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**Chapter 06 Discounted Cash Flow Valuation
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Multiple Choice Questions

1. An ordinary annuity is best defined by which one of the following? A. increasing payments paid for a definitive period of time B. increasing payments paid forever C. equal payments paid at regular intervals over a stated time period D. equal payments paid at regular intervals of time on an ongoing basis E. unequal payments that occur at set intervals for a limited period of time

2. Which one of the following accurately defines a perpetuity? A. a limited number of equal payments paid in even time increments B. payments of equal amounts that are paid irregularly but indefinitely C. varying amounts that are paid at even intervals forever D. unending equal payments paid at equal time intervals E. unending equal payments paid at either equal or unequal time intervals

3. Which one of the following terms is used to identify a British perpetuity? A. ordinary annuity B. amortized cash flow C. annuity due D. discounted loan E. consol

4. The interest rate that is quoted by a lender is referred to as which one of the following? A. stated interest rate B. compound rate C. effective annual rate D. simple rate E. common rate

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Chapter 06 - Discounted Cash Flow Valuation

5. A monthly interest rate expressed as an annual rate would be an example of which one of the following rates? A. stated rate B. discounted annual rate C. effective annual rate D. periodic monthly rate E. consolidated monthly rate

6. What is the interest rate charged per period multiplied by the number of periods per year called? A. effective annual rate B. annual percentage rate C. periodic interest rate D. compound interest rate E. daily interest rate

7. A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. amortized B. continuous C. balloon D. pure discount E. interest-only

8. Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment? A. amortized loan B. modified loan C. balloon loan D. pure discount loan E. interest-only loan

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Chapter 06 - Discounted Cash Flow Valuation

9. Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal? A. amortized loan B. modified loan C. balloon loan D. pure discount loan E. interest-only loan

10. Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum? A. amortized loan B. continuing loan C. balloon loan D. remainder loan E. interest-only loan

11. You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities? A. These two annuities have equal present values but unequal futures values at the end of year five. B. These two annuities have equal present values as of today and equal future values at the end of year five. C. Annuity B is an annuity due. D. Annuity A has a smaller future value than annuity B. E. Annuity B has a smaller present value than annuity A.

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II. I and III only C. Both projects have the same future value given a zero rate of return. 13. IV.Discounted Cash Flow Valuation 12. B. compounded annually. II and IV only E.000 of income. Option B has a higher present value at time zero than does option A. given a positive discount rate. III.000 each.000 the first year followed by two annual payments of $5. I. Option B is a perpetuity. II. given a positive discount rate. You are comparing two investment options that each pay 5 percent interest. A. Both options will provide you with $12. Both options are of equal value given that they both provide $12.000 of income. given a positive rate of return. Which one of the following statements is correct given these two investment options? A.000 each. and IV only 6-4 . Option A pays three annual payments starting with $2. Project X has a higher present value than Project Y. Option B pays three annual payments of $4. II only B. E. Project Y has a higher present value than Project X. Option A is an annuity. Option A has the higher future value at the end of year three. C. II and III only D.Chapter 06 . D. Both projects have the same future value at the end of year 4. You are considering two projects with the following cash flows: Which of the following statements are true concerning these two projects? I.

D. As long as the discount rate is positive. B.Discounted Cash Flow Valuation 14. D. Perpetuities are finite but annuities are not. Project B will always be worth less today than will Project A. C. but the future value can. The present value of Project A cannot be computed because the second cash flow is equal to zero. The present value of a perpetuity cannot be computed. 6-5 . Both sets of cash flows have equal present values as of time zero given a positive discount rate. Which one of the following statements related to annuities and perpetuities is correct? A. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments. Most loans are a form of a perpetuity. compounded annually. E. The cash flows for Project B are an annuity. 15. B. C. Which one of the following statements is correct given the following two sets of project cash flows? A. compounded monthly. An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest.Chapter 06 . but those of Project A are not. given an interest rate of 12 percent. E. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three.

Annual interest rates consider the effect of interest earned on reinvested interest payments. Savers would prefer annual compounding over monthly compounding. I. An increase in the discount rate increases the present value. A. 6-6 . I and II only B.Chapter 06 . Which of the following statements related to interest rates are correct? I. II and III only C. III. B. The cash flow used in the growing annuity formula is the initial cash flow at time zero. E. D. An increase in the rate of growth will decrease the present value of an annuity. III.Discounted Cash Flow Valuation 16. II. II. Which one of these statements related to growing annuities and perpetuities is correct? A. C. Time and future values are inversely related. B. given positive rates. D. the effective annual rate will always exceed the annual percentage rate. Which one of the following statements concerning interest rates is correct? A. II and IV only D. For any positive rate of interest. all else held constant. C. all else held constant. Borrowers would prefer monthly compounding over annual compounding. E. IV. Time and present value are inversely related. An increase in time increases the future value given a zero rate of interest. When comparing loans. 18. D. Annual and effective interest rates are equal when interest is compounded annually. II. The present value of a growing perpetuity will decrease if the discount rate is increased. Which one of the following statements correctly states a relationship? A. and IV only 17. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. Interest rates and time are positively related. 19. E. C. The effective annual rate decreases as the number of compounding periods per year increases. Growth rates cannot be applied to perpetuities if you wish to compute the present value. B. all else held constant. and III only E. The future value of an annuity will decrease if the growth rate is increased. you should compare the effective annual rates. The effective annual rate equals the annual percentage rate when interest is compounded annually.

annual B. repays both the principal and the interest in one lump sum at the end of the loan term. The principal is repaid in equal increments and included in each loan payment. requires the principal amount to be repaid in even increments over the life of the loan. C. E. requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. The principal is forgiven over the loan period so does not have to be repaid. An amortized loan: A. How is the principal amount of an interest-only loan repaid? A. daily E. B. The principal is repaid in equal annual payments. D. amortized loan D. 23. interest-only loan B. continuous 21. may have equal or increasing amounts applied to the principal from each loan payment. The principal is repaid in a lump sum at the end of the loan period.Discounted Cash Flow Valuation 20. C. E. requires that all payments be equal in amount and include both principal and interest. semi-annual C. The principal is repaid in increasing increments through regular monthly payments. D.Chapter 06 . bullet loan 22. Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate? A. monthly D. 6-7 . balloon loan C. B. pure discount loan E. The entire repayment of which one of the following loans is computed simply by computing a single future value? A.

67 E.03 C. $181.25 27.84 D. $4. You need $25. interest-only loan B. $9. $7.00 6-8 .000 today and have decided to take out a loan at 7 percent for five years.87 E. what are these payments worth to you on the day you enter college? A. Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree. $172. You just won the grand prize in a national writing contest! As your prize. $9.509.450. At a 5.266. how much can he afford to borrow to purchase a car? A. amortized loan with equal loan payments D.608. $178. A.00 26.299.252.5 percent discount rate. amortized loan with equal principal payments C.Discounted Cash Flow Valuation 24. $8. $185. discount loan E. $190.6 percent. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis. $4. balloon loan where 50 percent of the principal is repaid as a balloon payment 25.40 D.33 E. $8.88 C. $4.411.338.06 C.71 B.000 a month for ten years.Chapter 06 .201.752.19 D.400.16 B.800.00 B.348. you will receive $2.333.750. Phil can afford $180 a month for 5 years for a car loan. If the interest rate is 8. what is this prize worth to you today? A. $4. $4. If you can earn 7 percent on your money.

$44. You should accept the payments because they are worth $209. B. $80. 29. Which option should you take and why? A.5 percent.760. $80. $81.548.068.46 C. You should accept the $200.07 B. $44. You should accept the $200.306. D. C.5 percent interest compounded monthly.800 to you today.987.311 to you today. You can earn 6 percent on your money. The Design Team just decided to save $1. The money will be set aside in a separate savings account which pays 4. The insurance company informs you that you have two options for receiving the insurance proceeds. The first deposit will be made today. $81.74 30.18 D. $81.Chapter 06 .384.000 today or receive payments of $1. $44.333. You can receive a lump sum of $200. Your employer contributes $75 a week to your retirement plan. You are the beneficiary of a life insurance policy.16 E. E.79 C.211.20 6-9 .33 E.000 because the payments are only worth $195.618.11 D. what is this employee benefit worth to you today? A. $40.69 B.000 to you today. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years? A.459. You should accept the payments because they are worth $247.Discounted Cash Flow Valuation 28.500 a month for the next 5 years as a safety net for recessionary periods.400 a month for 20 years. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.413 to you today.000 because the payments are only worth $189. You should accept the payments because they are worth $336. $42. Given these assumptions.414 to you today.

$2.221 D. One annuity pays $5.309 B. $142.68 E. $5.390 E. You are comparing two annuities with equal present values. The payments are paid on the first day of each year.75 percent.50 D. if you make payments of $25 a month for the next six months.5 percent? A. $2. $251.09 B.304 34. $2. You need some money today and the only friend you have that has any is your miserly friend. In keeping with his reputation. $241. The applicable discount rate is 8. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year? A.409 D.22 C.5 percent interest per month. $5. $138. $139.Discounted Cash Flow Valuation 31. You buy an annuity that will pay you $24.000 a year for 25 years. $5. The discount rate is 8 percent. How much money are you borrowing? A. $245. He also charges you 1.211 B. $2.999 B. $5.319 E.013 C.000 on the first day of each year for 20 years.227 E. What is the value of this annuity today if the discount rate is 8. $134.498 33. $1. You are scheduled to receive annual payments of $4. $258.57 32. he requires that the first payment be paid today. He agrees to loan you the money you need.309 D. $266. $5.800 for each of the next 7 years.621 C.267 C. $144.Chapter 06 . How much does the second annuity pay each year for 20 years if it pays at the end of each year? A.438 6-10 .

878. $1. How much will she have in her account at the end of 45 years? A.25 percent.000 a year for 30 years at 12 percent interest? A.06 C.806.63 B. $3. $2.572 E. What is the future value of $15.868 D.990 C. what is the difference in the present value of these two sets of payments? A.200 a year for 40 years at 8 percent interest? Assume annual compounding.369 C.333.Discounted Cash Flow Valuation 35. $132.115 B. $129.267 37. $2. $3. Both Trish and Josh will receive payments for next three years.407 D.492 C.429 B. $121. $118.316 6-11 . $124.211.838.223 38. $2. $3. Josh receives $480 on the last day of each month. $347.414 D.000 a year and expects to earn an annual rate of 10. $301.711. $310. $306.021. A.406 B. What is the future value of $1.989.Chapter 06 .50 36. At a 9. $342. Alexa plans on saving $3.476 E. Trish receives $480 on the first of each month.30 D. $4.08 E. $1.619. $2.508.5 percent discount rate.908 E.

Chapter 06 - Discounted Cash Flow Valuation

39. Theresa adds $1,000 to her savings account on the first day of each year. Marcus adds $1,000 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years? A. $8,062 B. $8,113 C. $8,127 D. $8,211 E. $8,219

40. You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at 8.6 percent interest. What is the amount of each payment? A. $287.71 B. $291.40 C. $301.12 D. $342.76 E. $366.05

41. You borrow $165,000 to buy a house. The mortgage rate is 7.5 percent and the loan period is 30 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay? A. $206,408 B. $229,079 C. $250,332 D. $264,319 E. $291,406

42. Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her first three years of service. HT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.65 percent on the funds. How much must HT set aside each year for this purpose? A. $3,184,467 B. $3,277,973 C. $3,006,409 D. $3,318,190 E. $3,466,667

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Chapter 06 - Discounted Cash Flow Valuation

43. Nadine is retiring at age 62 and expects to live to age 85. On the day she retires, she has $348,219 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death? A. $1,609.92 B. $1,847.78 C. $1,919.46 D. $2,116.08 E. $2,329.05

44. Kingston Development Corp. purchased a piece of property for $2.79 million. The firm paid a down payment of 15 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent, compounded monthly. What is the amount of each mortgage payment? A. $22,322.35 B. $23,419.97 C. $23,607.11 D. $24,878.15 E. $25,301.16

45. You estimate that you will owe $42,800 in student loans by the time you graduate. The interest rate is 4.25 percent. If you want to have this debt paid in full within six years, how much must you pay each month? A. $611.09 B. $674.50 C. $714.28 D. $736.05 E. $742.50

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Chapter 06 - Discounted Cash Flow Valuation

46. You are buying a previously owned car today at a price of $3,500. You are paying $300 down in cash and financing the balance for 36 months at 8.5 percent. What is the amount of each loan payment? A. $101.02 B. $112.23 C. $118.47 D. $121.60 E. $124.40

47. Atlas Insurance wants to sell you an annuity which will pay you $3,400 per quarter for 25 years. You want to earn a minimum rate of return of 6.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity? A. $151,008.24 B. $154,208.16 C. $167,489.11 D. $173,008.80 E. $178,927.59

48. Your car dealer is willing to lease you a new car for $245 a month for 48 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease? A. $10,331.03 B. $10,386.99 C. $12,197.74 D. $12,203.14 E. $13,008.31

49. Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $3,600 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 6.75 percent? A. $38,890.88 B. $40,311.16 C. $41,516.01 D. $42,909.29 E. $43,333.33

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989.264 B.123. The firm can earn 4.75 percent on its savings. C.94 B.90 percent.Chapter 06 .Discounted Cash Flow Valuation 50.007 6-15 . $2. $26. How much does the firm have to save each quarter to achieve its goal? A. In other words. $1. The plan is to set aside an equal amount of money on the first day of each quarter starting today. Samuelson Engines wants to save $750. The offer gives you a choice of one of the following three offers: You can earn 7. $2.5 percent on your investments. You just received an insurance settlement offer related to an accident you had six years ago.969.312 D. $1. B. $27.192.70 C. 51. $26.08 52.000 to buy some new equipment six years from now. $27. Option B is the best choice because it pays the largest total amount.943.911. Which one of the following statements is correct given this information? A. to her retirement account.419. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period. Stephanie is going to contribute $300 on the first of each month. starting today.05 D. $1. Her employer will provide a 50 percent match. E. D. If both Stephanie and her employer continue to do this and she can earn a monthly rate of 0.418 E.936. Option B is the best choice because you will receive the most payments.068. Option C is the best choice because it is has the largest current value. $27.872.29 E.286 C. Option A is the best choice as it provides the largest monthly payment. You are indifferent to the three options as they are all equal in value. how much will she have in her retirement account 35 years from now? A. her employer will contribute 50 percent of the amount Stephanie saves.

What is the length of the annuity time period? A. 5.126 a year at an annual interest rate of 7.91 years 6-16 .82 years E.31 years 55.200 on your credit card to purchase some furniture. 7.23 years E. 6. How long does the company have to wait before expanding its operations? A.87 years B. 14 years D.Discounted Cash Flow Valuation 53. The firm earns 6.46 years D. 7. You are considering an annuity which costs $160. 13 years C. 15 years E. 4.2 million a quarter for this purpose. Today. How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $120? A. 4.25 percent.40 years C. 16 years 54. you borrowed $6. on the funds it saves. The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire construction project. compounded monthly.32 years C.93 years D.09 years B. The interest rate is 14. The anticipated total cost is $23. compounded quarterly.6 million. 12 years B. Meadow Brook Manor would like to buy some additional land and build a new assisted living center. 4. 4.Chapter 06 .50 percent. Management has decided to save $1. 4.000 today. 6.9 percent. The annuity pays $18.

The terms of the loan call for daily payments of $100. The firm currently needs to borrow $27.81 days C.225 a month for the next 30 years.41 percent E. 316.500 and only one company will even deal with them.56 percent 59. 7. 31.000 today.Discounted Cash Flow Valuation 56. on this money throughout your retirement years. starting today. You want to withdraw $2. 7. Today.97 years B. A. 7. The interest rate is 21.Chapter 06 . compounded daily.97 percent C.09 days 58. What is the rate of return on this project? A. What is the time period of this loan? Assume a 365 day year. 300. 6. you are retiring. By buying this annuity.28 percent D.016 in your retirement savings and have the funds invested such that you expect to earn an average of 7. 264. You will never run out of money.56 years C. 48.20 percent D.75 percent B. 57. 5.03 year D. The first payment is due today. 6.19 years E.400.500 at the beginning of every month. How long will it be until you run out of money? A.9 percent. 5.46 days E.832 monthly for 84 months.45 percent E.04 percent C. You have a total of $411. 42. The project will yield cash flows of $2.43 days D. 34. What is the rate of return on this investment? A.36 days B. 7. 6. compounded monthly.97 percent B. The Wine Press is considering a project which has an initial cash requirement of $187. 6. Your insurance agent is trying to sell you an annuity that costs $200. your agent promises that you will receive payments of $1. 341. 280. Gene's Art Gallery is notoriously known as a slow-payer.67 percent 6-17 .10 percent.

41 percent E.85 percent C. You have been investing $250 a month for the last 13 years.98 percent E. you decide to save $50 a day.90 percent D. 13. 5. 6." Today completes your 17th year of saving and you now have $6. you turn 23.37 percent E. 14. Today.54 percent 6-18 . 5.29 percent D. In an attempt to reach this goal.67 percent B. What is your average rate of return on your investments? A.91 in this account. His holdings are now worth $598. 9. 9. 11. You open an investment account and deposit your first $50 today.47 percent D. What rate of return must you earn to achieve your goal? A.Discounted Cash Flow Valuation 60. 14. 13. 5. 14.23 percent C. your investment account is worth $73.24 percent C. Will has been purchasing $25. 9. 5.13 percent B.68 percent 62. 12. 10. Your father helped you start saving $20 a month beginning on your 5th birthday. What is the rate of return on your savings? A.15 percent B. 14.Chapter 06 .262.000 worth of New Tek stock annually for the past 11 years.30 percent C. Your birthday wish is that you will be a millionaire by your 40th birthday.06 percent E.78 percent 61.36 percent D. What is his annual rate of return on this stock? A.528. Today. 14.12 percent 63. 9. 8. every day until you turn 40.100.94 percent B. He always made you deposit the money into your savings account on the first day of each month just to "start the month out right.

you opted to receive never-ending payments.408.17 66. You just won a national sweepstakes! For your prize.Chapter 06 .006. $76.699. $291. $166. The settlement calls for increasing payments over a 10-year period.409.15 B.00 6-19 .05 D. $300. Your grandfather left you an inheritance that will provide an annual income for the next 10 years.908.000.67 B. The first payment will be paid one year from now in the amount of $10. $85.76 C.67 C.464.12 E.14 E. the payments will increase by 3.16 65. $31.008.500 and will be paid one year from today.5 percent annually.Discounted Cash Flow Valuation 64.19 C. The following payments will increase by 4. $248.023. What is the value of this settlement to you today if you can earn 8 percent on your investments? A.777.000.666. $43. $277. What is the present value of your prize at a discount rate of 8 percent? A. $80. $84.141. $41.192. $36.78 D. What is your inheritance worth to you today if you can earn 9.12 E. $46.5 percent annually. You will receive the first payment one year from now in the amount of $4. Every year thereafter.5 percent on your investments? A.121.666. You just settled an insurance claim. $82.000. the payment amount will increase by 6 percent.28 B. Every year after that.21 D. The first payment will be $12.

000.000 over the next three years.000 C.080 E. $4.500 B. $2. respectively. Annually thereafter. and $3.000.000. After that time.530 C. The scholarship fund will last indefinitely.615 C. $538.400. This gift was established to provide scholarships for worthy students.920 D. $638. Southern Tours is considering acquiring Holiday Vacations.260 6-20 . $4. Southern Tours has determined that a 13.000 D. the scholarship amount will be increased by 5.098 B. What is Southern Tours willing to pay today to acquire Holiday Vacations? A. $5. respectively. $1.Chapter 06 . they feel the business will be worthless. $5.407 69. $437.200.226 E.5 percent rate of return is applicable to this potential acquisition. Management believes Holiday Vacations can generate cash flows of $187. You are considering two savings options.600 D.000 E. $545. The other option is to save one lump sum amount today.Discounted Cash Flow Valuation 67.750 68.410 B. and $245.450.5 percent to help offset the effects of inflation. If you want to have the same balance in your savings account at the end of the three years.100.4 percent rate of return. $503. regardless of the savings method you select. Both options offer a 7.000 at the end of each year for the next three years. The first scholarships will be granted one year from now for a total of $35. $601. What is the value of this gift today at a discount rate of 8 percent? A. $750. A wealthy benefactor just donated some money to the local college. how much do you need to save today if you select the lump sum option? A. $220. $1. $1. The first option is to save $900. $4.

700.75 percent? A.847 6-21 . $112. $28. The other offer is the payment of one lump sum amount today.Chapter 06 . given a 9 percent discount rate? A. and $8.388 E. and $12. The offer also includes a starting bonus of $2.545 C. respectively. What is the minimum amount that you will accept today if you are to select the lump sum offer? A. $15. $29.216 B.691 71.407 C. $16. You are considering changing jobs.000 at the end of each year for the next three years.877 B. respectively.333 D.429 D. You are considering a project which will provide annual cash inflows of $4. respectively. $29. Your parents have made you two offers.000. The first offer includes annual gifts of $10.000 at the end of each of the next three years. $16.500. $134. $14. $30. $5.000.Discounted Cash Flow Valuation 70. and $46. A potential employer just offered you an annual salary of $41.439 E. All salary payments are made as lump sum payments at the end of each year.000. What is this offer worth to you today at a discount rate of 6. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. $121. $115. $117. $15. $30.103 C.500 payable immediately. $11. $44.212 E.000 a year for the next three years.406 B. Your goal is to work for three years and then return to school full-time in pursuit of an advanced degree.000.697 72. What is the present value of these cash flows.367 D.

5 percent.000 today. You should accept the $89.Chapter 06 .407 E. B. and $80. 75. C.000. You should accept the first offer as it has the greatest value to you. and a final payment of $45. If the applicable discount rate is 11.307 C. $133.000 on the day you depart three years from today.695 C. $93. The first offer is for $89.478 6-22 . You should accept the second offer because it has the larger net present value.219 D.75 percent? A. It does not matter which offer you accept as they are equally valuable. What is the present value of these cash flows given a 10. $151. $86.000 two years from today. E.131 E.500 today in cash.500 today because it has the lower future value. D. respectively.554 B. What is the cost of this vacation in today's dollars if the discount rate is 9. $156. The package requires that you pay $25.5 percent discount rate? A. $52. $148.Discounted Cash Flow Valuation 73.000 today and an additional $70. You just signed a consulting contract that will pay you $35. $91.000 one year from today. $142.880 D. $89. $30.000 annually at the end of the next three years. Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica. which offer should you accept and why? A.000. You have some property for sale and have received two offers.376 B. You should accept the $89.500 today because it has the higher net present value. The second offer is the payment of $35. $91.910 74.

$13. Deltona Motor Parts deposited $16.000 to the account one year from today. $56.500 in an investment account for the purpose of buying new equipment three years from today. $53. $53.255 78.800. and $7.50 E. What is the future value of these cash flows at the end of year five if the interest rate is 7 percent? A. What will your investment account be worth at the end of year three if you can earn 8. $14. $58. it is adding another $12. How much will be available when it is ready to buy the equipment.883 D. $13. and $12. $32.408 B.621. One year ago. Today.528.500 the following year.Chapter 06 .700.779.57 C.40 6-23 . $13.411 E. Lucas will receive $6. The company plans on making a final deposit of $20.907 C.500 each year starting at the end of year one.5 percent on your funds? A. $8.200 this year.12 B. You will deposit these amounts into your investment account at the end of each year. $32.211 D.021 77. $56.11 D.418 B. $14.5 interest? A. $33. $36.792 E.Discounted Cash Flow Valuation 76. assuming the account pays 5.907. nothing next year.000 to this account.919 C. You plan on saving $5.526. $35.

$24. $31. including the investment earnings.000.000. starting one year from today.457 C.776 80.572.67 6-24 . $366.231.00 C. $972. How much does the firm need to deposit today? A. $21. All of this money will be saved for her retirement.000. over the next four years. $515.311 D. $18.Discounted Cash Flow Valuation 79. The account pays a 4.5 percent on her investments.674. If she can earn an average of 10.33 D. $458. The fine calls for annual payments of $150.147. Blackwell. How much will the community shelter receive four years from today? A.000 each year for the next three years. Year 2 = $35. The government has imposed a fine on the Corner Tavern.497.56 81. The government will earn 6.072.400. respectively.299. has a $75.25 percent on the funds held. The plan is to make an initial deposit today and then deposit an additional $15.000. The first payment is due one year from today.006.875. Miley expects to receive the following payments: Year 1 = $60.5 percent rate of return.Chapter 06 .78 E. Year 3 = $12. Inc. $422.509 E.56 D.000.487. $1.000. The government plans to invest the funds until the final payment is collected and then donate the entire amount. how much will she have in her account 25 years after making her first deposit? A.373 B.076.71 E. $989. and $50. $100.000.000 liability it must pay three years from today.91 C. $20.737. $75.95 B. to help the local community shelter. $1.06 B. $1. $349. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid.

00 percent E. $1.75 percent? A. You would like to establish a trust fund that will provide $120. $28. 5.80 E.Chapter 06 . $1.000 C. 6.25 percent 6-25 .000 in scholarships each year for needy students.500.48 B. $22.000 for an annuity that will pay you and your heirs $45.000 a year forever for your heirs.122 E.000 a year forever. 5. How much money must you deposit today to fund this gift for your heirs? A. $2. $30. $2.333 D.50 percent C. $1. 5. $2.200.000 83.957 B.121. What rate of return are you earning on this policy? A.333. $1.150.00 C.75 percent D.60. The trust fund is going to be invested very conservatively so the expected rate of return is only 5.Discounted Cash Flow Valuation 82. $20.000 85.086. You just paid $750. $2.000 B. 6.500. $2.600. $18.000 D.75 percent. A preferred stock pays an annual dividend of $2. Wicker Imports established a trust fund that provides $90. The trust fund earns a fixed 6 percent rate of return.458.300. How much money did the firm contribute to the fund assuming that only the interest income is distributed? A.212 C.55 84. $1.13 D. What is one share of this stock worth today if the rate of return is 11.25 percent B.000 E.

9. What is the rate of return? A.75 percent B.40 88.400 a year to his heirs forever.95 percent B. 9.90 percent D.10 D. 5. What is the amount of the annual dividend? A.27 percent E. $2.31 percent 6-26 .65 percent interest per month. You grandfather won a lottery years ago. 9. $2. 4. He invested this money such that it will provide annual payments of $2.95 C. What is the annual percentage rate on your account? A.80 percent C. $3.70 percent 89.18 percent D. $3. The value of his winnings at the time was $50. 21.10 percent E.00 percent D. $3.25 percent per quarter? A. 4.000. 5. 19. What is the annual percentage rate on a loan with a stated rate of 2. 21.25 percent E. 20.80 percent C.15 percent 87.25 E. Your credit card company charges you 1. 9.30 per share. 5. The preferred stock of Casco has a 5.09 percent C.Discounted Cash Flow Valuation 86.48 percent dividend yield. 18.80 B.00 percent B.Chapter 06 . 9. The stock is currently priced at $59.

18. 23.Discounted Cash Flow Valuation 90. 17.91 percent 92. 23.57 percent E.974 percent on your credit card.50 percent compounded quarterly? A. 19. 9. 18.32 percent C. You are paying an effective annual rate of 18.49 percent D.44 percent D. What is the actual rate being charged on these loans? A.72 percent 93. 19. 23.00 percent C.16 percent B. What is the actual rate of interest you are paying? A. 23.68 percent C. 9. The Pawn Shop loans money at an annual rate of 21 percent and compounds interest weekly. 9.64 percent 6-27 .9 percent. What is the effective annual rate if a bank charges you 9. 9.25 percent D.21 percent C.00 percent 91. Your credit card company quotes you a rate of 17. 19.03 percent B. The interest is compounded monthly.Chapter 06 .50 percent B.64 percent E. 19.72 percent D.62 percent B. 9.84 percent E.56 percent E. 18. What is the annual percentage rate on this account? A. Interest is billed monthly. 19. 19. 23.

10 percent. The terms of the two loans are equivalent with the exception of the interest rates.84 percent E. are given below. the annual percentage rate is 7.75 percent compounded continuously? A. 3. B. 16. What is the effective annual rate of 9.26 percent. the annual percentage rate is 7.Chapter 06 .24 percent C. compounded quarterly 96. 3.07 percent 97. compounded annually B. 3. compounded daily.68 percent. You have $5. There are five banks located in your area. 10. 15.69 percent D. 15. the effective annual rate is 8. Which bank should you select if your goal is to maximize your interest income? A. 95.Discounted Cash Flow Valuation 94.75 percent. 10. What is the effective annual rate of 14.16 percent. A.9 percent compounded continuously? A.33 percent E. respectively. You are considering two loans. 10. the effective annual rate is 8.47 percent 6-28 .06 percent.29 percent D. Loan B offers a rate of 8 percent. compounded continuously E. Which loan should you select and why? A. C. compounded semi-annually. 3. A.20 percent. compounded monthly C.15 percent. The rates paid by banks A through E.17 percent B.59 percent B. 10. 15.62 percent C.25 percent. The loans are equivalent offers so you can select either one. 15.600 that you want to use to open a savings account. Loan A offers a rate of 7. 3. D. E. B.75 percent. B. compounded semi-annually D. 10.

21 percent D. $1. $1.20 6-29 . You are going to loan a friend $900 for one year at a 5 percent rate of interest.65 percent annual interest.900. $13. 8. $1.14 C. $12. $0. How much are you borrowing? A. $12.16 E. You will repay the principal plus all the interest in one lump sum of $12.911. 8.23 D. you borrowed $9.800 two years from today. What is the maximum rate the bank can actually earn based on the quoted rate? A. compounded annually. $13. $11.36 E.26 percent E. How much will you have to repay? A.00 101. $10. 8.877.401.97 B. 8.48 percent.Discounted Cash Flow Valuation 98.808.04 D. $12.92 B.08 E.14 percent C. compounded annually.757.75 percent annual percentage rate on its loans. You are borrowing money today at 8. City Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.006.00 B.89 D. $11.06 percent B. This morning.58 percent 99.16 C.250.211. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today. $9.441. How much additional interest could you have earned if you had compounded the rate continuously rather than annually? A.41 100. 8. $1. $10.Chapter 06 .500 at 7.13 C.

four-year loan at 5.93 percent 103.400. On this date last year.264 D. The payment that is required at that time is $6. 8 percent. $89. $1.607. What is the amount of your loan payment in year 2? A.000 E. Payments are made annually. you borrowed $18. you borrowed $3. Payments are to be paid annually. How much total interest will you pay on this loan? A. interest-only loan from the bank. 9.00 C. What is the interest rate on this loan? A. The terms of the loan include an interest rate of 4. 9.120 B. 8. 8.000. $3.000.529. On the day you entered college you borrowed $25.890 C.50 D. $5. $945 B. 8.937.25 percent from your local bank.75 percent. The terms stipulate that the principal is due in full one year after you graduate. $5. $6.106 E.120 104.67 B. Interest is to be paid annually at the end of each year.600 D. What is the amount of the loan payment in year 10? A. $5. $8. $6.250 105.00 E. Assume that you complete college in four years. You have to repay the loan principal plus all of the interest six years from today.000 on an interest-only. 10-year. $5. John's Auto Repair just took out an $89. $96. On the day you entered college.01 percent B.Discounted Cash Flow Valuation 102.Chapter 06 .850 C.45 percent C.266. $7.400.11 6-30 . $13. $6.000 from your local bank.78 percent D.47 percent E.

20 B.44 D.70 108.75 percent interest. $277. Equal payments are to be made at the end of each month for thirty years. On June 1. $603. $268.25 percent.194.84 B. The loan is to be repaid in equal monthly payments over 15 years.403. This morning.500 at 6.548.56 D.) A. How much of the first loan payment is interest? (Assume each month is equal to 1/12 of a year.83 E.38 E. $1.67 6-31 .21 E.) A. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year. $1. you borrowed $150. $925.453. The mortgage rate is 8.32 B.16 C. $2.000 to buy a house.Chapter 06 .358.) A.000 to buy a house.056.06 D. The first payment is due one month from today. compounded monthly.206. you borrowed $212. $1.14 C. $925. $698.60 107. $917.Discounted Cash Flow Valuation 106. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year. $1. The mortgage rate is 7.511. The first payment is due on July 1. The loan is to be repaid in equal monthly payments over 20 years. You just acquired a mortgage in the amount of $249.61 C.35 percent. $1. $1. $1.

You are considering two annuities. Explain the difference between the effective annual rate (EAR) and the annual percentage rate (APR). Of the two.000 at the end of each year for the next 20 years. 6-32 . both of which pay a total of $20. Which annuity has the greater value today? Is there any circumstance where the two annuities would have equal values as of today? Explain.000 at the end of each year for the next 10 years. which one has the greater importance and why? 110.Discounted Cash Flow Valuation Essay Questions 109. Annuity B pays $1.Chapter 06 .000 over the life of the annuity. Annuity A pays $2.

000 at the end of each year. Explain how you can determine the value of this offer. which would be cheaper? 112. 6-33 . She comes to you and offers to sell you all of the payments to be received after the 10th year.Discounted Cash Flow Valuation 111.Chapter 06 . Why might a borrower select an interest-only loan instead of an amortized loan. Kristie owns a perpetuity which pays $12.

8.53 percent D.72 percent D. What is the amount of your annual loan payment? A.336.311. 9.542. $12.4 percent compounded daily on its savings accounts. You want to buy a new sports coupe for $41. $12. 6-year term loan at 8 percent annual interest.901. and the finance office at the dealership has quoted you an 8. $4. $4. How much will you have in your account 11 years from now? A.95 percent 6-34 . 9.50 B. $4.000 today.87 percent E.204.750.14 116.23 percent B.000.Discounted Cash Flow Valuation Multiple Choice Questions 113. You deposit $8.81 E.62 C.28 percent B.38 percent C. 9. 9.50 D. 8. 10.228. $4. What is the effective interest rate on this loan? A. By law.Chapter 06 .07 114. $11. 8. $12.666.09 B. $11.714.18 E.67 D. The bank uses daily compounding on its loans. what interest rate is the bank required to report to potential borrowers? A.628.414. 8.72 percent E.00 percent 115.41 percent C. Western Bank offers you a $21.06 C.6 percent APR loan compounded monthly for 48 months to buy the car. $5. First Century Bank wants to earn an effective annual return on its consumer loans of 10 percent per year. Downtown Bank is offering 3. 8.

You want to be a millionaire when you retire in 40 years.454.Chapter 06 .11 C. you will combine your money into an account with a 5 percent return. you want to be able to withdraw $1.847.113. Beginning three months from now.636.97 119. The return on the stock account is expected to be 7 percent. $2.068.18 118. $168. $22.100 a month in a stock account and $500 a month in a bond account. $3.15 E.00 D.630.25 percent interest per quarter. How much can you withdraw each month during retirement assuming a 20-year withdrawal period? A.15 C.22 B. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month? A.500 each quarter from your bank account to cover college expenses over the next 4 years. $114.44 B.09 E. $79.47 D. $2. you will invest $1.13 C. $21. The account pays 1.19 B.29 6-35 . $22.04 E. $3.711. $21. When you retire. $3.21 D. You are planning to save for retirement over the next 15 years. $22. You can earn an 11 percent annual return. How much do you need to have in your account today to meet your expense needs over the next 4 years? A. $201. $240.904. To do this. and the bond account will pay 4 percent.406.Discounted Cash Flow Valuation 117.008.

You can afford to make monthly payments of $1.Chapter 06 . 9. into an account that pays 6 percent interest compounded monthly. $6. You want to borrow $47. 97 B. The payments will increase in value by 4 percent each year.811.559.18 percent 6-36 . $6. beginning at the end of this month.38 percent B. How many payments will you have made when your account balance reaches $9.67 percent C.613 D. Assume monthly compounding. You have just won the lottery and will receive $540.01 percent E.11 121. 119 D. What is the highest rate you can afford on a 48-month APR loan? A. 8. 108 C. $8.170 from your local bank to buy a new sailboat.160.Discounted Cash Flow Valuation 120.372 C. $7. 8.407 B. You are preparing to make monthly payments of $65.000 as your first payment one year from now. 124 E. but no more.003. $7. 131 122. 8. The appropriate discount rate is 10 percent. 9.406 E.221. What is the present value of your winnings? A. You will receive payments for 26 years.278? A.906.82 percent D.

Chapter 06 - Discounted Cash Flow Valuation

123. You need a 25-year, fixed-rate mortgage to buy a new home for $240,000. Your mortgage bank will lend you the money at a 7.5 percent APR for this 300-month loan, with interest compounded monthly. However, you can only afford monthly payments of $850, so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment. What will be the amount of the balloon payment if you are to keep your monthly payments at $850? A. $738,464 B. $745,316 C. $767,480 D. $810,220 E. $847,315

124. The present value of the following cash flow stream is $5,933.86 when discounted at 11 percent annually. What is the value of the missing cash flow?

A. $1,500 B. $1,750 C. $2,000 D. $2,250 E. $2,500

125. You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000 purchase price. The monthly payment on this loan will be $11,000. What is the effective annual rate on this loan? A. 4.98 percent B. 5.25 percent C. 5.46 percent D. 6.01 percent E. 6.50 percent

6-37

Chapter 06 - Discounted Cash Flow Valuation

126. Consider a firm with a contract to sell an asset 3 years from now for $90,000. The asset costs $71,000 to produce today. At what rate will the firm just break even on this contract? A. 7.87 percent B. 8.01 percent C. 8.23 percent D. 8.57 percent E. 8.90 percent

127. What is the present value of $1,100 per year, at a discount rate of 10 percent if the first payment is received 6 years from now and the last payment is received 28 years from now? A. $6,067.36 B. $6,138.87 C. $6,333.33 D. $6,420.12 E. $6,511.08

128. You have your choice of two investment accounts. Investment A is a 5-year annuity that features end-of-month $2,500 payments and has an interest rate of 11.5 percent compounded monthly. Investment B is a 10.5 percent continuously compounded lump sum investment, also good for five years. How much would you need to invest in B today for it to be worth as much as investment A five years from now? A. $108,206.67 B. $119,176.06 C. $124,318.08 D. $129,407.17 E. $131,008.15

129. Given an interest rate of 8 percent per year, what is the value at date t = 9 of a perpetual stream of $500 annual payments that begins at date t = 17? A. $3,646.81 B. $4,109.19 C. $4,307.78 D. $6,250.00 E. $6,487.17

6-38

Chapter 06 - Discounted Cash Flow Valuation

130. You want to buy a new sports car for $55,000. The contract is in the form of a 60-month annuity due at a 6 percent APR, compounded monthly. What will your monthly payment be? A. $1,047.90 B. $1,053.87 C. $1,058.01 D. $1,063.30 E. $1,072.11

131. You are looking at a one-year loan of $10,000. The interest rate is quoted as 10 percent plus 5 points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. The interest rate quotation in this example requires the borrower to pay 5 points to the lender up front and repay the loan later with 10 percent interest. What is the actual rate you are paying on this loan? A. 15.00 percent B. 15.47 percent C. 15.55 percent D. 15.79 percent E. 15.84 percent

132. Your holiday ski vacation was great, but it unfortunately ran a bit over budget. All is not lost. You just received an offer in the mail to transfer your $5,000 balance from your current credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a rate of 9.4 percent. You plan to make payments of $510 a month on this debt. How many less payments will you have to make to pay off this debt if you transfer the balance to the new card? A. 0.36 payments B. 0.48 payments C. 1.10 payments D. 1.23 payments E. 2.49 payments

6-39

2 Topic: Annuity 2.2 Topic: Perpetuity 6-40 . Which one of the following accurately defines a perpetuity? A.2 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-2 Section: 6.2 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-2 Section: 6. equal payments paid at regular intervals over a stated time period D. unending equal payments paid at equal time intervals E. a limited number of equal payments paid in even time increments B. unequal payments that occur at set intervals for a limited period of time Refer to section 6. increasing payments paid for a definitive period of time B.Discounted Cash Flow Valuation Chapter 06 Discounted Cash Flow Valuation Answer Key Multiple Choice Questions 1. An ordinary annuity is best defined by which one of the following? A. equal payments paid at regular intervals of time on an ongoing basis E. varying amounts that are paid at even intervals forever D. payments of equal amounts that are paid irregularly but indefinitely C.Chapter 06 . increasing payments paid forever C. unending equal payments paid at either equal or unequal time intervals Refer to section 6.

3 Topic: Stated rate 6-41 .Chapter 06 . simple rate E. annuity due D.3 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-4 Section: 6. ordinary annuity B. Which one of the following terms is used to identify a British perpetuity? A. consol Refer to section 6.2 Topic: Consol 4.Discounted Cash Flow Valuation 3. common rate Refer to section 6. The interest rate that is quoted by a lender is referred to as which one of the following? A. amortized cash flow C. discounted loan E. compound rate C. stated interest rate B. effective annual rate D.2 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-2 Section: 6.

compound interest rate E.3 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-4 Section: 6.3 Topic: Effective annual rate 6.3 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-4 Section: 6.Chapter 06 . daily interest rate Refer to section 6. A monthly interest rate expressed as an annual rate would be an example of which one of the following rates? A.Discounted Cash Flow Valuation 5. periodic interest rate D. effective annual rate B. What is the interest rate charged per period multiplied by the number of periods per year called? A. discounted annual rate C. periodic monthly rate E.3 Topic: Annual percentage rate 6-42 . stated rate B. annual percentage rate C. effective annual rate D. consolidated monthly rate Refer to section 6.

balloon loan D.4 Topic: Interest-only loan 6-43 . modified loan C.Chapter 06 . amortized B.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. interest-only loan Refer to section 6. continuous C. A.Discounted Cash Flow Valuation 7.4 Topic: Pure discount loan 8. pure discount loan E. A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. amortized loan B. Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment? A. balloon D. pure discount E.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. interest-only Refer to section 6.

4 Topic: Balloon loan 6-44 . modified loan C. continuing loan C.4 Topic: Amortized loan 10. pure discount loan E. interest-only loan Refer to section 6.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. amortized loan B. Which one of the following terms is defined as a loan wherein the regular payments. interest-only loan Refer to section 6. which then must be repaid in one lump sum? A. balloon loan D. including both interest and principal amounts. amortized loan B. remainder loan E.Discounted Cash Flow Valuation 9. are insufficient to retire the entire loan amount.Chapter 06 .4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. balloon loan D. Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal? A.

000 of income. Option A pays three annual payments starting with $2. Both options will provide you with $12. Option B has a higher present value at time zero than does option A. Option B pays three annual payments of $4. D.2 Topic: Annuity present and future values 12.500 for five years and pay 0. E.1 and 6. These two annuities have equal present values but unequal futures values at the end of year five.1 and 6.000 each.2 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-2 Section: 6.2 Topic: Present and future values 6-45 . Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. C. Refer to sections 6.000 each. You are comparing two investment options that each pay 5 percent interest. Both options are of equal value given that they both provide $12. You are comparing two annuities which offer quarterly payments of $2. compounded annually. Option A has the higher future value at the end of year three.75 percent interest per month.Discounted Cash Flow Valuation 11. Annuity A has a smaller future value than annuity B.Chapter 06 . Which one of the following statements is correct concerning these two annuities? A. Option B is a perpetuity. Refer to section 6.2 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-2 Section: 6. Option A is an annuity. Which one of the following statements is correct given these two investment options? A. D.000 the first year followed by two annual payments of $5. B. Annuity B is an annuity due. C. Annuity B has a smaller present value than annuity A. B. E. These two annuities have equal present values as of today and equal future values at the end of year five.000 of income.

III. II and III only D. You are considering two projects with the following cash flows: Which of the following statements are true concerning these two projects? I. Project Y has a higher present value than Project X. IV.1 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-1 Section: 6. and IV only Refer to section 6.Discounted Cash Flow Valuation 13. Project X has a higher present value than Project Y. I and III only C. given a positive discount rate. A. Both projects have the same future value given a zero rate of return. II only B. II and IV only E.1 Topic: Present and future values 6-46 .Chapter 06 . I. given a positive rate of return. Both projects have the same future value at the end of year 4. II. II. given a positive discount rate.

Refer to section 6.1 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-1 Section: 6. Which one of the following statements is correct given the following two sets of project cash flows? A. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three. Project B will always be worth less today than will Project A.Discounted Cash Flow Valuation 14. E. but those of Project A are not. C. B.1 Topic: Present value 6-47 . The present value of Project A cannot be computed because the second cash flow is equal to zero. Both sets of cash flows have equal present values as of time zero given a positive discount rate.Chapter 06 . The cash flows for Project B are an annuity. As long as the discount rate is positive. D.

IV. Which of the following statements related to interest rates are correct? I. II and III only C. III. you should compare the effective annual rates. I. Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers. An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest.2 Topic: Annuities and perpetuities 16. I and II only B. III.3 Topic: Interest rate 6-48 .Chapter 06 . Annual interest rates consider the effect of interest earned on reinvested interest payments. Refer to section 6. given an interest rate of 12 percent. Which one of the following statements related to annuities and perpetuities is correct? A. II. compounded annually. D. Perpetuities are finite but annuities are not. Annual and effective interest rates are equal when interest is compounded annually. E. Most loans are a form of a perpetuity.Discounted Cash Flow Valuation 15. C. but the future value can. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments. A. and III only E. compounded monthly.3 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-4 Section: 6. II. The present value of a perpetuity cannot be computed. When comparing loans. B. II. II and IV only D. and IV only Refer to section 6.2 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-2 Section: 6.

The future value of an annuity will decrease if the growth rate is increased.Chapter 06 . E. D. B. the effective annual rate will always exceed the annual percentage rate.3 AACSB: N/A Bloom's: Comprehension Difficulty: Basic Learning Objective: 6-4 Section: 6. C. Which one of the following statements concerning interest rates is correct? A. The effective annual rate decreases as the number of compounding periods per year increases. B. Refer to section 6. An increase in the rate of growth will decrease the present value of an annuity.3 Topic: Interest rate 18.2 Topic: Growing annuities and perpetuities 6-49 . E. Which one of these statements related to growing annuities and perpetuities is correct? A. Refer to section 6. The present value of a growing perpetuity will decrease if the discount rate is increased. Savers would prefer annual compounding over monthly compounding. D. Growth rates cannot be applied to perpetuities if you wish to compute the present value.Discounted Cash Flow Valuation 17. C. The cash flow used in the growing annuity formula is the initial cash flow at time zero.2 AACSB: N/A Bloom's: Comprehension Difficulty: Intermediate Learning Objective: 6-1 Section: 6. For any positive rate of interest. Borrowers would prefer monthly compounding over annual compounding. The effective annual rate equals the annual percentage rate when interest is compounded annually.

Chapter 06 . An increase in time increases the future value given a zero rate of interest. annual B. B.3 Topic: Interest compounding 6-50 . monthly D.3 AACSB: N/A Bloom's: Comprehension Difficulty: Intermediate Learning Objective: 6-2 Section: 6. semi-annual C. continuous Refer to section 6. Which one of the following statements correctly states a relationship? A. Time and present value are inversely related. given positive rates. all else held constant. Interest rates and time are positively related. all else held constant. Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate? A. Time and future values are inversely related. Refer to section 6.3 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-2 Section: 6. daily E. all else held constant. C.3 Topic: Time value relationships 20. E. D. An increase in the discount rate increases the present value.Discounted Cash Flow Valuation 19.

pure discount loan E. The principal is repaid in equal increments and included in each loan payment. Refer to section 6. E. The principal is repaid in equal annual payments. The principal is repaid in a lump sum at the end of the loan period. The principal is forgiven over the loan period so does not have to be repaid. amortized loan D. C.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. balloon loan C.4 Topic: Interest-only loan 6-51 .Chapter 06 . D. bullet loan Refer to section 6.4 Topic: Pure discount loan 22. B.Discounted Cash Flow Valuation 21. The entire repayment of which one of the following loans is computed simply by computing a single future value? A. How is the principal amount of an interest-only loan repaid? A. The principal is repaid in increasing increments through regular monthly payments.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. interest-only loan B.

balloon loan where 50 percent of the principal is repaid as a balloon payment Refer to section 6. A. Refer to section 6. repays both the principal and the interest in one lump sum at the end of the loan term. You need $25.Chapter 06 . D.4 Topic: Amortized loan 24.Discounted Cash Flow Valuation 23. amortized loan with equal loan payments D.000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.4 AACSB: N/A Bloom's: Comprehension Difficulty: Intermediate Learning Objective: 6-3 Section: 6. An amortized loan: A. may have equal or increasing amounts applied to the principal from each loan payment. discount loan E. requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. interest-only loan B.4 Topic: Loan types 6-52 . requires the principal amount to be repaid in even increments over the life of the loan. C. requires that all payments be equal in amount and include both principal and interest. E.4 AACSB: N/A Bloom's: Knowledge Difficulty: Basic Learning Objective: 6-3 Section: 6. amortized loan with equal principal payments C. B.

$4.88 C.2 Topic: Annuity present value 6-53 .Chapter 06 .87 E. $4. $4.509.Discounted Cash Flow Valuation 25.16 B.201. At a 5. what are these payments worth to you on the day you enter college? A.800.19 D.00 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.299. Your grandmother is gifting you $100 a month for four years while you attend college to earn your bachelor's degree.608.5 percent discount rate. $4. $4.

Discounted Cash Flow Valuation 26.411. If you can earn 7 percent on your money. You just won the grand prize in a national writing contest! As your prize. $172.000 a month for ten years.40 D.33 E. $178.71 B.25 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. $185.450. $190. what is this prize worth to you today? A.338. $181. you will receive $2.333.2 Topic: Annuity present value 6-54 .Chapter 06 .06 C.252.

00 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.266. $8. Phil can afford $180 a month for 5 years for a car loan.752.84 D. If the interest rate is 8.750.00 B.Chapter 06 . $9.03 C.67 E. $8.6 percent. how much can he afford to borrow to purchase a car? A. $7.348.400.2 Topic: Loan amount 6-55 . $9.Discounted Cash Flow Valuation 27.

414 to you today. You are the beneficiary of a life insurance policy. E. You should accept the payments because they are worth $336.800 to you today. AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. The insurance company informs you that you have two options for receiving the insurance proceeds.Chapter 06 .2 Topic: Annuity present value 6-56 .000 to you today. You can receive a lump sum of $200. You should accept the $200. You should accept the payments because they are worth $209.311 to you today. C. Which option should you take and why? A. You should accept the payments because they are worth $247.413 to you today.Discounted Cash Flow Valuation 28. You can earn 6 percent on your money.400 a month for 20 years.000 because the payments are only worth $189. D. You should accept the $200. B.000 because the payments are only worth $195.000 today or receive payments of $1.

Your employer contributes $75 a week to your retirement plan.Chapter 06 .74 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.5 percent.11 D.211. $40.2 Topic: Present value 6-57 . what is this employee benefit worth to you today? A.16 E. $44. $44. Given these assumptions.69 B.384. $42.Discounted Cash Flow Valuation 29. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.618.306. $44.987.46 C.

5 percent interest compounded monthly.Discounted Cash Flow Valuation 30. $81.068. $81. $80.07 B.Chapter 06 . The first deposit will be made today. The money will be set aside in a separate savings account which pays 4. The Design Team just decided to save $1.548.20 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.760.79 C.333. $81.33 E. $80.500 a month for the next 5 years as a safety net for recessionary periods.459.2 Topic: Annuity due present value 6-58 .18 D. What would today's deposit amount have to be if the firm opted for one lump sum deposit today that would yield the same amount of savings as the monthly deposits after 5 years? A.

How much money are you borrowing? A. $138. $142.68 E.57 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.09 B.2 Topic: Loan present value 6-59 . He agrees to loan you the money you need. He also charges you 1. $139.50 D. $144. he requires that the first payment be paid today.Chapter 06 .Discounted Cash Flow Valuation 31. if you make payments of $25 a month for the next six months. In keeping with his reputation. You need some money today and the only friend you have that has any is your miserly friend.22 C. $134.5 percent interest per month.

Chapter 06 - Discounted Cash Flow Valuation

32. You buy an annuity that will pay you $24,000 a year for 25 years. The payments are paid on the first day of each year. What is the value of this annuity today if the discount rate is 8.5 percent? A. $241,309 B. $245,621 C. $251,409 D. $258,319 E. $266,498

AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.2 Topic: Annuity due present value

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Chapter 06 - Discounted Cash Flow Valuation

33. You are scheduled to receive annual payments of $4,800 for each of the next 7 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year? A. $1,999 B. $2,013 C. $2,221 D. $2,227 E. $2,304

Difference = $26,990 - $24,991 = $1,999 Note: The difference = 0.08 × $24,991 = $1,999

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-1 Section: 6.2 Topic: Annuity present value

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Chapter 06 - Discounted Cash Flow Valuation

34. You are comparing two annuities with equal present values. The applicable discount rate is 8.75 percent. One annuity pays $5,000 on the first day of each year for 20 years. How much does the second annuity pay each year for 20 years if it pays at the end of each year? A. $5,211 B. $5,267 C. $5,309 D. $5,390 E. $5,438

Because each payment is received one year later, then the cash flow has to equal: $5,000 × (1 + 0.0875) = $5,438

AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6.2 Topic: Annuity comparison

6-62

$124.5 percent discount rate. Both Trish and Josh will receive payments for next three years.Chapter 06 .63 B.30 D.06 C. $121.2 Topic: Annuity comparison 6-63 . $118. Trish receives $480 on the first of each month. $132.08 E. Josh receives $480 on the last day of each month. At a 9. what is the difference in the present value of these two sets of payments? A. $129.50 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6.Discounted Cash Flow Valuation 35.

$301.115 B.990 C.908 E.000 a year for 30 years at 12 percent interest? A.Chapter 06 .2 Topic: Annuity future value 37.Discounted Cash Flow Valuation 36. $4. What is the future value of $15. $3. $3. What is the future value of $1.200 a year for 40 years at 8 percent interest? Assume annual compounding.476 E. A. $310.492 C. $306.267 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.414 D. $2. $342.2 Topic: Future value 6-64 .021.406 B.619. $3.711.989.868 D.223 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $347.878.

$1. $1.Chapter 06 .407 D.429 B. $2.806.000 a year and expects to earn an annual rate of 10.316 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.25 percent.838. $2.369 C.2 Topic: Annuity future value 6-65 . Alexa plans on saving $3. How much will she have in her account at the end of 45 years? A.333.Discounted Cash Flow Valuation 38.211. $2.508.572 E.

062 Note: Difference = $124. $8.113 C.Discounted Cash Flow Valuation 39. Theresa adds $1.096. $8.211 E.5 percent annual interest.000 to her savings account on the first day of each year.000 to his savings account on the last day of each year.127 D. $8.065 = $8. They both earn 6. Marcus adds $1. What is the difference in their savings account balances at the end of 35 years? A.219 Difference = $132.Chapter 06 .2 Topic: Annuity comparison 6-66 .062 B.69 = $8.034.062 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6. $8.69 × 0.$124. $8.034.95 .

You are borrowing $17. $301.71 B.6 percent interest.Chapter 06 . $342.2 Topic: Loan payment 6-67 .76 E. What is the amount of each payment? A. $366.800 to buy a car.05 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. The terms of the loan call for monthly payments for 5 years at 8. $287.12 D.Discounted Cash Flow Valuation 40.40 C. $291.

$264.Discounted Cash Flow Valuation 41. $291. $229.000 to buy a house. how much total interest will you pay? A. You borrow $165. The mortgage rate is 7. $206.406 AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 6-2 Section: 6.319 E. $250.079 C. If you pay the mortgage according to the loan agreement.2 Topic: Loan interest 6-68 .Chapter 06 .5 percent and the loan period is 30 years. Payments are made monthly.332 D.408 B.

467 B. Holiday Tours (HT) has an employment contract with its newly hired CEO.466.4 million be paid to the CEO upon the successful completion of her first three years of service. $3. $3.409 D.Discounted Cash Flow Valuation 42.190 E.2 Topic: Annuity payment 6-69 . How much must HT set aside each year for this purpose? A.973 C.65 percent on the funds.277.006. $3. The contract requires a lump sum payment of $10. HT wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 5.Chapter 06 . $3.318.184. $3.667 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.

919.78 C.219 in her retirement savings account.2 Topic: Annuity payment 6-70 .92 B.Discounted Cash Flow Valuation 43. $2. $1. she has $348.847. On the day she retires.08 E. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death? A. $1.609.Chapter 06 .116. Nadine is retiring at age 62 and expects to live to age 85.329. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. $1.05 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $2.46 D.

322.419. compounded monthly.000 × (1 . purchased a piece of property for $2.35 B.15) = $2.15 E.500 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $25.301.607.878. $22.97 C.Chapter 06 . $23. $24. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.790.75 percent.11 D. The firm paid a down payment of 15 percent in cash and financed the balance.0.16 Amount financed = $2. Kingston Development Corp. $23. What is the amount of each mortgage payment? A.2 Topic: Loan payment 6-71 .Discounted Cash Flow Valuation 44.79 million.371.

$736.50 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.09 B.50 C. The interest rate is 4. You estimate that you will owe $42.800 in student loans by the time you graduate.25 percent.28 D. $714.2 Topic: Loan payment 6-72 .05 E. how much must you pay each month? A. If you want to have this debt paid in full within six years.Chapter 06 . $742. $674.Discounted Cash Flow Valuation 45. $611.

500 . What is the amount of each loan payment? A.02 B.2 Topic: Loan payment 6-73 . $124. You are buying a previously owned car today at a price of $3.Discounted Cash Flow Valuation 46. $121.5 percent. $118. You are paying $300 down in cash and financing the balance for 36 months at 8.47 D.23 C.$300 = $3.40 Amount financed = $3.500. $101.200 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.Chapter 06 . $112.60 E.

208.16 C. $154.2 Topic: Annuity present value 6-74 .008. Atlas Insurance wants to sell you an annuity which will pay you $3.11 D.400 per quarter for 25 years.Chapter 06 . You want to earn a minimum rate of return of 6. $151.489.927. $178.Discounted Cash Flow Valuation 47.80 E.5 percent. $167.59 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. What is the most you are willing to pay as a lump sum today to buy this annuity? A. $173.24 B.008.

03 B.197.5 percent. If your cost of money is 6. $13.008. $10.Discounted Cash Flow Valuation 48.331. Payments are due on the first day of each month starting with the day you sign the lease contract. $10. what is the current value of the lease? A. $12.31 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.Chapter 06 .99 C.14 E. $12. Your car dealer is willing to lease you a new car for $245 a month for 48 months.74 D.203.2 Topic: Annuity present value 6-75 .386.

909.516. The trust agreement states that you are to receive $3.890. $40. $43.333. Your great aunt left you an inheritance in the form of a trust. $41.16 C.75 percent? A. $38.33 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.01 D.Discounted Cash Flow Valuation 49.2 Topic: Annuity due present value 6-76 .Chapter 06 .600 on the first day of each year.29 E.311. $42.88 B. What is the value of this inheritance today if the applicable discount rate is 6. starting immediately and continuing for 20 years.

Option B is the best choice because it pays the largest total amount.5 percent on your investments.5 percent.Chapter 06 . Option B has a present value of $85. Option C is the best choice since it has the largest present value. The offer gives you a choice of one of the following three offers: You can earn 7.255.Discounted Cash Flow Valuation 50.16 at 7. Option A has a present value of $90. You do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period. Option A is the best choice as it provides the largest monthly payment. C.68 at 7. Option B is the best choice because you will receive the most payments. D. Option C is the best choice because it is has the largest current value. 6-77 . Option C has a present value of $100.000. You just received an insurance settlement offer related to an accident you had six years ago.5 percent. B. You are indifferent to the three options as they are all equal in value. Which one of the following statements is correct given this information? A. E.514.

Samuelson Engines wants to save $750.08 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $26.872. The firm can earn 4.94 B.192.000 to buy some new equipment six years from now. How much does the firm have to save each quarter to achieve its goal? A.2 Topic: Annuity present value 51.Discounted Cash Flow Valuation AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6.969. $27.419. The plan is to set aside an equal amount of money on the first day of each quarter starting today.Chapter 06 . $27.2 Topic: Annuity due payment 6-78 . $26.70 C.05 D.75 percent on its savings.911.29 E. $27.

936. Stephanie is going to contribute $300 on the first of each month.312 D. $1.2 Topic: Annuity future value 6-79 .943.418 E.007 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.286 C.264 B.989. $1.Discounted Cash Flow Valuation 52.Chapter 06 . starting today. $2.90 percent. If both Stephanie and her employer continue to do this and she can earn a monthly rate of 0. In other words. how much will she have in her retirement account 35 years from now? A.068.123. Her employer will provide a 50 percent match. $1. to her retirement account. her employer will contribute 50 percent of the amount Stephanie saves. $2.

13 years C. 15 years E. What is the length of the annuity time period? A. You are considering an annuity which costs $160. 16 years AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.2 Topic: Annuity time period 6-80 . 14 years D.Chapter 06 .000 today. 12 years B. The annuity pays $18.Discounted Cash Flow Valuation 53.126 a year at an annual interest rate of 7.50 percent.

9 percent. 7.40 years C.93 years AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. compounded monthly. 6.31 years 83. 7. 6. The interest rate is 14. you borrowed $6.Discounted Cash Flow Valuation 54.23 years E.2 Topic: Annuity payment 6-81 .87 years B. 5.93 years D.14 months/12 = 6. Today. How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $120? A.Chapter 06 .200 on your credit card to purchase some furniture.

2 million a quarter for this purpose. Meadow Brook Manor would like to buy some additional land and build a new assisted living center.6 million. The firm earns 6. 4. 4. on the funds it saves.82 years E.28292 quarters/4 = 4. How long does the company have to wait before expanding its operations? A. The CEO of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire construction project. 4.91 years t = 17.Chapter 06 . compounded quarterly. 4. The anticipated total cost is $23.32 years AACSB: Analytic Bloom's: Application Difficulty: Intermediate Learning Objective: 6-2 Section: 6.Discounted Cash Flow Valuation 55.09 years B.46 years D. Management has decided to save $1.2 Topic: Annuity time period 6-82 .32 years C.25 percent. 4.

you are retiring. starting today.33688 months/12 = 48. 42.19 years E. compounded monthly.56 years C.2 Topic: Annuity time period 6-83 . 48. You want to withdraw $2.97 years B.500 at the beginning of every month. t = 578. Today. You have a total of $411. How long will it be until you run out of money? A.Chapter 06 . 34. You will never run out of money.016 in your retirement savings and have the funds invested such that you expect to earn an average of 7. 31.Discounted Cash Flow Valuation 56. on this money throughout your retirement years.03 year D.19 years AACSB: Analytic Bloom's: Application Difficulty: Intermediate Learning Objective: 6-2 Section: 6.10 percent.

The interest rate is 21. 264.500 and only one company will even deal with them. The first payment is due today.43 days D.Discounted Cash Flow Valuation 57. 280. A. 316. compounded daily.9 percent. Gene's Art Gallery is notoriously known as a slow-payer.81 days C. What is the time period of this loan? Assume a 365 day year.2 Topic: Annuity time period 6-84 .46 days E.09 days AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.36 days B. 300. 341. The terms of the loan call for daily payments of $100. The firm currently needs to borrow $27.Chapter 06 .

Chapter 06 .Discounted Cash Flow Valuation 58. 6.28 percent D. 7.04 percent C. 7.56 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.41 percent E. 7.832 monthly for 84 months.2 Topic: Interest rate 6-85 . What is the rate of return on this project? A.97 percent B. The Wine Press is considering a project which has an initial cash requirement of $187. The project will yield cash flows of $2.400. 7.

5.20 percent D. What is the rate of return on this investment? A.45 percent E. 6.Discounted Cash Flow Valuation 59. 6.97 percent C.67 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.225 a month for the next 30 years. your agent promises that you will receive payments of $1.2 Topic: Interest rate 6-86 .Chapter 06 . 5.75 percent B. Your insurance agent is trying to sell you an annuity that costs $200. By buying this annuity. 6.000 today.

Chapter 06 . your investment account is worth $73.23 percent C. What is your average rate of return on your investments? A.41 percent E.Discounted Cash Flow Valuation 60. 9.94 percent B. You have been investing $250 a month for the last 13 years. 9. 9.78 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.36 percent D. 9. 8.2 Topic: Interest rate 6-87 . Today.262.

Chapter 06 .100.2 Topic: Interest rate 6-88 .24 percent C. 14. Will has been purchasing $25.37 percent E.Discounted Cash Flow Valuation 61.13 percent B. What is his annual rate of return on this stock? A.000 worth of New Tek stock annually for the past 11 years. 14. 14.68 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. 14. His holdings are now worth $598.29 percent D. 14.

98 percent E.2 Topic: Interest rate 6-89 .12 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. 5." Today completes your 17th year of saving and you now have $6.91 in this account.30 percent C.Discounted Cash Flow Valuation 62.15 percent B. 5. What is the rate of return on your savings? A. 5.528. He always made you deposit the money into your savings account on the first day of each month just to "start the month out right. 5. 6.Chapter 06 . Your father helped you start saving $20 a month beginning on your 5th birthday.47 percent D.

Today. you decide to save $50 a day.Chapter 06 . 13.67 percent B.85 percent C. In an attempt to reach this goal. 12.54 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. Your birthday wish is that you will be a millionaire by your 40th birthday.Discounted Cash Flow Valuation 63. 10.06 percent E. 11. you turn 23. every day until you turn 40. You open an investment account and deposit your first $50 today. What rate of return must you earn to achieve your goal? A.2 Topic: Interest rate 6-90 .90 percent D. 13.

You just settled an insurance claim. $82. $80.14 E.76 C.408. $84. The first payment will be paid one year from now in the amount of $10. $76. What is the value of this settlement to you today if you can earn 8 percent on your investments? A.192.5 percent annually.000.141.16 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.2 Topic: Growing annuity 6-91 .Discounted Cash Flow Valuation 64. The settlement calls for increasing payments over a 10-year period.023. The following payments will increase by 4.008. $85.05 D.28 B.Chapter 06 .

$41. $31.908.666. You just won a national sweepstakes! For your prize. What is your inheritance worth to you today if you can earn 9. $43. you opted to receive never-ending payments. What is the present value of your prize at a discount rate of 8 percent? A.464. $300. You will receive the first payment one year from now in the amount of $4.121.00 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.000.5 percent annually.12 E. $36. Every year after that.12 E. Your grandfather left you an inheritance that will provide an annual income for the next 10 years.78 D.2 Topic: Growing annuity 66. Every year thereafter.Discounted Cash Flow Valuation 65.699.17 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.21 D.15 B.500 and will be paid one year from today. The first payment will be $12. the payments will increase by 3. $46.666.409. $277.67 C.5 percent on your investments? A.777. $248. the payment amount will increase by 6 percent. $291.006.67 B.19 C.Chapter 06 .000.2 Topic: Growing perpetuity 6-92 . $166.

Southern Tours is considering acquiring Holiday Vacations. $220. The scholarship fund will last indefinitely. Management believes Holiday Vacations can generate cash flows of $187. The first scholarships will be granted one year from now for a total of $35. $1.2 Topic: Growing perpetuity 68.200.450.Discounted Cash Flow Valuation 67. $601. A wealthy benefactor just donated some money to the local college.5 percent to help offset the effects of inflation. $750. and $245.000 C.920 D. respectively.750 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6.000 E.1 Topic: Present value 6-93 . $638.000 D. What is Southern Tours willing to pay today to acquire Holiday Vacations? A.000.5 percent rate of return is applicable to this potential acquisition. they feel the business will be worthless.000 over the next three years.098 B.400. After that time. This gift was established to provide scholarships for worthy students.226 E. What is the value of this gift today at a discount rate of 8 percent? A. the scholarship amount will be increased by 5. $538. $503.615 C. $545.Chapter 06 .407 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. Southern Tours has determined that a 13.500 B. Annually thereafter. $1. $1. $437.000.000.

080 E. respectively. $2. The other option is to save one lump sum amount today.000 at the end of each year for the next three years.100.260 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. $4.4 percent rate of return.1 Topic: Present value 6-94 . and $3.Chapter 06 . regardless of the savings method you select. $5.410 B. how much do you need to save today if you select the lump sum option? A.600 D.Discounted Cash Flow Valuation 69. $4. Both options offer a 7.530 C. The first option is to save $900. You are considering two savings options. $4. $5. If you want to have the same balance in your savings account at the end of the three years.

$29. and $12.1 Topic: Present value 6-95 .407 C. Your parents have made you two offers.000 at the end of each of the next three years. $11.000.367 D. $30. $30. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. The other offer is the payment of one lump sum amount today.216 B. $29. The first offer includes annual gifts of $10.Chapter 06 . respectively.691 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.000. $28.439 E.Discounted Cash Flow Valuation 70. What is the minimum amount that you will accept today if you are to select the lump sum offer? A.

000. What is this offer worth to you today at a discount rate of 6. and $8.333 D. $16. All salary payments are made as lump sum payments at the end of each year. $15.75 percent? A.1 Topic: Present value 72. respectively. What is the present value of these cash flows.877 B. respectively. You are considering a project which will provide annual cash inflows of $4.406 B.847 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. A potential employer just offered you an annual salary of $41. $117.388 E.700. and $46.500. $121. $112. $115.500 payable immediately.212 E. $5. given a 9 percent discount rate? A.697 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. You are considering changing jobs.Discounted Cash Flow Valuation 71. $15.000. $134.000 a year for the next three years. $44. Your goal is to work for three years and then return to school full-time in pursuit of an advanced degree.1 Topic: Present value 6-96 .545 C. The offer also includes a starting bonus of $2.429 D.103 C.000 at the end of each year for the next three years.Chapter 06 . $16. $14.

$52. The first offer is for $89. which offer should you accept and why? A. B.000. $151.500 today in cash.554 B. respectively.000 two years from today.500 today because it has the lower future value. If the applicable discount rate is 11. $142. E. C. $156. You should accept the $89. You have some property for sale and have received two offers.Discounted Cash Flow Valuation 73.5 percent. D.307 C. $133.5 percent discount rate? A. You just signed a consulting contract that will pay you $35.000 today and an additional $70.000.500 today because it has the higher net present value.1 Topic: Present value 6-97 . $148. AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. The second offer is the payment of $35. You should accept the second offer because it has the larger net present value.910 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. It does not matter which offer you accept as they are equally valuable.Chapter 06 .880 D. You should accept the first offer as it has the greatest value to you.131 E. and $80. You should accept the $89. What is the present value of these cash flows given a 10.1 Topic: Present value 74.000 annually at the end of the next three years.

$30. $56.792 E. and a final payment of $45. $56. it is adding another $12. What is the cost of this vacation in today's dollars if the discount rate is 9.376 B.919 C. How much will be available when it is ready to buy the equipment.1 Topic: Future value 6-98 .408 B. Deltona Motor Parts deposited $16. $91.500 in an investment account for the purpose of buying new equipment three years from today.021 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-1 Section: 6.Chapter 06 . $53. Today.000 to this account.478 AACSB: Analytic Bloom's: Application Difficulty: Intermediate Learning Objective: 6-1 Section: 6.75 percent? A.000 to the account one year from today.1 Topic: Present value 76. $93. $89.Discounted Cash Flow Valuation 75. $91.000 today.000 one year from today. $53.695 C. assuming the account pays 5. Your local travel agent is advertising an upscale winter vacation package for travel three years from now to Antarctica.407 E.000 on the day you depart three years from today. The company plans on making a final deposit of $20. $58.211 D. $86. One year ago.5 interest? A.219 D. The package requires that you pay $25.

200 this year. nothing next year.526.1 Topic: Future value 6-99 .50 E. and $12.57 C.12 B.528. $33.255 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-1 Section: 6.1 Topic: Future value 78. $32.500 each year starting at the end of year one. $13. $13.779. $35.5 percent on your funds? A.907. What is the future value of these cash flows at the end of year five if the interest rate is 7 percent? A. You will deposit these amounts into your investment account at the end of each year.11 D.800.411 E. $14. $8.700. $32. What will your investment account be worth at the end of year three if you can earn 8. $14.40 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-1 Section: 6.Discounted Cash Flow Valuation 77. Lucas will receive $6.Chapter 06 .500 the following year.883 D. You plan on saving $5.907 C. and $7. $36.621. $13.418 B.

231.457 C. $1.000. $989.147. Year 2 = $35.509 E.000.Discounted Cash Flow Valuation 79. $1. All of this money will be saved for her retirement. how much will she have in her account 25 years after making her first deposit? A.311 D. If she can earn an average of 10.776 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. $1.5 percent on her investments.006.Chapter 06 . Year 3 = $12.373 B. $972.1 Topic: Future value 6-100 .000. Miley expects to receive the following payments: Year 1 = $60.

Chapter 06 .95 B. The company is opening a savings account so that the entire amount will be available when this debt needs to be paid. starting one year from today.56 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. $20.400. has a $75. $31.Discounted Cash Flow Valuation 80. Inc. Blackwell.000 liability it must pay three years from today.1 Topic: Future value 6-101 .076.78 E. $18. The account pays a 4.487.072. $24. The plan is to make an initial deposit today and then deposit an additional $15.33 D.000 each year for the next three years. How much does the firm need to deposit today? A. $21.5 percent rate of return.299.91 C.

500. Wicker Imports established a trust fund that provides $90. The trust fund earns a fixed 6 percent rate of return. $515.000.06 B.71 E.000.333 D.00 C.572. $422.737.000 in scholarships each year for needy students.1 Topic: Future value 82.150.497.2 Topic: Perpetuity present value 6-102 .000 E. The government has imposed a fine on the Corner Tavern. The government plans to invest the funds until the final payment is collected and then donate the entire amount.200.000 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. to help the local community shelter. $458.000.25 percent on the funds held.Discounted Cash Flow Valuation 81.333. $366. $349. $1. How much will the community shelter receive four years from today? A.Chapter 06 . over the next four years.674. The first payment is due one year from today. $1.000. including the investment earnings. $75. The government will earn 6. $1.56 D. and $50. $1. $1.67 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.875. $100. How much money did the firm contribute to the fund assuming that only the interest income is distributed? A.600. respectively. The fine calls for annual payments of $150.000 C.000 B.

300.500. $2.000 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6. $18.13 D.000 a year forever for your heirs.458.48 B. $2. A preferred stock pays an annual dividend of $2. $20.2 Topic: Perpetuity present value 84. $28. $22.60. You would like to establish a trust fund that will provide $120.121.80 E.957 B.75 percent? A. $2.2 Topic: Perpetuity present value 6-103 . The trust fund is going to be invested very conservatively so the expected rate of return is only 5.Chapter 06 . What is one share of this stock worth today if the rate of return is 11.122 E.75 percent.086. How much money must you deposit today to fund this gift for your heirs? A.55 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-1 Section: 6.Discounted Cash Flow Valuation 83. $2.212 C. $2. $30.00 C.000 D.

25 percent B.10 percent E. 5.80 percent C.Discounted Cash Flow Valuation 85. 5. 4. 6.00 percent D.50 percent C. 5.Chapter 06 .000 a year forever.2 Topic: Perpetuity 86. You grandfather won a lottery years ago. What is the rate of return? A. 5. 6.75 percent B.75 percent D. 5. The value of his winnings at the time was $50. You just paid $750.400 a year to his heirs forever.000.000 for an annuity that will pay you and your heirs $45. 4.15 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. 5. What rate of return are you earning on this policy? A.25 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. He invested this money such that it will provide annual payments of $2.00 percent E.2 Topic: Perpetuity rate 6-104 .

95 percent B. Your credit card company charges you 1.95 C. 21.90 percent D.65 percent interest per month.3 Topic: Annual percentage rate 6-105 .80 B.10 D.25 percent E.80 percent C.25 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $3.0165 × 12 = 19. 21.70 percent APR = 0.Discounted Cash Flow Valuation 87. 19. What is the amount of the annual dividend? A. $2. 18. 20. $3.2 Topic: Annuity payment 88.30 × 0. The preferred stock of Casco has a 5.40 C = $59.25 E.48 percent dividend yield.80 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. $3.30 per share.Chapter 06 .0548 = $3. The stock is currently priced at $59. What is the annual percentage rate on your account? A. $2.

The interest is compounded monthly.31 percent APR = 0.3 Topic: Annual percentage rate 6-106 . 18.3 Topic: Annual percentage rate 90.64 percent E. 9.18 percent D. What is the annual percentage rate on a loan with a stated rate of 2.00 percent C. What is the annual percentage rate on this account? A.25 percent D. 9.27 percent E. 9. 19.0225 × 4 = 9. 18.09 percent C.Chapter 06 .50 percent B.00 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. 9.00 percent B.00 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. 18.Discounted Cash Flow Valuation 89.25 percent per quarter? A. 9.974 percent on your credit card. 17. You are paying an effective annual rate of 18.

9.3 Topic: Effective annual rate 92.72 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6.3 Topic: Effective interest rate 6-107 . 19. What is the effective annual rate if a bank charges you 9.Discounted Cash Flow Valuation 91. 19.9 percent.57 percent E.72 percent D.50 percent compounded quarterly? A.84 percent E. 9. 19. 9.62 percent B. 9. 19.91 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6.Chapter 06 .68 percent C.03 percent B. 19. 9.44 percent D. What is the actual rate of interest you are paying? A. Your credit card company quotes you a rate of 17.21 percent C. Interest is billed monthly.

68 percent. Loan A offers a rate of 7.3 Topic: Effective annual rate 94. 23.32 percent C.06 percent. What is the actual rate being charged on these loans? A. compounded daily. 23. E.Discounted Cash Flow Valuation 93. A. The Pawn Shop loans money at an annual rate of 21 percent and compounds interest weekly. the effective annual rate is 8. Loan B offers a rate of 8 percent. 23. compounded semi-annually.3 Topic: Effective annual rate 6-108 . The loans are equivalent offers so you can select either one. B. 23.75 percent. B.Chapter 06 . The terms of the two loans are equivalent with the exception of the interest rates. the annual percentage rate is 7. B.16 percent B. C.64 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. You are considering two loans. the effective annual rate is 8.16 percent. AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-4 Section: 6.75 percent. 23.56 percent E. the annual percentage rate is 7.49 percent D. D. Which loan should you select and why? A. A.

compounded continuously E. Which bank should you select if your goal is to maximize your interest income? A.Discounted Cash Flow Valuation 95. 3. 3. There are five banks located in your area.20 percent.26 percent. are given below. compounded annually B. compounded semi-annually D. 3. 3. You have $5.25 percent. respectively.15 percent. compounded quarterly EARA = 3. AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-4 Section: 6.10 percent. The rates paid by banks A through E.3 Topic: Effective annual rate 6-109 . compounded monthly C.26 percent Bank C offers the highest effective annual rate at 3.276 percent.Chapter 06 .600 that you want to use to open a savings account. 3.

29 percent D.84 percent E. 10.24 percent C.3 Topic: Continuous compounding 6-110 . 15.75 percent compounded continuously? A. What is the effective annual rate of 14.47 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. 16.3 Topic: Continuous compounding 97. 10.9 percent compounded continuously? A.Chapter 06 .33 percent E.69 percent D. 10.17 percent B. What is the effective annual rate of 9.59 percent B. 10. 15.07 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6. 10. 15. 15.62 percent C.Discounted Cash Flow Valuation 96.

06 percent B.14 C. $1. You are going to loan a friend $900 for one year at a 5 percent rate of interest. $1. What is the maximum rate the bank can actually earn based on the quoted rate? A. $1. 8. compounded annually.75 percent annual percentage rate on its loans.Discounted Cash Flow Valuation 98.41 Additional interest = $900 × (0.0.58 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-4 Section: 6.3 Topic: Continuous compounding 99.14 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-4 Section: 6. How much additional interest could you have earned if you had compounded the rate continuously rather than annually? A.97 B.26 percent E.3 Topic: Interest compounding 6-111 . 8.36 E. 8. $0. 8.14 percent C.Chapter 06 . City Bank wants to appear competitive based on quoted loan rates and thus must offer a 7. 8. $1.21 percent D.05) = $1.0512711 .23 D.

4 Topic: Pure discount loan 6-112 .401.877. You are borrowing money today at 8. compounded annually.800 two years from today.Discounted Cash Flow Valuation 100.00 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-2 Section: 6. $10. $11. $11.Chapter 06 .900.48 percent. $9.16 C. How much are you borrowing? A.16 E. $10. You will repay the principal plus all the interest in one lump sum of $12.00 B.04 D.250.211.

How much will you have to repay? A. you borrowed $3.006. $12.000.441. $13. 9.08 E. 8.01 percent B.500 at 7.78 percent D. 8.911.65 percent annual interest.13 C.89 D. $12.93 percent AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6. you borrowed $9.808.4 Topic: Pure discount loan 6-113 . $12.400.757. $13. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today.45 percent C. On this date last year.Chapter 06 .20 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6. You have to repay the loan principal plus all of the interest six years from today. 9. This morning.Discounted Cash Flow Valuation 101.4 Topic: Pure discount loan 102. 8.92 B. What is the interest rate on this loan? A.47 percent E. The payment that is required at that time is $6.

08) = $96.25 percent from your local bank.264 D. four-year loan at 5.000.890 C. John's Auto Repair just took out an $89.250 Payment in year 2 = $18.4 Topic: Interest-only loan 104. $5.120 Payment in year 10 = $89. Payments are made annually.000 E. $96. 8 percent.850 C.000 + ($89. $7.0525 = $945 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6.120 B.000 on an interest-only. interest-only loan from the bank. $945 B. On the day you entered college. $89. $6. $13. you borrowed $18.120 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6. What is the amount of your loan payment in year 2? A.Discounted Cash Flow Valuation 103. 10-year.Chapter 06 . $3. $8.106 E. What is the amount of the loan payment in year 10? A. Payments are to be paid annually.600 D.000 × 0.4 Topic: Interest-only loan 6-114 . $1.000 × 0.

11 Total interest paid = $25.21 E.) A.500 at 6.937.00 C.50 D.607.0475 × 5 = $5. $1.529.20 B.000 × 0. $6.44 D. $5. $1. You just acquired a mortgage in the amount of $249.Discounted Cash Flow Valuation 105. $925.67 B.403.400. $5.4 Topic: Interest-only loan 106. $1.266.75 percent.000 from your local bank. $6.548. On the day you entered college you borrowed $25. Equal payments are to be made at the end of each month for thirty years. $5. How much of the first loan payment is interest? (Assume each month is equal to 1/12 of a year.206.50 AACSB: Analytic Bloom's: Application Difficulty: Basic Learning Objective: 6-3 Section: 6. Assume that you complete college in four years.60 Interest portion of first loan payment = AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-3 Section: 6. The terms of the loan include an interest rate of 4. How much total interest will you pay on this loan? A. Interest is to be paid annually at the end of each year.Chapter 06 . compounded monthly.00 E.511.75 percent interest. The terms stipulate that the principal is due in full one year after you graduate.4 Topic: Amortized loan 6-115 . $1.937.16 C.

The first payment is due on July 1.) A. $1.056. $1.Discounted Cash Flow Valuation 107.32 B.56 D.358. you borrowed $212. The mortgage rate is 8.14 C.000 to buy a house. The loan is to be repaid in equal monthly payments over 15 years.38 E. $698.Chapter 06 . How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.453. On June 1. $603.70 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-3 Section: 6.2 Topic: Amortized loan 6-116 .25 percent. $2.

2 Topic: Amortized loan 6-117 .Discounted Cash Flow Valuation 108. This morning. $925. you borrowed $150. $1.61 C.Chapter 06 . The first payment is due one month from today.67 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-3 Section: 6. The mortgage rate is 7.) A.194. How much of the second payment applies to the principal balance? (Assume that each month is equal to 1/12 of a year.000 to buy a house. $277.84 B. $268. $917.06 D. The loan is to be repaid in equal monthly payments over 20 years.35 percent.83 E.

Feedback: Refer to section 6.1.2 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-2 Section: 6. Of the two.000 over the life of the annuity. Feedback: Refer to section 6. where r is the rate per period and n is the number of periods per year. The effective annual rate will always be higher than the annual percentage rate as long as the account is compounded more than once a year and the interest rate is greater than zero. then both annuities have equal values as both would have a current value of $20. The EAR considers compounding and is computed as (1 + r)n . Explain the difference between the effective annual rate (EAR) and the annual percentage rate (APR). both of which pay a total of $20.2 Topic: Annuity present value 6-118 . Annuity A will have the greater value. If the discount rate is zero. As long as the discount rate is positive. The EAR has greater importance because it is the actual cost of a loan.3 Topic: Annual and effective rates 110. The EAR is the equivalent rate based on annual compounding.000 at the end of each year for the next 10 years.000.Chapter 06 . which one has the greater importance and why? The APR is a stated rate and is computed as (r × n). You are considering two annuities.3 AACSB: Reflective thinking Bloom's: Analysis Difficulty: Intermediate Learning Objective: 6-4 Section: 6. Annuity A pays $2. where r is the rate per period and n is the number of periods per year. Which annuity has the greater value today? Is there any circumstance where the two annuities would have equal values as of today? Explain. Annuity B pays $1.000 at the end of each year for the next 20 years.Discounted Cash Flow Valuation Essay Questions 109.

Discounted Cash Flow Valuation 111.Chapter 06 . Feedback: Refer to section 6. which would be cheaper? The borrower might need the entire principal amount for the length of the loan period. Why might a borrower select an interest-only loan instead of an amortized loan.4 Topic: Loan repayment 6-119 .4 AACSB: Reflective thinking Bloom's: Synthesis Difficulty: Intermediate Learning Objective: 6-3 Section: 6. With an amortized loan. the principal amount is repaid over the loan term and thus the borrower does not have all of the loan proceeds available for his or her use during the loan term.

000 .000 at the end of each year.$80.02 Feedback: Refer to section 6.98 = $69. the offer will most likely be worth less than 50 percent of the perpetuity's total value.2 Topic: Perpetuity and annuity values 6-120 .2 AACSB: Analytic and reflective thinking Bloom's: Evaluation Difficulty: Intermediate Learning Objective: 6-2 Section: 6.520.Discounted Cash Flow Valuation 112. (Assuming a normal rate of interest.) Here's an example that can be used to explain this answer using an assumed 8 percent rate of interest. You should determine the present value of the perpetuity and also the present value of the first 10 payments at your discount rate. Kristie owns a perpetuity which pays $12. The difference between the two values is the maximum amount you should pay for this offer. She comes to you and offers to sell you all of the payments to be received after the 10th year. Explain how you can determine the value of this offer.Chapter 06 .479. Value of offer at 8 percent = $150.

$4.228.666.542.901. What is the amount of your annual loan payment? A. Western Bank offers you a $21.Discounted Cash Flow Valuation Multiple Choice Questions 113.53 percent D. $4.72 percent E. 9.18 E. $4. 6-year term loan at 8 percent annual interest. $4. what interest rate is the bank required to report to potential borrowers? A. The bank uses daily compounding on its loans.00 percent APR = 365 × [(1 + 0.67 D.50 B.38 percent C.000. First Century Bank wants to earn an effective annual return on its consumer loans of 10 percent per year. $5.2 Topic: Loan payment 114.10)1/365 .311.62 C. 9.23 percent B. 10.Chapter 06 . By law.53 percent AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-15 Learning Objective: 6-4 Section: 6.07 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 6-9 Learning Objective: 6-2 Section: 6. 9.3 Topic: Interest rate 6-121 . 9.1] = 9.

4 percent compounded daily on its savings accounts.086/12)]12 . You deposit $8. 8.06 C. 8.336. How much will you have in your account 11 years from now? A.09 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 6-17 Learning Objective: 6-1 Section: 6.000 × [1 + (0. $11. and the finance office at the dealership has quoted you an 8.750.95 percent AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 6-20 Learning Objective: 6-4 Section: 6.414. You want to buy a new sports coupe for $41.41 percent C.6 percent APR loan compounded monthly for 48 months to buy the car. $12.Chapter 06 .95 percent EAR = [1 + (. $12. $11. 8.3 Topic: Effective interest rate 6-122 .000 today.Discounted Cash Flow Valuation 115. 8.628.28 percent B. $12.204.1 = 8.87 percent E.72 percent D.1 Topic: Future value 116.81 E.09 B.628. 8. What is the effective interest rate on this loan? A.034/365)]11 × 365 = $11.714. Downtown Bank is offering 3.50 D.14 FV = $8.

How much do you need to have in your account today to meet your expense needs over the next 4 years? A.00 D.847.500 each quarter from your bank account to cover college expenses over the next 4 years. $21.068. Beginning three months from now.44 B. $22.15 C.09 E.Chapter 06 .Discounted Cash Flow Valuation 117.454. you want to be able to withdraw $1.630.711. $22. $21. $22.1 Topic: Present value 6-123 .25 percent interest per quarter.18 AACSB: Analytic Bloom's: Application Difficulty: Basic EOC #: 6-26 Learning Objective: 6-1 Section: 6. The account pays 1.

$3.904. $3.97 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-32 Learning Objective: 6-2 Section: 6.Chapter 06 . When you retire. you will combine your money into an account with a 5 percent return. $3. $2.100 a month in a stock account and $500 a month in a bond account.636.113.Discounted Cash Flow Valuation 118.2 Topic: Annuity payment 6-124 .04 E. $2.19 B. You are planning to save for retirement over the next 15 years. The return on the stock account is expected to be 7 percent.008. you will invest $1.406.11 C. and the bond account will pay 4 percent.21 D. To do this. How much can you withdraw each month during retirement assuming a 20-year withdrawal period? A.

$6.47 D.11/12)]40 × 12.000 = C × [{[1 + (0. $201.000. $7. C = $356.000 as your first payment one year from now. $114. $7.22 B. $8.221. $6. How much more will you have to save each month if you wait 10 years to start saving versus if you start saving at the end of this month? A.13 C.811. You can earn an 11 percent annual return.406 E.407 B.57 . What is the present value of your winnings? A.000.29 FVA40 years = $1.2 Topic: Growing annuity 6-125 .372 C.613 D.15 E.2 Topic: Annuity payment 120. $168. The payments will increase in value by 4 percent each year.57 Difference = $356. You want to be a millionaire when you retire in 40 years.$116.906.Chapter 06 .003. You have just won the lottery and will receive $540.11 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-37 Learning Objective: 6-2 Section: 6.28 = $240.11/12)]30 × 12. The appropriate discount rate is 10 percent.29 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-34 Learning Objective: 6-2 Section: 6.000 = C × [{[1 + (0.28 FVA30 years = $1. $79. $240.559. You will receive payments for 26 years. C = $116.Discounted Cash Flow Valuation 119.

01 percent E.67 percent C. 97 B. You want to borrow $47. 8.38 percent B.170 from your local bank to buy a new sailboat.Chapter 06 . into an account that pays 6 percent interest compounded monthly.005. 8.160. You are preparing to make monthly payments of $65.2 Topic: Number of payments 122. 131 t = ln 1.7137/ln 1.Discounted Cash Flow Valuation 121.18 percent AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-41 Learning Objective: 6-2 Section: 6. 9. beginning at the end of this month.82 percent D. How many payments will you have made when your account balance reaches $9. 119 D.2 Topic: Interest rate 6-126 . 9. 8. t = 108 payments AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-40 Learning Objective: 6-2 Section: 6.278? A. 108 C. but no more. What is the highest rate you can afford on a 48-month APR loan? A. You can afford to make monthly payments of $1. 124 E. Assume monthly compounding.

You need a 25-year. What will be the amount of the balloon payment if you are to keep your monthly payments at $850? A.464 B.Discounted Cash Flow Valuation 123.978.5 percent APR for this 300-month loan. with interest compounded monthly.220 AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-42 Learning Objective: 6-2 Section: 6. you can only afford monthly payments of $850.075/12)]25 × 12 = $810.67 = $124.2 Topic: Loan payment 6-127 .33 Balloon payment = $124.480 D.000.021.220 E.978.316 C. $738. $745.$115.000 .33 × [1 + (0. However.315 Remaining principal = $240. $810. fixed-rate mortgage to buy a new home for $240. $767. so you offer to pay off any remaining loan balance at the end of the loan in the form of a single balloon payment.Chapter 06 . Your mortgage bank will lend you the money at a 7. $847.

933.11) .250 E.000/1.750/1.500 PV of missing cash flow = $5. $2.($2.250/1.($1.Discounted Cash Flow Valuation 124.06 × 1.Chapter 06 . What is the value of the missing cash flow? A.($1.500 B.500 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-43 Learning Objective: 6-1 Section: 6. $1.029.86 . The present value of the following cash flow stream is $5.112 = $2.933.1 Topic: Present and future values 6-128 .029. $2.000 D. $2. $1.113) .750 C.06 CF2 = $2.86 when discounted at 11 percent annually.114) = $2.

50 percent Loan amount = $2. 7.000 × 0.3 Topic: Effective annual rate 126.87 percent B.57 percent E.000.000 to produce today.80 = $2. The asset costs $71.000 × (1 + r)3.000 EAR = [1 + (. 8.000. Consider a firm with a contract to sell an asset 3 years from now for $90.1 = 4.000 purchase price.600.23 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-46 Learning Objective: 6-2 Section: 6. 8. r = 8. You have just purchased a new warehouse.0487/12)]12 . 8.90 percent $90.Discounted Cash Flow Valuation 125.2 Topic: Break-even interest 6-129 .23 percent D. At what rate will the firm just break even on this contract? A.01 percent E. To finance the purchase. 6.080.01 percent C.600.000 = $71. 4. 6. you've arranged for a 30-year mortgage loan for 80 percent of the $2. 5.Chapter 06 . The monthly payment on this loan will be $11.98 percent B. 5.98 percent AACSB: Analytic Bloom's: Analysis Difficulty: Intermediate EOC #: 6-45 Learning Objective: 6-4 Section: 6.46 percent D.25 percent C. 8. What is the effective annual rate on this loan? A.

23 PV = $201.008. Investment B is a 10. You have your choice of two investment accounts.462.5 percent continuously compounded lump sum investment.067.15 = $6.Discounted Cash Flow Valuation 127.36 B.105 ×5 = $119.36 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-47 Learning Objective: 6-1 Section: 6. $124.771. also good for five years. $6.462.115/12)] = $201.87 C.420. Investment A is a 5-year annuity that features end-of-month $2.100 per year.067.206.333. $108.500 payments and has an interest rate of 11.06 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-49 Learning Objective: 6-1 Section: 6.511.23 e-1 × 0.33 D.12 E.318.06 C.5 percent compounded monthly.15 FVA = $2.407. What is the present value of $1.Chapter 06 . at a discount rate of 10 percent if the first payment is received 6 years from now and the last payment is received 28 years from now? A. $6.2 Topic: Present value 128.67 B.115/12)]5 × 12 -1}/(0. How much would you need to invest in B today for it to be worth as much as investment A five years from now? A. $6. $6.17 E.54/1.176.500 × [{[1 + (0.3 Topic: Present value 6-130 .08 PV = $9. $119. $6.138. $131.08 D. $129.176.

053.000. What will your monthly payment be? A.2 Topic: Perpetuity present value 130. $6.Discounted Cash Flow Valuation 129. $1.646.00 E.2 Topic: Annuity due 6-131 .063. what is the value at date t = 9 of a perpetual stream of $500 annual payments that begins at date t = 17? A.109. $6.30 E.307.646.01 D.08 = $6.78 D.19 C. $1.250. $3.Chapter 06 . $4.81 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-50 Learning Objective: 6-1 Section: 6.058.81 B. $1. compounded monthly.250 PVt = 9 = $6.87 C. $4.250/1.11 AACSB: Analytic Bloom's: Application Difficulty: Intermediate EOC #: 6-54 Learning Objective: 6-2 Section: 6. You want to buy a new sports car for $55.0816-9 = $3.072. The contract is in the form of a 60-month annuity due at a 6 percent APR.487.047.90 B. Given an interest rate of 8 percent per year. $1.17 PVt = 16 = $500/. $1.

r = 15.000 × 1.79 percent AACSB: Analytic Bloom's: Synthesis Difficulty: Challenge EOC #: 6-62 Learning Objective: 6-4 Section: 6.47 percent C.Chapter 06 .101 = $11.05) = $9.00 percent B.000 = $9. The interest rate quotation in this example requires the borrower to pay 5 points to the lender up front and repay the loan later with 10 percent interest.84 percent Loan amount received = $10. 15.000 $11. The interest rate is quoted as 10 percent plus 5 points. 15.Discounted Cash Flow Valuation 131. 15.000. You are looking at a one-year loan of $10. 15.55 percent D.000 × (1 .. Quotes similar to this one are very common with home mortgages. A point on a loan is simply 1 percent (one percentage point) of the loan amount.4 Topic: Effective rate with points 6-132 .500 × (1 + r)1. 15. What is the actual rate you are paying on this loan? A.79 percent E.500 Loan repayment amount = $10.

which charges an annual rate of 18. 1.24 payments Difference = 10. You plan to make payments of $510 a month on this debt.72 .48 payments C.2 Topic: Number of periods 6-133 .4 percent. You just received an offer in the mail to transfer your $5.9232)/ln 1. Your holiday ski vacation was great.Discounted Cash Flow Valuation 132. How many less payments will you have to make to pay off this debt if you transfer the balance to the new card? A. 2. t = 10.36 payments B.000 balance from your current credit card. 1. to a new credit card charging a rate of 9.7 percent.094/12)] t = ln (1/0.49 payments $5. 0.10.24 = 0.000 = $510 × [(1 .094/12)]}t)/(0. All is not lost. 0. but it unfortunately ran a bit over budget.10 payments D.007833.Chapter 06 .48 payments AACSB: Analytic Bloom's: Analysis Difficulty: Challenge EOC #: 6-67 Learning Objective: 6-2 Section: 6.{1 + (0.23 payments E.

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