ;3 gi!en a positi!e discount rate. A. 99 only ". 9 and 999 only C. 99 and 999 only D. 99 and 9V only $. 93 993 and 9V only Jefer to section 6.1
AACSB: N/A Bloom's: Com're.ension Difficulty: Basic Learning Ob ecti!e: "#/ Section: "%/ &o'ic: (resent and future !alues
6-)6
1). &hich one of the following state ents is correct gi!en the following two sets of pro7ect cash flows?
A. *he cash flows for :ro7ect " are an annuity3 but those of :ro7ect A are not. ". "oth sets of cash flows ha!e e#ual present !alues as of ti e (ero gi!en a positi!e discount rate. C. *he present !alue at ti e (ero of the final cash flow for :ro7ect A will be discounted using an e,ponent of three. D. *he present !alue of :ro7ect A cannot be co puted because the second cash flow is e#ual to (ero. E. As long as the discount rate is positi!e3 :ro7ect " will always be worth less today than will :ro7ect A. Jefer to section 6.1
AACSB: N/A Bloom's: Com're.ension Difficulty: Basic Learning Ob ecti!e: "#/ Section: "%/ &o'ic: (resent !alue
6-)-
1+. &hich one of the following state ents related to annuities and perpetuities is correct? A. An ordinary annuity is worth ore than an annuity due gi!en e#ual annual cash flows for ten years at - percent interest3 co pounded annually. B. A perpetuity co prised of 5100 onthly pay ents is worth ore than an annuity co prised of 5100 onthly pay ents3 gi!en an interest rate of 1% percent3 co pounded onthly. C. <ost loans are a for of a perpetuity. D. *he present !alue of a perpetuity cannot be co puted3 but the future !alue can. $. :erpetuities are finite but annuities are not. Jefer to section 6.%
AACSB: N/A Bloom's: Com're.ension Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuities and 'er'etuities
16. &hich of the following state ents related to interest rates are correct? 9. Annual interest rates consider the effect of interest earned on rein!ested interest pay ents. 99. &hen co paring loans3 you should co pare the effecti!e annual rates. 999. =enders are re#uired by law to disclose the effecti!e annual rate of a loan to prospecti!e borrowers. 9V. Annual and effecti!e interest rates are e#ual when interest is co pounded annually. A. 9 and 99 only ". 99 and 999 only C. 99 and 9V only D. 93 993 and 999 only $. 993 9993 and 9V only Jefer to section 6.'
AACSB: N/A Bloom's: Com're.ension Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: ,nterest rate
6-)1
1-. &hich one of the following state ents concerning interest rates is correct? A. >a!ers would prefer annual co pounding o!er onthly co pounding. ". *he effecti!e annual rate decreases as the nu ber of co pounding periods per year increases. C. *he effecti!e annual rate e#uals the annual percentage rate when interest is co pounded annually. D. "orrowers would prefer onthly co pounding o!er annual co pounding. $. For any positi!e rate of interest3 the effecti!e annual rate will always e,ceed the annual percentage rate. Jefer to section 6.'
AACSB: N/A Bloom's: Com're.ension Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: ,nterest rate
11. &hich one of these state ents related to growing annuities and perpetuities is correct? A. *he cash flow used in the growing annuity for ula is the initial cash flow at ti e (ero. ". ?rowth rates cannot be applied to perpetuities if you wish to co pute the present !alue. C. *he future !alue of an annuity will decrease if the growth rate is increased. D. An increase in the rate of growth will decrease the present !alue of an annuity. E. *he present !alue of a growing perpetuity will decrease if the discount rate is increased. Jefer to section 6.%
AACSB: N/A Bloom's: Com're.ension Difficulty: ,ntermediate Learning Ob ecti!e: "#/ Section: "%$ &o'ic: 0rowing annuities and 'er'etuities
6-)2
12. &hich one of the following state ents correctly states a relationship? A. *i e and future !alues are in!ersely related3 all else held constant. ". 9nterest rates and ti e are positi!ely related3 all else held constant. C. An increase in the discount rate increases the present !alue3 gi!en positi!e rates. D. An increase in ti e increases the future !alue gi!en a (ero rate of interest. E. *i e and present !alue are in!ersely related3 all else held constant. Jefer to section 6.'
AACSB: N/A Bloom's: Com're.ension Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%* &o'ic: &ime !alue relations.i's
%0. &hich one of the following co pounding periods will yield the s allest present !alue gi!en a stated future !alue and annual percentage rate? A. annual ". se i-annual C. onthly D. daily E. continuous Jefer to section 6.'
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%* &o'ic: ,nterest com'ounding
6-+0
%1. *he entire repay ent of which one of the following loans is co puted si ply by co puting a single future !alue? A. interest-only loan ". balloon loan C. a orti(ed loan D. pure discount loan $. bullet loan Jefer to section 6.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: (ure discount loan
%%. @ow is the principal a ount of an interest-only loan repaid? A. *he principal is forgi!en o!er the loan period so does not ha!e to be repaid. ". *he principal is repaid in e#ual incre ents and included in each loan pay ent. C. *he principal is repaid in a lu p su at the end of the loan period. D. *he principal is repaid in e#ual annual pay ents. $. *he principal is repaid in increasing incre ents through regular onthly pay ents. Jefer to section 6.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: ,nterest#only loan
6-+1
%'. An a orti(ed loan8 A. re#uires the principal a ount to be repaid in e!en incre ents o!er the life of the loan. B. ay ha!e e#ual or increasing a ounts applied to the principal fro each loan pay ent. C. re#uires that all interest be repaid on a onthly basis while the principal is repaid at the end of the loan ter . D. re#uires that all pay ents be e#ual in a ount and include both principal and interest. $. repays both the principal and the interest in one lu p su at the end of the loan ter . Jefer to section 6.)
AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: Amorti-ed loan
%). 4ou need 5%+3000 today and ha!e decided to taAe out a loan at - percent for fi!e years. &hich one of the following loans would be the least e,pensi!e? Assu e all loans re#uire onthly pay ents and that interest is co pounded on a onthly basis. A. interest-only loan B. a orti(ed loan with e#ual principal pay ents C. a orti(ed loan with e#ual loan pay ents D. discount loan $. balloon loan where +0 percent of the principal is repaid as a balloon pay ent Jefer to section 6.)
AACSB: N/A Bloom's: Com're.ension Difficulty: ,ntermediate Learning Ob ecti!e: "#* Section: "%) &o'ic: Loan ty'es
6-+%
%+. 4our grand other is gifting you 5100 a onth for four years while you attend college to earn your bachelorBs degree. At a +.+ percent discount rate3 what are these pay ents worth to you on the day you enter college? A. 5)3%01.16 B. 5)3%22.11 C. 5)3+02.12 D. 5)3601.1$. 5)3100.00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#/ Section: "%$ &o'ic: Annuity 'resent !alue
6-+'
%6. 4ou 7ust won the grand pri(e in a national writing contestC As your pri(e3 you will recei!e 5%3000 a onth for ten years. 9f you can earn - percent on your oney3 what is this pri(e worth to you today? A. 51-%3%+%.-1 ". 51-13)11.06 C. 51113''1.)0 D. 511+3'''.'' $. 51203)+0.%+
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#/ Section: "%$ &o'ic: Annuity 'resent !alue
6-+)
%-. :hil can afford 5110 a onth for + years for a car loan. 9f the interest rate is 1.6 percent3 how uch can he afford to borrow to purchase a car? A. 5-3-+0.00 ". 513')1.0' C. 513-+%.1) D. 523%66.6$. 523)00.00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Loan amount
6-++
%1. 4ou are the beneficiary of a life insurance policy. *he insurance co pany infor s you that you ha!e two options for recei!ing the insurance proceeds. 4ou can recei!e a lu p su of 5%003000 today or recei!e pay ents of 513)00 a onth for %0 years. 4ou can earn 6 percent on your oney. &hich option should you taAe and why? A. 4ou should accept the pay ents because they are worth 5%023)1) to you today. ". 4ou should accept the pay ents because they are worth 5%)-3100 to you today. C. 4ou should accept the pay ents because they are worth 5''63000 to you today. D. 4ou should accept the 5%003000 because the pay ents are only worth 51123'11 to you today. E. 4ou should accept the 5%003000 because the pay ents are only worth 512+3)1' to you today.
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity 'resent !alue
6-+6
%2. 4our e ployer contributes 5-+ a weeA to your retire ent plan. Assu e that you worA for your e ployer for another %0 years and that the applicable discount rate is -.+ percent. ?i!en these assu ptions3 what is this e ployee benefit worth to you today? A. 5)03'1).62 ". 5)%3611.)6 C. 5))3%11.11 D. 5))3'06.16 $. 5))321-.-)
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: (resent !alue
6-+-
'0. *he Design *ea 7ust decided to sa!e 513+00 a onth for the ne,t + years as a safety net for recessionary periods. *he oney will be set aside in a separate sa!ings account which pays ).+ percent interest co pounded onthly. *he first deposit will be ade today. &hat would todayBs deposit a ount ha!e to be if the fir opted for one lu p su deposit today that would yield the sa e a ount of sa!ings as the onthly deposits after + years? A. 5103)+2.0B. 5103-60.-2 C. 5113061.11 D. 5113'''.'' $. 5113+)1.%0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity due 'resent !alue
6-+1
'1. 4ou need so e oney today and the only friend you ha!e that has any is your iserly friend. @e agrees to loan you the oney you need3 if you aAe pay ents of 5%+ a onth for the ne,t si, onths. 9n Aeeping with his reputation3 he re#uires that the first pay ent be paid today. @e also charges you 1.+ percent interest per onth. @ow uch oney are you borrowing? A. 51').02 ". 51'1.%% C. 51'2.+0 D. 51)%.61 E. 51)).+-
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Loan 'resent !alue
6-+2
'%. 4ou buy an annuity that will pay you 5%)3000 a year for %+ years. *he pay ents are paid on the first day of each year. &hat is the !alue of this annuity today if the discount rate is 1.+ percent? A. 5%)13'02 ". 5%)+36%1 C. 5%+13)02 D. 5%+13'12 E. 5%663)21
6-60
''. 4ou are scheduled to recei!e annual pay ents of 5)3100 for each of the ne,t - years. *he discount rate is 1 percent. &hat is the difference in the present !alue if you recei!e these pay ents at the beginning of each year rather than at the end of each year? A. 513222 ". 5%301' C. 5%3%%1 D. 5%3%%$. 5%3'0)
Difference H 5%63220 - 5%)3221 H 513222 Eote8 *he difference H 0.01 5%)3221 H 513222
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#/ Section: "%$ &o'ic: Annuity 'resent !alue
6-61
'). 4ou are co paring two annuities with e#ual present !alues. *he applicable discount rate is 1.-+ percent. 6ne annuity pays 5+3000 on the first day of each year for %0 years. @ow uch does the second annuity pay each year for %0 years if it pays at the end of each year? A. 5+3%11 ". 5+3%6C. 5+3'02 D. 5+3'20 E. 5+3)'1
"ecause each pay ent is recei!ed one year later3 then the cash flow has to e#ual8 5+3000 .1 M 0.01-+/ H 5+3)'1
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity com'arison
6-6%
'+. *rish recei!es 5)10 on the first of each onth. Dosh recei!es 5)10 on the last day of each onth. "oth *rish and Dosh will recei!e pay ents for ne,t three years. At a 2.+ percent discount rate3 what is the difference in the present !alue of these two sets of pay ents? A. 5111.6' ". 51%1.06 C. 51%).'0 D. 51%2.01 $. 51'%.+0
6-6'
'6. &hat is the future !alue of 513%00 a year for )0 years at 1 percent interest? Assu e annual co pounding. A. 5'01311+ ". 5'063)2% C. 5'103161 D. 5')%3201 $. 5')-3%6-
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity future !alue
'-. &hat is the future !alue of 51+3000 a year for '0 years at 1% percent interest? A. 5%31-13)06 B. 5'36123220 C. 5'3-113)1) D. 5'32123)-6 $. 5)30%13%%'
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: 1uture !alue
6-6)
'1. Ale,a plans on sa!ing 5'3000 a year and e,pects to earn an annual rate of 10.%+ percent. @ow uch will she ha!e in her account at the end of )+ years? A. 5131063)%2 ". 5131'13'62 C. 5%3%113)0D. 5%3'''3+-% $. 5%3+013'16
6-6+
'2. *heresa adds 513000 to her sa!ings account on the first day of each year. <arcus adds 513000 to his sa!ings account on the last day of each year. *hey both earn 6.+ percent annual interest. &hat is the difference in their sa!ings account balances at the end of '+ years? A. 51306% ". 51311' C. 5131%D. 513%11 $. 513%12
Difference H 51'%3026.2+ - 51%)30').62 H 51306% Eote8 Difference H 51%)30').62 0.06+ H 51306%
6-66
)0. 4ou are borrowing 51-3100 to buy a car. *he ter s of the loan call for for + years at 1.6 percent interest. &hat is the a ount of each pay ent? A. 5%1-.-1 ". 5%21.)0 C. 5'01.1% D. 5')%.-6 E. 5'66.0+
onthly pay ents
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Loan 'ayment
6-6-
)1. 4ou borrow 516+3000 to buy a house. *he ortgage rate is -.+ percent and the loan period is '0 years. :ay ents are ade onthly. 9f you pay the ortgage according to the loan agree ent3 how uch total interest will you pay? A. 5%063)01 ". 5%%230-2 C. 5%+03''% D. 5%6)3'12 $. 5%213)06
AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Loan interest
6-61
)%. @oliday *ours .@*/ has an e ploy ent contract with its newly hired C$6. *he contract re#uires a lu p su pay ent of 510.) illion be paid to the C$6 upon the successful co pletion of her first three years of ser!ice. @* wants to set aside an e#ual a ount of oney at the end of each year to co!er this anticipated cash outflow and will earn +.6+ percent on the funds. @ow uch ust @* set aside each year for this purpose? A. 5'311)3)6B. 5'3%--32-' C. 5'30063)02 D. 5'3'113120 $. 5'3)66366-
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity 'ayment
6-62
)'. Eadine is retiring at age 6% and e,pects to li!e to age 1+. 6n the day she retires3 she has 5')13%12 in her retire ent sa!ings account. >he is so ewhat conser!ati!e with her oney and e,pects to earn 6 percent during her retire ent years. @ow uch can she withdraw fro her retire ent sa!ings each onth if she plans to spend her last penny on the orning of her death? A. 513602.2% ". 5131)-.-1 C. 513212.)6 D. 5%3116.01 E. 5%3'%2.0+
6--0
)). Fingston De!elop ent Corp. purchased a piece of property for 5%.-2 illion. *he fir paid a down pay ent of 1+ percent in cash and financed the balance. *he loan ter s re#uire onthly pay ents for 1+ years at an annual percentage rate of -.-+ percent3 co pounded onthly. &hat is the a ount of each ortgage pay ent? A. 5%%3'%%.'+ ". 5%'3)12.2C. 5%'360-.11 D. 5%)31-1.1+ $. 5%+3'01.16 A ount financed H 5%3-203000 .1 - 0.1+/ H 5%3'-13+00
6--1
)+. 4ou esti ate that you will owe 5)%3100 in student loans by the ti e you graduate. *he interest rate is ).%+ percent. 9f you want to ha!e this debt paid in full within si, years3 how uch ust you pay each onth? A. 5611.02 B. 56-).+0 C. 5-1).%1 D. 5-'6.0+ $. 5-)%.+0
6--%
)6. 4ou are buying a pre!iously owned car today at a price of 5'3+00. 4ou are paying 5'00 down in cash and financing the balance for '6 onths at 1.+ percent. &hat is the a ount of each loan pay ent? A. 5101.0% ". 511%.%' C. 5111.)D. 51%1.60 $. 51%).)0 A ount financed H 5'3+00 - 5'00 H 5'3%00
6--'
)-. Atlas 9nsurance wants to sell you an annuity which will pay you 5'3)00 per #uarter for %+ years. 4ou want to earn a ini u rate of return of 6.+ percent. &hat is the ost you are willing to pay as a lu p su today to buy this annuity? A. 51+13001.%) ". 51+)3%01.16 C. 516-3)12.11 D. 51-'3001.10 $. 51-132%-.+2
6--)
)1. 4our car dealer is willing to lease you a new car for 5%)+ a onth for )1 onths. :ay ents are due on the first day of each onth starting with the day you sign the lease contract. 9f your cost of oney is 6.+ percent3 what is the current !alue of the lease? A. 5103''1.0' B. 5103'16.22 C. 51%312-.-) D. 51%3%0'.1) $. 51'3001.'1
6--+
)2. 4our great aunt left you an inheritance in the for of a trust. *he trust agree ent states that you are to recei!e 5'3600 on the first day of each year3 starting i ediately and continuing for %0 years. &hat is the !alue of this inheritance today if the applicable discount rate is 6.-+ percent? A. 5'13120.11 ". 5)03'11.16 C. 5)13+16.01 D. 5)%3202.%2 $. 5)'3'''.''
6--6
+0. 4ou 7ust recei!ed an insurance settle ent offer related to an accident you had si, years ago. *he offer gi!es you a choice of one of the following three offers8
4ou can earn -.+ percent on your in!est ents. 4ou do not care if you personally recei!e the funds or if they are paid to your heirs should you die within the settle ent period. &hich one of the following state ents is correct gi!en this infor ation? A. 6ption A is the best choice as it pro!ides the largest onthly pay ent. ". 6ption " is the best choice because it pays the largest total a ount. C. 6ption C is the best choice because it is has the largest current !alue. D. 6ption " is the best choice because you will recei!e the ost pay ents. $. 4ou are indifferent to the three options as they are all e#ual in !alue.
6ption A has a present !alue of 5203+1).16 at -.+ percent. 6ption " has a present !alue of 51+3%++.61 at -.+ percent. 6ption C has a present !alue of 51003000. 6ption C is the best choice since it has the largest present !alue.
6---
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity 'resent !alue
+1. >a uelson $ngines wants to sa!e 5-+03000 to buy so e new e#uip ent si, years fro now. *he plan is to set aside an e#ual a ount of oney on the first day of each #uarter starting today. *he fir can earn ).-+ percent on its sa!ings. @ow uch does the fir ha!e to sa!e each #uarter to achie!e its goal? A. 5%631-%.2) ". 5%63262.-0 C. 5%-312%.0+ D. 5%-3)12.%2 $. 5%-3211.01
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity due 'ayment
6--1
+%. >tephanie is going to contribute 5'00 on the first of each onth3 starting today3 to her retire ent account. @er e ployer will pro!ide a +0 percent atch. 9n other words3 her e ployer will contribute +0 percent of the a ount >tephanie sa!es. 9f both >tephanie and her e ployer continue to do this and she can earn a onthly rate of 0.20 percent3 how uch will she ha!e in her retire ent account '+ years fro now? A. 5132'63%6) ". 5132)'3%16 C. 5132123'1% D. 5%30613)11 E. 5%31%'300-
6--2
+'. 4ou are considering an annuity which costs 51603000 today. *he annuity pays 51131%6 a year at an annual interest rate of -.+0 percent. &hat is the length of the annuity ti e period? A. 1% years ". 1' years C. 1) years D. 1+ years $. 16 years
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity time 'eriod
6-10
+). *oday3 you borrowed 563%00 on your credit card to purchase so e furniture. *he interest rate is 1).2 percent3 co pounded onthly. @ow long will it taAe you to pay off this debt assu ing that you do not charge anything else and aAe regular onthly pay ents of 51%0? A. +.1- years ". 6.)0 years C. 6.2' years D. -.%' years $. -.'1 years
1'.1)
onthsK1% H 6.2' years
6-11
++. <eadow "rooA <anor would liAe to buy so e additional land and build a new assisted li!ing center. *he anticipated total cost is 5%'.6 illion. *he C$6 of the fir is #uite conser!ati!e and will only do this when the co pany has sufficient funds to pay cash for the entire construction pro7ect. <anage ent has decided to sa!e 51.% illion a #uarter for this purpose. *he fir earns 6.%+ percent3 co pounded #uarterly3 on the funds it sa!es. @ow long does the co pany ha!e to wait before e,panding its operations? A. ).02 years B. ).'% years C. ).)6 years D. ).1% years $. ).21 years
t H 1-.%1%2% #uartersK) H ).'% years
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity time 'eriod
6-1%
+6. *oday3 you are retiring. 4ou ha!e a total of 5)113016 in your retire ent sa!ings and ha!e the funds in!ested such that you e,pect to earn an a!erage of -.10 percent3 co pounded onthly3 on this oney throughout your retire ent years. 4ou want to withdraw 5%3+00 at the beginning of e!ery onth3 starting today. @ow long will it be until you run out of oney? A. '1.2- years ". ').+6 years C. )%.0' year D. )1.12 years $. 4ou will ne!er run out of oney.
t H +-1.''611
onthsK1% H )1.12 years
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity time 'eriod
6-1'
+-. ?eneBs Art ?allery is notoriously Anown as a slow-payer. *he fir currently needs to borrow 5%-3+00 and only one co pany will e!en deal with the . *he ter s of the loan call for daily pay ents of 5100. *he first pay ent is due today. *he interest rate is %1.2 percent3 co pounded daily. &hat is the ti e period of this loan? Assu e a '6+ day year. A. %6).'6 days ". %10.11 days C. '00.)' days D. '16.)6 days $. ')1.02 days
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity time 'eriod
6-1)
+1. *he &ine :ress is considering a pro7ect which has an initial cash re#uire ent of 511-3)00. *he pro7ect will yield cash flows of 5%31'% onthly for 1) onths. &hat is the rate of return on this pro7ect? A. 6.2- percent B. -.0) percent C. -.%1 percent D. -.)1 percent $. -.+6 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: ,nterest rate
6-1+
+2. 4our insurance agent is trying to sell you an annuity that costs 5%003000 today. "y buying this annuity3 your agent pro ises that you will recei!e pay ents of 513%%+ a onth for the ne,t '0 years. &hat is the rate of return on this in!est ent? A. +.-+ percent ". +.2- percent C. 6.%0 percent D. 6.)+ percent $. 6.6- percent
6-16
60. 4ou ha!e been in!esting 5%+0 a onth for the last 1' years. *oday3 your in!est ent account is worth 5-'3%6%. &hat is your a!erage rate of return on your in!est ents? A. 1.2) percent ". 2.%' percent C. 2.'6 percent D. 2.)1 percent $. 2.-1 percent
6-1-
61. &ill has been purchasing 5%+3000 worth of Eew *eA stocA annually for the past 11 years. @is holdings are now worth 5+213100. &hat is his annual rate of return on this stocA? A. 1).1' percent ". 1).%) percent C. 1).%2 percent D. 1).'- percent E. 1).61 percent
6-11
6%. 4our father helped you start sa!ing 5%0 a onth beginning on your +th birthday. @e always ade you deposit the oney into your sa!ings account on the first day of each onth 7ust to Gstart the onth out right.G *oday co pletes your 1-th year of sa!ing and you now ha!e 563+%1.21 in this account. &hat is the rate of return on your sa!ings? A. +.1+ percent ". +.'0 percent C. +.)- percent D. +.21 percent $. 6.1% percent
6-12
6'. *oday3 you turn %'. 4our birthday wish is that you will be a illionaire by your )0th birthday. 9n an atte pt to reach this goal3 you decide to sa!e 5+0 a day3 e!ery day until you turn )0. 4ou open an in!est ent account and deposit your first 5+0 today. &hat rate of return ust you earn to achie!e your goal? A. 10.6- percent B. 11.1+ percent C. 1%.20 percent D. 1'.06 percent $. 1'.+) percent
6-20
6). 4ou 7ust settled an insurance clai . *he settle ent calls for increasing pay ents o!er a 10-year period. *he first pay ent will be paid one year fro now in the a ount of 5103000. *he following pay ents will increase by ).+ percent annually. &hat is the !alue of this settle ent to you today if you can earn 1 percent on your in!est ents? A. 5-63)01.%1 B. 510312%.-6 C. 51%30%'.0+ D. 51)31)1.1) $. 51+3001.16
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: 0rowing annuity
6-21
6+. 4our grandfather left you an inheritance that will pro!ide an annual inco e for the ne,t 10 years. 4ou will recei!e the first pay ent one year fro now in the a ount of 5)3000. $!ery year after that3 the pay ent a ount will increase by 6 percent. &hat is your inheritance worth to you today if you can earn 2.+ percent on your in!est ents? A. 5'13622.1+ ". 5'63666.6C. 5)131%1.%1 D. 5)'3)6).1% $. 5)63201.1-
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: 0rowing annuity
66. 4ou 7ust won a national sweepstaAesC For your pri(e3 you opted to recei!e ne!er-ending pay ents. *he first pay ent will be 51%3+00 and will be paid one year fro today. $!ery year thereafter3 the pay ents will increase by '.+ percent annually. &hat is the present !alue of your pri(e at a discount rate of 1 percent? A. 51663666.6". 5%)13)02.12 C. 5%--3---.-1 D. 5%213006.1% $. 5'003000.00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: 0rowing 'er'etuity
6-2%
6-. A wealthy benefactor 7ust donated so e oney to the local college. *his gift was established to pro!ide scholarships for worthy students. *he first scholarships will be granted one year fro now for a total of 5'+3000. Annually thereafter3 the scholarship a ount will be increased by +.+ percent to help offset the effects of inflation. *he scholarship fund will last indefinitely. &hat is the !alue of this gift today at a discount rate of 1 percent? A. 5)'-3+00 ". 5-+03000 C. 513%003000 D. 513)003000 $. 513)+03-+0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: 0rowing 'er'etuity
61. >outhern *ours is considering ac#uiring @oliday Vacations. <anage ent belie!es @oliday Vacations can generate cash flows of 511-30003 5%%030003 and 5%)+3000 o!er the ne,t three years3 respecti!ely. After that ti e3 they feel the business will be worthless. >outhern *ours has deter ined that a 1'.+ percent rate of return is applicable to this potential ac#uisition. &hat is >outhern *ours willing to pay today to ac#uire @oliday Vacations? A. 5+0'3021 ". 5+'1361+ C. 5+)+32%0 D. 56013%%6 $. 56'13)0-
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#/ Section: "%/ &o'ic: (resent !alue
6-2'
62. 4ou are considering two sa!ings options. "oth options offer a -.) percent rate of return. *he first option is to sa!e 52003 5%31003 and 5'3000 at the end of each year for the ne,t three years3 respecti!ely. *he other option is to sa!e one lu p su a ount today. 9f you want to ha!e the sa e balance in your sa!ings account at the end of the three years3 regardless of the sa!ings ethod you select3 how uch do you need to sa!e today if you select the lu p su option? A. 5)3)10 ". 5)3+'0 C. 5)3600 D. 5+3010 $. 5+3%60
6-2)
-0. 4our parents ha!e ade you two offers. *he first offer includes annual gifts of 51030003 51130003 and 51%3000 at the end of each of the ne,t three years3 respecti!ely. *he other offer is the pay ent of one lu p su a ount today. 4ou are trying to decide which offer to accept gi!en the fact that your discount rate is 1 percent. &hat is the ini u a ount that you will accept today if you are to select the lu p su offer? A. 5%13%16 ". 5%23)0C. 5%23'6D. 5'03)'2 $. 5'03621
6-2+
-1. 4ou are considering changing 7obs. 4our goal is to worA for three years and then return to school full-ti e in pursuit of an ad!anced degree. A potential e ployer 7ust offered you an annual salary of 5)130003 5))30003 and 5)63000 a year for the ne,t three years3 respecti!ely. All salary pay ents are ade as lu p su pay ents at the end of each year. *he offer also includes a starting bonus of 5%3+00 payable i ediately. &hat is this offer worth to you today at a discount rate of 6.-+ percent? A. 511%3)06 ". 511+3+)+ C. 511-3''' D. 51%13%1% $. 51')362-
-%. 4ou are considering a pro7ect which will pro!ide annual cash inflows of 5)3+003 5+3-003 and 513000 at the end of each year for the ne,t three years3 respecti!ely. &hat is the present !alue of these cash flows3 gi!en a 2 percent discount rate? A. 51)31-B. 51+310' C. 51+3)%2 D. 5163'11 $. 51631)-
6-26
-'. 4ou 7ust signed a consulting contract that will pay you 5'+30003 5+%30003 and 5103000 annually at the end of the ne,t three years3 respecti!ely. &hat is the present !alue of these cash flows gi!en a 10.+ percent discount rate? A. 51''3++) ". 51)%3'0C. 51)13110 D. 51+131'1 $. 51+63210
-). 4ou ha!e so e property for sale and ha!e recei!ed two offers. *he first offer is for 5123+00 today in cash. *he second offer is the pay ent of 5'+3000 today and an additional 5-03000 two years fro today. 9f the applicable discount rate is 11.+ percent3 which offer should you accept and why? A. 4ou should accept the 5123+00 today because it has the higher net present !alue. ". 4ou should accept the 5123+00 today because it has the lower future !alue. C. 4ou should accept the first offer as it has the greatest !alue to you. D. 4ou should accept the second offer because it has the larger net present !alue. $. 9t does not atter which offer you accept as they are e#ually !aluable.
6-2-
-+. 4our local tra!el agent is ad!ertising an upscale winter !acation pacAage for tra!el three years fro now to Antarctica. *he pacAage re#uires that you pay 5%+3000 today3 5'03000 one year fro today3 and a final pay ent of 5)+3000 on the day you depart three years fro today. &hat is the cost of this !acation in todayBs dollars if the discount rate is 2.-+ percent? A. 5163'-6 ". 512362+ C. 5213%12 D. 5213)0$. 52'3)-1
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate Learning Ob ecti!e: "#/ Section: "%/ &o'ic: (resent !alue
-6. 6ne year ago3 Deltona <otor :arts deposited 5163+00 in an in!est ent account for the purpose of buying new e#uip ent three years fro today. *oday3 it is adding another 51%3000 to this account. *he co pany plans on aAing a final deposit of 5%03000 to the account one year fro today. @ow uch will be a!ailable when it is ready to buy the e#uip ent3 assu ing the account pays +.+ interest? A. 5+'3)01 ". 5+'3212 C. 5+63%11 D. 5+63-2% $. 5+130%1
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#/ Section: "%/ &o'ic: 1uture !alue
6-21
--. =ucas will recei!e 5631003 513-003 and 51%3+00 each year starting at the end of year one. &hat is the future !alue of these cash flows at the end of year fi!e if the interest rate is percent? A. 5'%3)11 ". 5'%320C. 5''311' D. 5'+3)11 $. 5'63%++
-1. 4ou plan on sa!ing 5+3%00 this year3 nothing ne,t year3 and 5-3+00 the following year. 4ou will deposit these a ounts into your in!est ent account at the end of each year. &hat will your in!est ent account be worth at the end of year three if you can earn 1.+ percent on your funds? A. 51'3+%1.1% B. 51'36%1.+C. 51'320-.11 D. 51)3+%6.+0 $. 51)3--2.)0
6-22
-2. <iley e,pects to recei!e the following pay ents8 4ear 1 H 5603000I 4ear % H 5'+3000I 4ear ' H 51%3000. All of this oney will be sa!ed for her retire ent. 9f she can earn an a!erage of 10.+ percent on her in!est ents3 how uch will she ha!e in her account %+ years after aAing her first deposit? A. 52-%3'-' ". 52123)+C. 5130063'11 D. 5131)-3+02 E. 513%'13--6
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#/ Section: "%/ &o'ic: 1uture !alue
6-100
10. "lacAwell3 9nc. has a 5-+3000 liability it ust pay three years fro today. *he co pany is opening a sa!ings account so that the entire a ount will be a!ailable when this debt needs to be paid. *he plan is to aAe an initial deposit today and then deposit an additional 51+3000 each year for the ne,t three years3 starting one year fro today. *he account pays a ).+ percent rate of return. @ow uch does the fir need to deposit today? A. 5113%22.2+ ". 5%030-%.21 C. 5%13)00.'' D. 5%)3)1-.-1 $. 5'130-6.+6
6-101
11. *he go!ern ent has i posed a fine on the Corner *a!ern. *he fine calls for annual pay ents of 51+030003 510030003 5-+30003 and 5+030003 respecti!ely3 o!er the ne,t four years. *he first pay ent is due one year fro today. *he go!ern ent plans to in!est the funds until the final pay ent is collected and then donate the entire a ount3 including the in!est ent earnings3 to help the local co unity shelter. *he go!ern ent will earn 6.%+ percent on the funds held. @ow uch will the co unity shelter recei!e four years fro today? A. 5')236-).06 ". 5'6631-+.00 C. 5)%%3)2-.+6 D. 5)+13+-%.-1 $. 5+1+3-'-.6-
1%. &icAer 9 ports established a trust fund that pro!ides 5203000 in scholarships each year for needy students. *he trust fund earns a fi,ed 6 percent rate of return. @ow uch oney did the fir contribute to the fund assu ing that only the interest inco e is distributed? A. 5131+03000 ". 513%003000 C. 513'''3''' D. 513+003000 $. 5136003000
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#/ Section: "%$ &o'ic: (er'etuity 'resent !alue
6-10%
1'. A preferred stocA pays an annual di!idend of 5%.60. &hat is one share of this stocA worth today if the rate of return is 11.-+ percent? A. 511.)1 ". 5%0.00 C. 5%%.1' D. 5%1.10 $. 5'0.++
1). 4ou would liAe to establish a trust fund that will pro!ide 51%03000 a year fore!er for your heirs. *he trust fund is going to be in!ested !ery conser!ati!ely so the e,pected rate of return is only +.-+ percent. @ow uch oney ust you deposit today to fund this gift for your heirs? A. 5%301632+". 5%31%13%1% C. 5%3'003000 D. 5%3)+131%% $. 5%3+003000
6-10'
1+. 4ou 7ust paid 5-+03000 for an annuity that will pay you and your heirs 5)+3000 a year fore!er. &hat rate of return are you earning on this policy? A. +.%+ percent ". +.+0 percent C. +.-+ percent D. 6.00 percent $. 6.%+ percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: (er'etuity
16. 4ou grandfather won a lottery years ago. *he !alue of his winnings at the ti e was 5+03000. @e in!ested this oney such that it will pro!ide annual pay ents of 5%3)00 a year to his heirs fore!er. &hat is the rate of return? A. ).-+ percent B. ).10 percent C. +.00 percent D. +.10 percent $. +.1+ percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%$ &o'ic: (er'etuity rate
6-10)
1-. *he preferred stocA of Casco has a +.)1 percent di!idend yield. *he stocA is currently priced at 5+2.'0 per share. &hat is the a ount of the annual di!idend? A. 5%.10 ". 5%.2+ C. 5'.10 D. 5'.%+ $. 5'.)0 C H 5+2.'0 0.0+)1 H 5'.%+
11. 4our credit card co pany charges you 1.6+ percent interest per percentage rate on your account? A. 11.2+ percent B. 12.10 percent C. %0.20 percent D. %1.%+ percent $. %1.-0 percent A:J H 0.016+ 1% H 12.10 percent
onth. &hat is the annual
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: Annual 'ercentage rate
6-10+
12. &hat is the annual percentage rate on a loan with a stated rate of %.%+ percent per #uarter? A. 2.00 percent ". 2.02 percent C. 2.11 percent D. 2.%- percent $. 2.'1 percent A:J H 0.0%%+ ) H 2.00 percent
20. 4ou are paying an effecti!e annual rate of 11.2-) percent on your credit card. *he interest is co pounded onthly. &hat is the annual percentage rate on this account? A. 1-.+0 percent ". 11.00 percent C. 11.%+ percent D. 11.6) percent $. 12.00 percent
6-106
21. &hat is the effecti!e annual rate if a banA charges you 2.+0 percent co pounded #uarterly? A. 2.6% percent ". 2.61 percent C. 2.-% percent D. 2.1) percent $. 2.21 percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: +ffecti!e annual rate
2%. 4our credit card co pany #uotes you a rate of 1-.2 percent. 9nterest is billed &hat is the actual rate of interest you are paying? A. 12.0' percent ". 12.%1 percent C. 12.)) percent D. 12.+- percent $. 12.-% percent
onthly.
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: +ffecti!e interest rate
6-10-
2'. *he :awn >hop loans oney at an annual rate of %1 percent and co pounds interest weeAly. &hat is the actual rate being charged on these loans? A. %'.16 percent B. %'.'% percent C. %'.)2 percent D. %'.+6 percent $. %'.6) percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: +ffecti!e annual rate
2). 4ou are considering two loans. *he ter s of the two loans are e#ui!alent with the e,ception of the interest rates. =oan A offers a rate of -.-+ percent3 co pounded daily. =oan " offers a rate of 1 percent3 co pounded se i-annually. &hich loan should you select and why? A. AI the effecti!e annual rate is 1.06 percent. ". AI the annual percentage rate is -.-+ percent. C. "I the annual percentage rate is -.61 percent. D. "I the effecti!e annual rate is 1.16 percent. $. *he loans are e#ui!alent offers so you can select either one.
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#) Section: "%* &o'ic: +ffecti!e annual rate
6-101
2+. 4ou ha!e 5+3600 that you want to use to open a sa!ings account. *here are fi!e banAs located in your area. *he rates paid by banAs A through $3 respecti!ely3 are gi!en below. &hich banA should you select if your goal is to a,i i(e your interest inco e? A. '.%6 percent3 co pounded annually ". '.%0 percent3 co pounded onthly C. '.%+ percent3 co pounded se i-annually D. '.10 percent3 co pounded continuously $. '.1+ percent3 co pounded #uarterly $AJA H '.%6 percent
"anA C offers the highest effecti!e annual rate at '.%-6 percent.
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#) Section: "%* &o'ic: +ffecti!e annual rate
6-102
26. &hat is the effecti!e annual rate of 1).2 percent co pounded continuously? A. 1+.+2 percent ". 1+.6% percent C. 1+.62 percent D. 1+.1) percent E. 16.0- percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#) Section: "%* &o'ic: Continuous com'ounding
2-. &hat is the effecti!e annual rate of 2.-+ percent co pounded continuously? A. 10.1- percent B. 10.%) percent C. 10.%2 percent D. 10.'' percent $. 10.)- percent
6-110
21. City "anA wants to appear co petiti!e based on #uoted loan rates and thus ust offer a -.-+ percent annual percentage rate on its loans. &hat is the a,i u rate the banA can actually earn based on the #uoted rate? A. 1.06 percent ". 1.1) percent C. 1.%1 percent D. 1.%6 percent $. 1.+1 percent
22. 4ou are going to loan a friend 5200 for one year at a + percent rate of interest3 co pounded annually. @ow uch additional interest could you ha!e earned if you had co pounded the rate continuously rather than annually? A. 50.2B. 51.1) C. 51.%' D. 51.'6 $. 51.)1
Additional interest H 5200 .0.0+1%-11 - 0.0+/ H 51.1)
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#) Section: "%* &o'ic: ,nterest com'ounding
6-111
100. 4ou are borrowing oney today at 1.)1 percent3 co pounded annually. 4ou will repay the principal plus all the interest in one lu p su of 51%3100 two years fro today. @ow uch are you borrowing? A. 523200.00 ". 5103%11.16 C. 51031--.0) D. 5113)01.16 $. 5113%+0.00
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#$ Section: "%) &o'ic: (ure discount loan
6-11%
101. *his orning3 you borrowed 523+00 at -.6+ percent annual interest. 4ou are to repay the loan principal plus all of the loan interest in one lu p su four years fro today. @ow uch will you ha!e to repay? A. 51%3-+-.2% ". 51%3101.1' C. 51%3211.12 D. 51'3006.01 $. 51'3))1.%0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: (ure discount loan
10%. 6n this date last year3 you borrowed 5'3)00. 4ou ha!e to repay the loan principal plus all of the interest si, years fro today. *he pay ent that is re#uired at that ti e is 563000. &hat is the interest rate on this loan? A. 1.01 percent B. 1.)+ percent C. 1.-1 percent D. 2.)- percent $. 2.2' percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: (ure discount loan
6-11'
10'. DohnBs Auto Jepair 7ust tooA out an 51230003 10-year3 1 percent3 interest-only loan fro the banA. :ay ents are ade annually. &hat is the a ount of the loan pay ent in year 10? A. 5-31%0 ". 5131+0 C. 51'3%6) D. 5123000 E. 52631%0 :ay ent in year 10 H 5123000 M .5123000 0.01/ H 52631%0
AACSB: Analytic Bloom's: A''lication Difficulty: Basic Learning Ob ecti!e: "#* Section: "%) &o'ic: ,nterest#only loan
10). 6n the day you entered college3 you borrowed 5113000 on an interest-only3 four-year loan at +.%+ percent fro your local banA. :ay ents are to be paid annually. &hat is the a ount of your loan pay ent in year %? A. 52)+ ". 513120 C. 5'3600 D. 5+3106 $. 563%+0 :ay ent in year % H 5113000 0.0+%+ H 52)+
6-11)
10+. 6n the day you entered college you borrowed 5%+3000 fro your local banA. *he ter s of the loan include an interest rate of ).-+ percent. *he ter s stipulate that the principal is due in full one year after you graduate. 9nterest is to be paid annually at the end of each year. Assu e that you co plete college in four years. @ow uch total interest will you pay on this loan? A. 5+3%66.6". 5+3)00.00 C. 5+32'-.+0 D. 563+%2.00 $. 56360-.11 *otal interest paid H 5%+3000 0.0)-+ + H 5+32'-.+0
106. 4ou 7ust ac#uired a ortgage in the a ount of 5%)23+00 at 6.-+ percent interest3 co pounded onthly. $#ual pay ents are to be ade at the end of each onth for thirty years. @ow uch of the first loan pay ent is interest? .Assu e each onth is e#ual to 1K1% of a year./ A. 52%+.%0 ". 513%06.16 C. 513)0'.)) D. 513+11.%1 $. 513+)1.60
9nterest portion of first loan pay ent H
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#* Section: "%) &o'ic: Amorti-ed loan
6-11+
10-. 6n Dune 13 you borrowed 5%1%3000 to buy a house. *he ortgage rate is 1.%+ percent. *he loan is to be repaid in e#ual onthly pay ents o!er 1+ years. *he first pay ent is due on Duly 1. @ow uch of the second pay ent applies to the principal balance? .Assu e that each onth is e#ual to 1K1% of a year./ A. 560'.'% ". 5621.1) C. 513'+1.+6 D. 513)+'.'1 $. 5%30+6.-0
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#* Section: "%$ &o'ic: Amorti-ed loan
6-116
101. *his orning3 you borrowed 51+03000 to buy a house. *he ortgage rate is -.'+ percent. *he loan is to be repaid in e#ual onthly pay ents o!er %0 years. *he first pay ent is due one onth fro today. @ow uch of the second pay ent applies to the principal balance? .Assu e that each onth is e#ual to 1K1% of a year./ A. 5%61.1) B. 5%--.61 C. 521-.06 D. 52%+.1' $. 51312).6-
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#* Section: "%$ &o'ic: Amorti-ed loan
6-11-

Essay Questions
102. $,plain the difference between the effecti!e annual rate .$AJ/ and the annual percentage rate .A:J/. 6f the two3 which one has the greater i portance and why? *he A:J is a stated rate and is co puted as .r n/3 where r is the rate per period and n is the nu ber of periods per year. *he $AJ considers co pounding and is co puted as .1 M r/n - 13 where r is the rate per period and n is the nu ber of periods per year. *he effecti!e annual rate will always be higher than the annual percentage rate as long as the account is co pounded ore than once a year and the interest rate is greater than (ero. *he $AJ is the e#ui!alent rate based on annual co pounding. *he $AJ has greater i portance because it is the actual cost of a loan. FeedbacA8 Jefer to section 6.'
AACSB: 2eflecti!e t.in3ing Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#) Section: "%* &o'ic: Annual and effecti!e rates
110. 4ou are considering two annuities3 both of which pay a total of 5%03000 o!er the life of the annuity. Annuity A pays 5%3000 at the end of each year for the ne,t 10 years. Annuity " pays 513000 at the end of each year for the ne,t %0 years. &hich annuity has the greater !alue today? 9s there any circu stance where the two annuities would ha!e e#ual !alues as of today? $,plain. As long as the discount rate is positi!e3 Annuity A will ha!e the greater !alue. 9f the discount rate is (ero3 then both annuities ha!e e#ual !alues as both would ha!e a current !alue of 5%03000. FeedbacA8 Jefer to section 6.%
AACSB: 2eflecti!e t.in3ing Bloom's: Analysis Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity 'resent !alue
6-111
111. &hy ight a borrower select an interest-only loan instead of an a orti(ed loan3 which would be cheaper? *he borrower ight need the entire principal a ount for the length of the loan period. &ith an a orti(ed loan3 the principal a ount is repaid o!er the loan ter and thus the borrower does not ha!e all of the loan proceeds a!ailable for his or her use during the loan ter . FeedbacA8 Jefer to section 6.)
AACSB: 2eflecti!e t.in3ing Bloom's: Synt.esis Difficulty: ,ntermediate Learning Ob ecti!e: "#* Section: "%) &o'ic: Loan re'ayment
6-112
11%. Fristie owns a perpetuity which pays 51%3000 at the end of each year. >he co es to you and offers to sell you all of the pay ents to be recei!ed after the 10th year. $,plain how you can deter ine the !alue of this offer. 4ou should deter ine the present !alue of the perpetuity and also the present !alue of the first 10 pay ents at your discount rate. *he difference between the two !alues is the a,i u a ount you should pay for this offer. .Assu ing a nor al rate of interest3 the offer will ost liAely be worth less than +0 percent of the perpetuityBs total !alue./ @ereBs an e,a ple that can be used to e,plain this answer using an assu ed 1 percent rate of interest.
Value of offer at 1 percent H 51+03000 - 5103+%0.21 H 5623)-2.0% FeedbacA8 Jefer to section 6.%
AACSB: Analytic and reflecti!e t.in3ing Bloom's: +!aluation Difficulty: ,ntermediate Learning Ob ecti!e: "#$ Section: "%$ &o'ic: (er'etuity and annuity !alues
6-1%0

11'. &estern "anA offers you a 5%130003 6-year ter is the a ount of your annual loan pay ent? A. 5)3%%1.+0 B. 5)3+)%.6% C. 5)3666.6D. 5)3201.11 $. 5+3'11.0-
loan at 1 percent annual interest. &hat
AACSB: Analytic Bloom's: A''lication Difficulty: Basic +OC 4: "#5 Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Loan 'ayment
11). First Century "anA wants to earn an effecti!e annual return on its consu er loans of 10 percent per year. *he banA uses daily co pounding on its loans. "y law3 what interest rate is the banA re#uired to report to potential borrowers? A. 2.%' percent ". 2.'1 percent C. 2.+' percent D. 2.-% percent $. 10.00 percent A:J H '6+ N.1 M 0.10/1K'6+ - 1O H 2.+' percent
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#/6 Learning Ob ecti!e: "#) Section: "%* &o'ic: ,nterest rate
6-1%1
11+. Downtown "anA is offering '.) percent co pounded daily on its sa!ings accounts. 4ou deposit 513000 today. @ow uch will you ha!e in your account 11 years fro now? A. 51136%1.02 ". 5113-1).06 C. 51%3%0).+0 D. 51%3''6.11 $. 51%3)1).1) FV H 513000 N1 M .0.0')K'6+/O11 '6+ H 51136%1.02
AACSB: Analytic Bloom's: A''lication Difficulty: Basic +OC 4: "#/7 Learning Ob ecti!e: "#/ Section: "%/ &o'ic: 1uture !alue
116. 4ou want to buy a new sports coupe for 5)13-+03 and the finance office at the dealership has #uoted you an 1.6 percent A:J loan co pounded onthly for )1 onths to buy the car. &hat is the effecti!e interest rate on this loan? A. 1.%1 percent ". 1.)1 percent C. 1.-% percent D. 1.1- percent E. 1.2+ percent $AJ H N1 M ..016K1%/O1% - 1 H 1.2+ percent
AACSB: Analytic Bloom's: A''lication Difficulty: Basic +OC 4: "#$8 Learning Ob ecti!e: "#) Section: "%* &o'ic: +ffecti!e interest rate
6-1%%
11-. "eginning three onths fro now3 you want to be able to withdraw 513+00 each #uarter fro your banA account to co!er college e,penses o!er the ne,t ) years. *he account pays 1.%+ percent interest per #uarter. @ow uch do you need to ha!e in your account today to eet your e,pense needs o!er the ne,t ) years? A. 5%136'0.)) ". 5%131)-.1+ C. 5%%3061.00 D. 5%%3)+).02 $. 5%%3-11.11
AACSB: Analytic Bloom's: A''lication Difficulty: Basic +OC 4: "#$" Learning Ob ecti!e: "#/ Section: "%/ &o'ic: (resent !alue
6-1%'
111. 4ou are planning to sa!e for retire ent o!er the ne,t 1+ years. *o do this3 you will in!est 513100 a onth in a stocA account and 5+00 a onth in a bond account. *he return on the stocA account is e,pected to be - percent3 and the bond account will pay ) percent. &hen you retire3 you will co bine your oney into an account with a + percent return. @ow uch can you withdraw each onth during retire ent assu ing a %0-year withdrawal period? A. 5%36'6.12 ". 5%320).11 C. 5'3001.%1 D. 5'311'.0) $. 5'3)06.2-
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate +OC 4: "#*$ Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity 'ayment
6-1%)
112. 4ou want to be a illionaire when you retire in )0 years. 4ou can earn an 11 percent annual return. @ow uch ore will you ha!e to sa!e each onth if you wait 10 years to start sa!ing !ersus if you start sa!ing at the end of this onth? A. 5-2.%% ". 511).1' C. 5161.)D. 5%01.1+ E. 5%)0.%2 FVA)0 years H 5130003000 H C NPN1 M .0.11K1%/O)0 1%I C H 5116.%1 FVA'0 years H 5130003000 H C NPN1 M .0.11K1%/O'0 1%I C H 5'+6.+Difference H 5'+6.+- - 5116.%1 H 5%)0.%2
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate +OC 4: "#*) Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity 'ayment
1%0. 4ou ha!e 7ust won the lottery and will recei!e 5+)03000 as your first pay ent one year fro now. 4ou will recei!e pay ents for %6 years. *he pay ents will increase in !alue by ) percent each year. *he appropriate discount rate is 10 percent. &hat is the present !alue of your winnings? A. 563%%13)0B. 5632063'-% C. 5-3++2361' D. 5-31113)06 $. 51300'.11
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#*7 Learning Ob ecti!e: "#$ Section: "%$ &o'ic: 0rowing annuity
6-1%+
1%1. 4ou are preparing to aAe onthly pay ents of 56+3 beginning at the end of this onth3 into an account that pays 6 percent interest co pounded onthly. @ow any pay ents will you ha!e ade when your account balance reaches 523%-1? A. 2B. 101 C. 112 D. 1%) $. 1'1
t H ln 1.-1'-Kln 1.00+I t H 101 pay ents
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#)8 Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Number of 'ayments
1%%. 4ou want to borrow 5)-31-0 fro your local banA to buy a new sailboat. 4ou can afford to aAe onthly pay ents of 5131603 but no ore. Assu e onthly co pounding. &hat is the highest rate you can afford on a )1- onth A:J loan? A. 1.'1 percent ". 1.6- percent C. 1.1% percent D. 2.01 percent $. 2.11 percent
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#)/ Learning Ob ecti!e: "#$ Section: "%$ &o'ic: ,nterest rate
6-1%6
1%'. 4ou need a %+-year3 fi,ed-rate ortgage to buy a new ho e for 5%)03000. 4our ortgage banA will lend you the oney at a -.+ percent A:J for this '00- onth loan3 with interest co pounded onthly. @owe!er3 you can only afford onthly pay ents of 51+03 so you offer to pay off any re aining loan balance at the end of the loan in the for of a single balloon pay ent. &hat will be the a ount of the balloon pay ent if you are to Aeep your onthly pay ents at 51+0? A. 5-'13)6) ". 5-)+3'16 C. 5-6-3)10 D. 51103%%0 $. 51)-3'1+
Je aining principal H 5%)03000 - 511+30%1.6- H 51%)32-1.'' "alloon pay ent H 51%)32-1.'' N1 M .0.0-+K1%/O%+ 1% H 51103%%0
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate +OC 4: "#)$ Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Loan 'ayment
6-1%-
1%). *he present !alue of the following cash flow strea is 5+32''.16 when discounted at 11 percent annually. &hat is the !alue of the issing cash flow?
A. 513+00 ". 513-+0 C. 5%3000 D. 5%3%+0 E. 5%3+00 :V of issing cash flow H 5+32''.16 - .5%3000K1.11/ - .513-+0K1.11'/ - .513%+0K1.11)/ H 5%30%2.06 CF% H 5%30%2.06 1.11% H 5%3+00
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#)* Learning Ob ecti!e: "#/ Section: "%/ &o'ic: (resent and future !alues
6-1%1
1%+. 4ou ha!e 7ust purchased a new warehouse. *o finance the purchase3 youB!e arranged for a '0-year ortgage loan for 10 percent of the 5%36003000 purchase price. *he onthly pay ent on this loan will be 5113000. &hat is the effecti!e annual rate on this loan? A. ).21 percent ". +.%+ percent C. +.)6 percent D. 6.01 percent $. 6.+0 percent =oan a ount H 5%36003000 0.10 H 5%30103000
$AJ H N1 M ..0)1-K1%/O1% - 1 H ).21 percent
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate +OC 4: "#)6 Learning Ob ecti!e: "#) Section: "%* &o'ic: +ffecti!e annual rate
1%6. Consider a fir with a contract to sell an asset ' years fro now for 5203000. *he asset costs 5-13000 to produce today. At what rate will the fir 7ust breaA e!en on this contract? A. -.1- percent ". 1.01 percent C. 1.%' percent D. 1.+- percent $. 1.20 percent 5203000 H 5-13000 .1 M r/'I r H 1.%' percent
AACSB: Analytic Bloom's: Analysis Difficulty: ,ntermediate +OC 4: "#)" Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Brea3#e!en interest
6-1%2
1%-. &hat is the present !alue of 513100 per year3 at a discount rate of 10 percent if the first pay ent is recei!ed 6 years fro now and the last pay ent is recei!ed %1 years fro now? A. 56306-.'6 ". 5631'1.1C. 563'''.'' D. 563)%0.1% $. 563+11.01
:V H 523--1.+)K1.1+ H 56306-.'6
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#)7 Learning Ob ecti!e: "#/ Section: "%$ &o'ic: (resent !alue
1%1. 4ou ha!e your choice of two in!est ent accounts. 9n!est ent A is a +-year annuity that features end-of- onth 5%3+00 pay ents and has an interest rate of 11.+ percent co pounded onthly. 9n!est ent " is a 10.+ percent continuously co pounded lu p su in!est ent3 also good for fi!e years. @ow uch would you need to in!est in " today for it to be worth as uch as in!est ent A fi!e years fro now? A. 51013%06.6B. 511231-6.06 C. 51%)3'11.01 D. 51%23)0-.1$. 51'13001.1+ FVA H 5%3+00 NPN1 M .0.11+K1%/O+ 1% -1QK.0.11+K1%/O H 5%013)6%.%' :V H 5%013)6%.%' e-1 0.10+ + H 511231-6.06
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#)5 Learning Ob ecti!e: "#/ Section: "%* &o'ic: (resent !alue
6-1'0
1%2. ?i!en an interest rate of 1 percent per year3 what is the !alue at date t H 2 of a perpetual strea of 5+00 annual pay ents that begins at date t H 1-? A. 5'36)6.11 ". 5)3102.12 C. 5)3'0-.-1 D. 563%+0.00 $. 563)1-.1:Vt H 16 H 5+00K.01 H 563%+0 :Vt H 2 H 563%+0K1.0116-2 H 5'36)6.11
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#68 Learning Ob ecti!e: "#/ Section: "%$ &o'ic: (er'etuity 'resent !alue
1'0. 4ou want to buy a new sports car for 5++3000. *he contract is in the for of a 60- onth annuity due at a 6 percent A:J3 co pounded onthly. &hat will your onthly pay ent be? A. 5130)-.20 ". 5130+'.1C. 5130+1.01 D. 51306'.'0 $. 5130-%.11
AACSB: Analytic Bloom's: A''lication Difficulty: ,ntermediate +OC 4: "#6) Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Annuity due
6-1'1
1'1. 4ou are looAing at a one-year loan of 5103000. *he interest rate is #uoted as 10 percent plus + points. A point on a loan is si ply 1 percent .one percentage point/ of the loan a ount. Luotes si ilar to this one are !ery co on with ho e ortgages. *he interest rate #uotation in this e,a ple re#uires the borrower to pay + points to the lender up front and repay the loan later with 10 percent interest. &hat is the actual rate you are paying on this loan? A. 1+.00 percent ". 1+.)- percent C. 1+.++ percent D. 1+.-2 percent $. 1+.1) percent =oan a ount recei!ed H 5103000 .1 - .0+/ H 523+00 =oan repay ent a ount H 5103000 1.101 H 5113000 5113000 H 523+00 .1 M r/1I r H 1+.-2 percent
AACSB: Analytic Bloom's: Synt.esis Difficulty: C.allenge +OC 4: "#"$ Learning Ob ecti!e: "#) Section: "%) &o'ic: +ffecti!e rate wit. 'oints
6-1'%
1'%. 4our holiday sAi !acation was great3 but it unfortunately ran a bit o!er budget. All is not lost. 4ou 7ust recei!ed an offer in the ail to transfer your 5+3000 balance fro your current credit card3 which charges an annual rate of 11.- percent3 to a new credit card charging a rate of 2.) percent. 4ou plan to aAe pay ents of 5+10 a onth on this debt. @ow any less pay ents will you ha!e to aAe to pay off this debt if you transfer the balance to the new card? A. 0.'6 pay ents B. 0.)1 pay ents C. 1.10 pay ents D. 1.%' pay ents $. %.)2 pay ents
5+3000 H 5+10 N.1 - P1 M .0.02)K1%/OQt/K.0.02)K1%/O t H ln .1K0.2%'%/Kln 1.00-1''I t H 10.%) pay ents Difference H 10.-% - 10.%) H 0.)1 pay ents
AACSB: Analytic Bloom's: Analysis Difficulty: C.allenge +OC 4: "#"7 Learning Ob ecti!e: "#$ Section: "%$ &o'ic: Number of 'eriods
6-1''

Chap 006 Discounted Cash Flow Valuation

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Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

ultiplied by the nu ber of periods per year

oney today and repays a single lu p su

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

onthly pay ents

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

onth. &hat is the annual

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Multiple Choice Questions

loan at 1 percent annual interest. &hat

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

A. 513+00 ". 513-+0 C. 5%3000 D. 5%3%+0 $. 5%3+00

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 Discounted Cash Flow Valuation Answer Fey

Multiple Choice Questions

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

ultiplied by the nu ber of periods per year

Chapter 06 - Discounted Cash Flow Valuation

oney today and repays a single lu p su

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation

Chapter 06 - Discounted Cash Flow Valuation