Chapter 2

Practice Quiz 1

1. Washington-Atlantic invests $4 million to clear a tract of land and to set our some
young pine trees. The trees will mature in 10 years, at which time Washington-
Atlantic plans to sell the forest at an expected price of $8 million. What is
Washington-Atlantic’s expected rate of return?
A. 8.12%
B. 7.18%-ANSWER
C. 6.43%
D. 8.04%

2. To complete your last year in business school and then go through law school,
you will need $10,000 per year for 4 years, starting next year. Your rich uncle
offers to put you through school, and he will deposit in a bank paying 7% interest,
compounded annually, a sum of money that is sufficient to provide the 4
payments of $10,000 each. His deposit will be made today. How large must the
deposit be?
A. $44,399.43
B. $67,744.23
C. $33,872.11-ANSWER
D. 29,847.83

3. Using the information from the question above, how much will be in the account
immediately after you make the first withdrawal?
A. $37,507.39
B. $62,486.33
C. $29,847.83
D. $26,243.04-ANSWER

4. What is the present value of a perpetuity of $100 per year if the appropriate
discount rate is 7%?
A. $933.46
B. $714.29
C. $1,212.48
D. $1,428.57-ANSWER

5. Using the information from the question above, if interest rates in general were to
double and the appropriate discount rate rose to 14%, what would happen to the
present value of the perpetuity?
A. When the interest rate is doubled, the PV of the perpetuity is doubled.
B. When the interest rate is doubled, the PV of the perpetuity remains the same.
C. When the interest rate is doubled, the PV of the perpetuity is halved.-ANSWER
D. When the interest rate is doubled, the PV of the perpetuity is quadrupled.