Essentials of Corporate Finance 9th Edition Ross By Jordan Professor, Bradford D - Test Bank

Essentials of Corporate Finance 9th Edition Ross By Jordan Professor, Bradford D – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

1. Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?
2. Perpetuity
3. Annuity
4. Consol
5. Lump sum
6. Present value

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

2. Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?
3. Ordinary annuity
4. Annuity due
5. Consol
6. Ordinary perpetuity
7. Perpetuity due

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

3. The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are:
4. an ordinary annuity.
5. an annuity due.
6. amortized payments.
7. a perpetuity.
8. a perpetuity due.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities.

Topic: Perpetuities

4. A perpetuity in Canada is frequently referred to as:
5. a consul.
6. an infinity.
7. forever cash.
8. a dowry.
9. a forevermore.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

5. The stated interest rate is the interest rate expressed:
6. as if it were compounded one time per year.
7. as the quoted rate compounded by 12 periods per year.
8. in terms of the rate charged per day.
9. in terms of the interest payment made each period.
10. in terms of an effective rate.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Stated interest rate

 

6. Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:
7. annual percentage rate.
8. simplified rate.
9. quoted rate.
10. stated rate.
11. effective annual rate.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

7. Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
8. . annual percentage rate.
9. compounded rate.
10. effective annual rate.
11. perpetual rate.
12. simple rate.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

8. All else held constant, the present value of an annuity will decrease if you:
9. increase the annuity’s future value.
10. increase the payment amount.
11. increase the time period.
12. decrease the discount rate.
13. decrease the annuity payment.

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Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

9. Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 percent

interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?

1. The present value of the car is equal to $500 + (36 ×$450).
2. The $500 is the present value of the purchase.
3. The car loan is an annuity due.
4. To compute the initial loan amount, you must use a monthly interest rate.
5. The future value of the loan is equal to 36 ×$450.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

10. Which statement is true?
11. All else equal, an ordinary annuity is more valuable than an annuity due.
12. All else equal, a decrease in the number of payments increases the future value of an annuity due.
13. An annuity with payments at the beginning of each period is called an ordinary annuity.
14. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
15. ..All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.

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Blooms: Understand

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

11. Which one of the following is the annuity present value formula?
12. C ×({1 – [1/(1 + r)t]}/r)
13. C ×({1 – [1/(1 + r)t]} –r)
14. C ×({1 – [r/(1 + r)t]}/r)
15. C ×({1 – [1/(1 ×r)t]} ×r)
16. C ×({1 – [r/(1 ×r)t]} ×r)

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

12. Which one of these is a perpetuity?
13. Trust income of $1,200 a year forever
14. Retirement pay of $2,200 a month for 20 years
15. Lottery winnings of $1,000 a month for life
16. Car payment of $260 a month for 60 months
17. Rental payment of $800 a month for one year

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Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

13. Which one of the following can be classified as an annuity but not as a perpetuity?
14. Increasing monthly payments forever
15. Increasing quarterly payments for six years
16. Unequal payments each year for nine years
17. Equal annual payments for life
18. Equal weekly payments forever

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Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

14. Which one of the following statements concerning annuities is correct?
15. The present value of an annuity is equal to the cash flow amount divided by the discount rate.
16. An annuity due has payments that occur at the beginning of each time period.
17. The future value of an annuity decreases as the interest rate increases.
18. If unspecified, you should assume an annuity is an annuity due.
19. An annuity is an unending stream of equal payments occurring at equal intervals of time.

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Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

15. Which one of the following qualifies as an annuity payment?
16. Weekly grocery bill
17. Clothing purchases
18. Car repairs
19. Auto loan payment
20. Medical bills

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Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 ValuingLevel Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

16. Perpetuities have:
17. irregular payments but constant payment periods.
18. equal payments and an infinite life.
19. equal payments and a set number of equal payment periods.
20. less value than comparable annuities.
21. no application in today?s world.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities.

Topic: Perpetuities

 

17. All else held constant, the future value of an annuity will increase if you:
18. decrease both the interest rate and the time period.
19. increase the time period.
20. decrease the present value.
21. decrease the payment amount.
22. decrease the interest rate.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

18. You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years. Annuity B pays $100 at the

beginning of each month for 10 years. The rate of return on both annuities is 8 percent. Which one of the following statements is correct given this information?

1. The present value of Annuity A is equal to the present value of Annuity B.
2. Annuity B will pay one more payment than Annuity A will.
3. The future value of Annuity A is greater than the future value of Annuity B.
4. Annuity B has both a higher present value and a higher future value than Annuity A.
5. Annuity A has a higher future value but a lower present value than Annuity B.

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Blooms: Understand

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

19. Which one of the following features distinguishes an ordinary annuity from an annuity due?
20. Number of equal payments
21. Amount of each payment
22. Frequency of the payments
23. Annuity interest rate
24. Timing of the annuity payments

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Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 ValuingLevel Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

20. Which one of the following is an ordinary annuity, but not a perpetuity?
21. $75 paid at the beginning of each monthly period for 50 years
22. $15 paid at the end of each monthly period for an infinite period of time
23. $40 paid quarterly for 5 years, starting today
24. $50 paid every year for ten years, starting today
25. $25 paid weekly for 1 year, starting one week from today

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 ValuingLevel Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

21. A 30-year home mortgage is a classic example of:
22. a set of unequal cash flows.
23. an ordinary annuity.
24. a perpetuity.
25. an annuity due.
26. a consol.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuities

 

22. You are comparing three investments, all of which pay $100 a month and have an interest rate of 8 percent. One is ordinary

annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options?

1. To be the perpetuity, the payments must occur on the first day of each monthly period.
2. The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years.
3. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.
4. The future value of all three investments must be equal.
5. The present value of all three investments must be equal.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

 

23. Which one of the following has the highest effective annual rate?
24. 6 percent compounded annually
25. 6 percent compounded semiannually
26. 6 percent compounded quarterly
27. 6 percent compounded daily
28. 6 percent compounded every 2 years

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

24. Assume all else is equal. When comparing savings accounts, you should select the account that has the:
25. lowest annual percentage rate.
26. highest annual percent rate.
27. highest stated rate.
28. lowest effective annual rate.
29. highest effective annual rate.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 ComparingRates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

25. A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
26. will be less than 12.9 percent.
27. can either be less than or equal to 12.9 percent.
28. is 12.9 percent.
29. can either be greater than or equal to 12.9 percent.
30. will be greater than 12.9 percent.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 ComparingRates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

26. Which one of the following statements is correct?
27. The APR is equal to the EAR for a loan that charges interest monthly.
28. The EAR is always greater than the APR.
29. The APR on a monthly loan is equal to (1 + monthly interest rate)¹²– 1.
30. The APR is the best measure of the actual rate you are paying on a loan.
31. The EAR, rather than the APR, should be used to compare both investment and loan options.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Intermediate

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

27. A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:
28. have a one-year term.
29. have a zero percent interest rate.
30. charge interest annually.
31. must be partially amortized with each loan payment.
32. require the accrued interest be paid in full with each monthly payment.

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Intermediate

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

28. Scott borrowed $2,500 today at an APR of 7.4 percent. The loan agreement requires him to repay $2,685 in one lump sum

payment one year from now. This type of loan is referred to as a(n):

1. A. interest-only loan.
2. pure discount loan.
3. quoted rate loan.
4. compound interest loan.
5. amortized loan.

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Blooms: Remember

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Loan payments

 

29. Cindy is taking out a loan today. The cash amount that she is receiving is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?
30. Principal-only
31. Amortized

C . Interest-only

1. Compound
2. Pure discount

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Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Loan payments

 

30. Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?
31. Interest-only
32. Pure discount
33. Compound
34. Amortized
35. Complex

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Loan payments

 

31. Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?
32. Amortized
33. Blended discount
34. Interest-only
35. Pure discount
36. Complex

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Amortization

 

32. Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?
33. Amortized
34. Complex
35. Pure discount
36. Lump sum
37. Interest-only

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

 Section: 5.4 Loan Types and Loan Amortization

Topic: Amortization

 

33. You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain?
34. Interest-only
35. Amortized
36. Perpetual
37. Pure discount
38. Lump sum

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Loan payments

 

34. Suenette plans to save $600 at the end of Year 1, $800 at the end of Year 2, and $1,000 at the end of Year 3. If she earns 3.4 percent on her savings, how much money will she have saved at the end of Year 3?
35. $2,200.00
36. $2,238.47
37. $2,468.69
38. $2,309.16
39. $2,402.19

 

FV = ($600 ×1.034²) + ($800 ×1.034¹) + $1,000 = $2,468.69

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.1 Future and Present Values of Multiple Cash Flows

Topic: Future value – multiple cash flows

 

35. McClary Tires plans to save $20,000, $25,000, $27,500, and $30,000 at the end of each year for Years 1 to 4, respectively. If itearns 3.3 percent on its savings, how much will the firm have saved at the end of Year 4?
36. $107,525.40
37. $108,392.69
38. $111,860.57
39. $107,130.78
40. $110,426.41

 

FV = ($20,000 ×1.033³) + ($25,000 ×1.033²) + ($27,500 ×1.033¹) + $30,000 = $107,130.78

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.1 Future and Present Values of Multiple Cash Flows

Topic: Future value – multiple cash flows

 

36. JK Industries just signed a sales contract with a new customer. JK will receive annual payments in the amount of $62,000, $108,000, $135,000, and $150,000 at the end of Years 1 to 4, respectively. What is this contract worth at the end of Year 4 if the firm earns 4.3 percent on its savings?
37. $497,425.35
38. $402,311.19
39. $466,118.00
40. $485,271.13
41. $478,639.54

 

FV = ($62,000 ×1.043³) + ($108,000 ×1.043²) + ($135,000 ×1.043¹) + $150,000 = $478,639.54

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.1 Future and Present Values of Multiple Cash Flows

Topic: Future value – multiple cash flows

 

37. ST Trucking just signed a $3.8 million contract. The contract calls for a payment of $1.1 million today, $1.3 million one year fromtoday, and $1.4 million two years from today. What is this contract worth today at a discount rate of 8.7 percent?
38. $3,783,648.48
39. $3,480,817.37
40. $2,108,001.32
41. $3,202,223.89
42. $3,202,840.91

 

PV = $1.1m + ($1.3m/1.087) + ($1.4m/1.087²) = $3,480,817.37

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.1 Future and Present Values of Multiple Cash Flows

Topic: Present value – multiple cash flows

 

38. Capstone Investments is considering a project that will produce cash inflows of $11,000 at the end of Year 1, $24,000 in Year 2,and $36,000 in Year 3. What is the present value of these cash inflows at a discount rate of 12 percent?
39. $41,997.60
40. $46,564.28
41. $54,578.17
42. $54,868.15
43. $63,494.54

 

PV = ($11,000/1.12) + ($24,000/1.12²) + ($36,000/1.12³) = $54,578.17

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.1 Future and Present Values of Multiple Cash Flows

Topic: Present value – multiple cash flows

 

39. Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs.Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?
40. Project 1, because the annual cash flows are greater by $4,000 than those of Project 2
41. Project 1, because the present value of its cash inflows exceeds those of Project 2 by $14,211.62
42. Project 2, because the total cash inflows are $72,000 greater than those of Project 1
43. Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33
44. It does not matter as both projects have almost identical present values.

 

PV₁ = $52,000 ×{1 -[1 / (1 + .15)⁶]} / .15 = $196,793.10

PV₂ = $48,000 ×{1 -[1 / (1 + .15)⁸]} / .15 = $215,391.43

Difference = $215,391.43 – 196,793.10 = $18,598.33

 

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

40. Eric is considering an investment that will pay $8,200 a year for five years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 11.2 percent?
41. $17,899.08
42. $27,117.36
43. $20,186.75
44. $30,154.50
45. $18,153.55

 

PV = $8,200 ×{1 – [1 / (1 + .112)⁵]} / .112 = $30,154.50

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

41. How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $42,000 a year for 25 years? She expects to earn an average rate of return of 9.75 percent.
42. $426,580.50
43. $407,419.81
44. $401,533.33
45. $385,160.98
46. $388,683.83

 

PV = $42,000 ×{1 – [1 / (1 + .0975)²⁵]} / .0975 = $388,683.83

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

42. Charlene can afford car payments of $185 a month for 48 months. If the interest rate is 5.65 percent, how much money can she afford to borrow?
43. $7,931.44
44. $7,734.95
45. $7,899.60
46. $8,022.15
47. $8,422.09

 

PV = $185 × (1 – {1 / [1 + (.0565 / 12)]⁴⁸}) / (.0565 / 12) = $7,931.44

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

43. The manager of Gloria’s Boutique has approved Carla’s application for 24 months of credit with maximum monthly payments of $70.If the APR is 14.2 percent, what is the maximum initial purchase that Carla can buy on credit?
44. $1,006.90
45. $1,300.00
46. $1,455.08
47. $1,184.75
48. $1,228.46

 

PV = $70 × (1 – {1 / [1 + (.142 / 12)]²⁴}) / (.142 / 12) = $1,455.08

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

44. Postal Express is considering the purchase of a new sorting machine. The sales quote consists of quarterly payments of $37,200 for five years at 7.6 percent interest. What is the purchase price?
45. $621,380.92
46. $614,184.40
47. $687,418.22
48. $774,311.28
49. $836,267.35

 

PV = $37,200 × (1 – {1 / [1 + (.076 / 4)]²⁰}) / (.076 / 4) = $614,184.40

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

45. You want to purchase a new condominium that costs $287,500. Your plan is to pay 25 percent down in cash and finance the balance over 15 years at 3.75 percent. What will be your monthly mortgage payment including principal and interest?
46. $1,568.07
47. $1,333.33
48. $1,708.16
49. $1,221.43
50. $1,406.11

 

Amount financed = (1 – .25) ×$287,500 = $215,625

PV = $215,625 = C × (1 – {1 / [1 + (.0375 / 12)]¹⁸⁰}) / (.0375 / 12) C = $1,568.07

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

46. Today, you are purchasing a 20-year, 6 percent annuity at a cost of $48,350. The annuity will pay annual payments starting one year from today. What is the amount of each payment?
47. $4,511.08
48. $4,215.37
49. $2,754.40
50. $4,013.20
51. $5,208.19

 

PV = $48,350 = C × {1 – [1 / (1 + .06)²⁰]} / .06 C = $4,215.37

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

47. Kurt wants to have $835,000 in an investment account six years from now. The account will pay .67 percent interest per month.If he saves money every month, starting one month from now, how much will he have to save each month to reach his goal?
48. $9,062.07
49. $9,497.03
50. $8,838.22
51. $8,501.03
52. $8,808.11

 

FV = $835,000 = C ×[(1 + .0067)⁷² – 1] / .0067 C = $9,062.07

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

48. Katie’s Dinor spent $113,800 to refurbish its current facility. The firm borrowed 65 percent of the refurbishment cost at 6.82 percent interest for six years. What is the amount of each monthly payment?
49. $1,108.91
50. $1,282.16
51. $1,333.33
52. $1,254.73
53. $1,087.06

 

Amount borrowed = .65 ×$113,800 = $73,970

PV = $73,970 = C × (1 – {1 / [1 + (.0682 / 12)]⁷²}) / (.0682 / 12)

C = $1,254.73

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

49. Your grandfather started his own business 52 years ago. He opened an investment account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 5.73 percent annually. Today, his account is valued at $289,209.11. How much did your grandfather save every three months assuming he saved the same amount each time?
50. $284.02
51. $328.67
52. $331.09
53. $226.78
54. $262.25

 

FV = $289,209.11 = C ×{[1 + (.0573 / 4)]²⁰⁸ – 1} / (.0573 / 4)

C = $226.78

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

50. Industrial Tools owes you $38,600. This amount is seriously delinquent so you have offered to accept weekly payments for one year at an interest rate of 3 percent to settle this debt in full. What is the amount of each payment?
51. $829.90
52. $818.11
53. $609.18
54. $599.04
55. $753.71

 

PV = $38,600 = C × (1 – {1 / [1 + (.03 / 52)]⁵²}) / (.03 / 52)

C = $753.71

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

51. S&S Furniture is offering a bedroom suite for $3,200. The credit terms are 60 months at $55 per month. What is the interest rate on this offer?
52. 1.22 percent
53. 1.50 percent
54. 1.65 percent
55. 1.15 percent
56. 1.30 percent

 

PV = $3,200 = $55 × (1 – {1 / [1 + (r / 12)]⁶⁰}) / (r / 12)

r = 1.22 percent

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – interest rates and inflation

 

52. Good Guys will pay you $2,500 a year for 10 years in exchange for $31,300 today. What interest rate will you earn on this annuity?
53. 1.67 percent
54. 3.89 percent
55. 5.50 percent
56. 2.55 percent
57. 2.38 percent

 

PV = $31,300 = $2,500 × {1 – [1 / (1 + r)¹⁰]} / r

r = 3.89 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – interest rates and inflation

 

53. City Motors will sell a $15,000 car for $345 a month for 52 months. What is the interest rate?
54. 9.28 percent
55. 8.67 percent
56. 8.53 percent
57. 9.10 percent
58. 8.38 percent

 

PV = $15,000 = $345 × (1 – {1 / [1 + (r / 12)]⁵²}) / (r / 12)

r = 8.38 percent

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – interest rates and inflation

 

54. You have just won the lottery! You can either receive $6,500 a year for 20 years or $100,000 as a lump sum payment today. What is the interest rate on the annuity option?
55. 2.64 percent
56. 1.68 percent
57. 2.20 percent
58. 2.45 percent
59. 1.95 percent

 

PV = $100,000 = $6,500 × {1 – [1 / (1 + r)²⁰]} / r r = 2.64 percent

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – interest rates and inflation

 

55. Recently, you needed money and agreed to sell a car you had inherited at a price of $55,000, to be paid in monthly payments of $1,500 for 42 months. What interest rate did you charge for financing the sale?
56. 7.25 percent
57. 6.50 percent
58. 6.84 percent
59. 7.78 percent
60. 8.33 percent

 

PV = $55,000 = $1,500 × (1 – {1 / [1 + (r / 12)]⁴²}) / r r = 7.78 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – interest rates and inflation

 

56. Overnight Trucking recently purchased a new truck costing $219,800. The firm financed this purchase at 6.6 percent interest with monthly payments of $2,435. How many years will it take the firm to pay off this debt?
57. 11.04 years
58. 9.22 years
59. 11.60 years
60. 10.23 years
61. 10.42 years

 

PV = $219,800 = $2,435 × (1 – {1 / [1 + (.066 / 12)]t}) / (.066 / 12) t = 125.09 months Years = 125.09 / 12 = 10.42 years

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – number of periods

 

57.Cromwell is acquiring some land for $1,200,000 in exchange for semiannual payments of $75,000 at an interest rate of 6.35 percent. How many years will it take Cromwell to pay for this purchase?

11. 11.00 years
12. 12.00 years
13. 11.35 years
14. 10.47 years
15. 11.80 years

 

PV = $1,200,000 = $75,000 × (1 – {1 / [1 + (.0635 / 2)]t}) / (.0635 / 2) t = 22.69 semiannual periods Years = 22.69 / 2 = 11.35 years

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – interest rates and inflation

 

58. So you can retire early, you have decided to start saving $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn 5 percent on your savings, how many years will it be before you can retire?
59. 33.39 years
60. 42.87 years
61. 44.76 years
62. 44.71 years
63. 33.87 years

 

PV = $1,000,000 = $500 × (1 – {1 / [1 + (.05 / 12)]t}) / (.05 / 12) t = 537.18 months Years = 537.18 / 12 = 44.76 years

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – number of periods

 

59. You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 9.3 percent interest. The monthlypayment is only $100. If you accept this offer, how long will it take you to pay off the loan?
60. 5.84 years
61. 5.29 years
62. 6.80 years
63. 6.33 years
64. 7.59 years

 

PV = $5,000 = $100 × (1 – {1 / [1 + (.093 / 12)]t}) / (.093 / 12) t = 63.50 months Years = 63.50 / 12 = 5.29 years

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – number of periods

 

60. Jake owes $3,990 on a credit card with an APR of 13.9 percent. How much more will it cost him to pay off this balance if he makes monthly payments of $50 rather than $60? Assume he does not charge any further purchases.
61. $2,409
62. $2,811
63. $1,648
64. $1,018
65. $3,545

 

PV = $3,990 = $50 × (1 – {1 / [1 + (.139 / 12)]t}) / (.139 / 12) t = 224.16 months PV = $3,990 = $60 × (1 – {1 / [1 + (.139 / 12)]t}) / (.139 / 12) t = 127.72 months Additional cost = (224.16 ×$50) – (127.72 ×$60) = $3,545

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – number of periods

 

61. You owe $6,800on a car loan that has an interest rate of 6.75 percent and monthly payments of $310. You lost your job and your new job pays less, so your lender just agreed to lower the monthly payments to $225 while keeping the interest rate at 6.75 percent. How much longer will it take you to repay this loan than you had originally planned?
62. 10.50 months
63. 11.47 months
64. 9.74 months
65. 12.19 months
66. 18.90 months

 

PV = $6,800 = $310 × (1 – {1 / [1 + (.0675 / 12)]t}) / (.0675 / 12)

t = 23.48 months

PV = $6,800 = $225 × (1 – {1 / [1 + (.0675 / 12)]t}) / (.0675 / 12) t = 33.22 months

Difference = 33.22-23.48= 9.74 months

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – number of periods

 

62. Karley’s setting aside $32,000 each quarter, starting today, for the next three years for an expansion project. How much money will the firm have at the end of the three years if it can earn an average of 5.45 percent on its savings?
63. $428,409.29
64. $414,123.86
65. $390,411.20
66. $419,766.30
67. $362,009.14

 

FV = $32,000 ×{[1 + (.0545 / 4)]¹² – 1} / (.0545 / 4)× [1 + (.0545 / 4)] = $419,766.30

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

63. Janice plans to save $80 a month, starting today, for 20 years. Kate plans to save $80 a month for 20 years, starting one month from today. Both Janice and Kate expect to earn an average return of 5.5 percent on their savings. At the end of the 20 years, Janice will have approximately _____ more than Janice.
64. $159.73
65. $66.67
66. $0
67. $78.14
68. $189.12

 

FVJ = $80 ×{[1 + (.055 / 12)]²⁴⁰ – 1} / (.055 / 12) × [1 + (.055 / 12)] = $35,009.92

FVK = $80 ×{[1 + (.055 / 12)]²⁴⁰ – 1} / (.055 / 12) = $34,850.19

Difference = $35,009.92 -34,850.19 = $159.73

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

64. What is the future value of $25 a week for 40 years at 8.5 percent interest? Assume the first payment occurs at the end of this week.
65. $441,710.03
66. $414,361.08
67. $469,727.15
68. $350,003.14
69. $335,221.18

 

FV = $25 × {[1 + (.085 / 52)]^2,080 – 1} / (.085 / 52) = $441,710.03

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

65. At the end of this month, Les will start saving $200 a month for retirement through his company’s retirement plan. His employer will contribute an additional $.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 8.25 percent on his retirement savings, how much will he have in his retirement account 30 years from now?
66. $589,406.19
67. $401,005.25
68. $540,311.67
69. $470,465.70
70. $503,289.01

 

Total monthly contribution = $200 + (.5 ×$200) = $300

FV = $300 ×{[1 + (.0825 / 12)]³⁶⁰ – 1} / (.0825 / 12) = $470,465.70

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

66. Alexis plans to invest $2,500 a year for 30 years starting at the end of this year. How much will this investment be worth at the end of the 30 years if she earns an average annual rate of return of 9.6 percent?
67. $387,411.26
68. $417,932.11
69. $403,018.90
70. $311,416.67
71. $381,324.92

 

FV = $2,500 ×[(1 + .096)³⁰ – 1] / .096 = $381,324.92

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

67. Kristina started setting aside funds three years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved?
68. $11,542.10
69. $12,388.19
70. $15,209.80
71. $15,366.67
72. $16,023.13

 

FV = $900 × {[1 + (.048 / 4)]¹² – 1} / (.048 / 4) = $11,542.10

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

68. Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?
69. $7,546.70
70. $7,600.00
71. $7,773.10
72. $7,800.00
73. $7,856.25

 

PV = $200,000 = C × (1 – {1 / [1 + (.06 / 2)]⁵⁰}) / (.06 / 2)× [1 + (.06 / 2)]

C = $7,546.70

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

69. Lacey will receive $135,000 a year for 5 years, starting today. If the rate of return is 8.9 percent, what are these payments worth today?
70. $568,346.72
71. $531,019.80
72. $573,323.90
73. $564,009.27
74. $526,468.23

 

PV = $135,000×({1 – [1 / (1 + .089)⁵]} / .089)× (1 + .089)

r = $573,323.90

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

70. You plan to save $200 a month for the next 24 years and hope to earn an average rate of return of 10.6 percent. How much more will you have at the end of the 24 years if you invest your money at the beginning rather than the end of each month?
71. $1,911.29
72. $1,807.70
73. $2,238.87
74. $2,317.82
75. $2,707.27

 

FV = $200 × {[1 + (.106 / 12)]²⁸⁸ – 1} / (.106 / 12) = $262,394.25

Difference = {$262,394.25 × [1 + (.106 / 12)]} – $262,394.25 = $2,317.82

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

71. A local magazine is offering a $2,500 grand prize to one lucky winner. The prize will be paid in four annual payments of $625 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 9 percent on your money?
72. $1,848.18
73. $1,934.24
74. $2,024.82
75. $2,450.14
76. $2,545.54

 

PV = $625×({1 – [1 / (1 + .09)⁴]} / .09) = $2,024.82

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – multiple cash flows

 

72. A preferred stock pays an annual dividend of $4.50. What is one share of this stock worth to you today if you require a rate of return of 11 percent?
73. $56.14
74. $37.98
75. $43.00
76. $40.91
77. $38.56

 

P = $4.50/.11 = $40.91

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

 

73. You would like to establish a trust fund that would provide annual scholarships of $100,000 forever. How much would you have to deposit today in one lump sum to achieve this goal if you can earn a guaranteed 4.5 percent rate of return?
74. $1,678,342
75. $1,800,000
76. $2,413,435
77. $1,620,975
78. $2,222,222

 

P = $100,000/.045 = $2,222,222

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

 

74. Standards Life Insurance offers a perpetuity that pays annual payments of $12,000. This contract sells for $250,000 today. What is the interest rate?
75. 4.80 percent
76. 3.87 percent
77. 4.10 percent
78. 4.21 percent
79. 4.39 percent

 

r = $12,000/$250,000 = .0480, or 4.80 percent

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – interest rates and inflation

 

75. A preferred stock offers a rate of return of 5.45 percent and sells for $78.20? What is the annual dividend amount?
76. $4.26
77. $4.09
78. $3.53
79. $4.50
80. $3.87

 

C = .0545 ×$78.20 = $4.26

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

 

76. Assume your university earns an average rate of return of 5.65 percent on its endowment funds. If a new gift permanently increases annual scholarships by $32,000, what was the amount of the gift?
77. $784,090.91
78. $485,293.05
79. $615,384.62
80. $658,929.38
81. $566,371.68

 

P = $32,000/.0565 = $566,371.68

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

 

77.Kurt will receive $1,200 a month for five years from an insurance settlement. The first payment was received today. If he invests the full amount of each payment at a guaranteed 6.15 percent rate, how much will he have saved at the end of the five years?

3. $76,003.18
4. $88,219.97
5. $91,388.71
6. $84,478.33
7. $95,115.16

 

FV = $1,200 ×({[1 + (.0615 / 12)]⁶⁰ – 1} / (.0615 / 12))× [1 + (.0615)] = $84,478.33

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Future value – annuity

 

78. Anne plans to save $40 a week, starting next week,for ten years and earn a rate of return of 4.6 percent, compounded weekly. After the ten years, she will discontinue saving and invest her account at 6.5 percent, compounded annually. How long from now will it be before she has accumulated a total of $50,000?
79. 10.32 years
80. 21.14 years
81. 15.08 years
82. 11.14 years
83. 20.32 years

 

FV = $40 ×({[1 + (.046 / 52)]⁵²⁰ – 1} / (.046 / 52)) = $26,395.74

FV = $50,000 = $26,395.74 ×(1 + .065)^t

t = 10.32 years

Total time = 10 + 10.32 = 20.32 years

AACSB: Analytical Thinking

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Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – number of periods

 

79. What is the value today of $3,600 received at the end of each year for eight years if the first payment is paid at the end of Year 4 and the discount rate is 12 percent?
80. $11,694.21
81. $12,484.57
82. $12,729.12
83. $15,089.23
84. $14,429.52

 

PV3 = $3,600× ({1 – [1 / (1 + .12)⁸]} / .12) × (1 + .12) = $17,883.50

PV0 = $17,883.50 / (1 + .12)³ = $12,729.12

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

80. You will receive annual payments of $800 at the end of each year for 12 years. The first payment will be received in Year 3. What is the present value of these payments if the discount rate is 7 percent?
81. $5,465.20
82. $6,018.52
83. $6,299.80
84. $5,549.96
85. $6,856.60

 

PV2 = $800× ({1 – [1 / (1 + .07)¹²]} / .07) × (1 + .07) = $6,354.15

PV0 = $6,354.15 / (1 + .07)² = $5,549.96

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

81. What is the effective annual rate of 8.25 percent compounded quarterly?
82. 8.25 percent
83. 8.49 percent
84. 8.38 percent
85. 8.51 percent
86. 8.56 percent

 

EAR = [1 + (.0825 /4)]⁴– 1 = .0851, or 8.51 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

82. What is the effective annual rate of 9.6 percent compounded semiannually?
83. 9.71 percent
84. 9.83 percent
85. 9.79 percent
86. 9.68 percent
87. 9.92 percent

 

EAR = [1 + (.096 /2)]²– 1 = .0983, or 9.83 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

83. Round House Furniture offers credit to its customers at a rate of 1.15 percent per month. What is the effective annual rate of this credit offer?
84. 14.13 percent
85. 13.80 percent
86. 14.41 percent
87. 15.04 percent
88. 14.71 percent

 

EAR = (1 + .0115)¹²– 1 = .1471, or 14.71 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

84. First Bank offers personal loans at 7.7 percent compounded monthly. Second Bank offers similar loans at 7.4percent compounded daily. Which one of the following statements is correct concerning these loans? Assume a 365-day year.
85. The First Bank loan has an effective rate of 7.98 percent.
86. The Second Bank loan has an effective rate of 8.01 percent.
87. The annual percentage rate for the Second Bank loans is 7.68 percent.
88. Borrowers should prefer the loans offered by First Bank.
89. Both banks offer the same effective rate.

 

EAR First Bank = [1 + (.077/12)]¹²– 1 = .0798, or 7.98 percent

EAR Second Bank = [1 + (.074 / 365)]³⁶⁵– 1 = .0768, or 7.68 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

85. What is the effective annual rate of 14.9 percent compounded quarterly?
86. 14.48 percent
87. 14.67 percent
88. 15.23 percent
89. 15.54 percent
90. 15.75 percent

 

EAR = [1 + (.149/4)]⁴– 1 = .1575, or 15.75 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

86. A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?
87. 13.53 percent
88. 13.59 percent
89. 13.96 percent
90. 14.07 percent
91. 14.10 percent

 

EAR = .1440 = [1 + (APR/12)]¹²– 1

APR = .1353, or 13.53 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

87. An amortized, 3-year loan has annual payments and an effective annual rate of 14.56 percent. What is the APR?
88. 13.09 percent
89. 13.46 percent
90. 13.90 percent
91. 14.56 percent
92. 14.82 percent

 

The APR equals the EAR when interest rate compounding is annual.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

88. Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?
89. 11.88 percent
90. 12.00 percent
91. 12.16 percent
92. 16.00 percent
93. 16.28 percent

 

APR = 1.00 ×12 = 12 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

89. Walker’s charges a daily rate of .049 percent on its store credit cards. What interest rate is the company required by law to report to potential customers? Assume each quarter has exactly 91.25 days.
90. 15.98 percent
91. 17.89 percent
92. 16.67 percent
93. 17.45 percent
94. 16.65 percent

 

APR = .049 percent ×365 = .1789, or 17.89 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

90. Dixie’s Markets offers credit to its customers and charges interest of 1.2 percent per month. What is the effective annual rate?
91. 15.39 percent
92. 14.61 percent
93. 15.10 percent
94. 15.51 percent
95. 15.73 percent

 

EAR = (1 + .012)¹²– 1 = .1539, or 15.39%

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

91. Sporting Goods charges .85 percent interest per month. What rate of interest are its credit customers actually paying?
92. 11.00 percent
93. 11.92 percent
94. 10.26 percent
95. 9.31 percent
96. 10.69 percent

 

EAR = (1 + .0085)¹²– 1 = .1069, or 10.69 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

92. Today, you are borrowing $7,800 to purchase a car. What will be your monthly payment if the loan is for four years at 6.45 percent interest?
93. $208.40
94. $221.50
95. $184.80
96. $180.24
97. $200.10

 

PV = $7,800 = C ×[(1 – {1 / [1 + (.0645 / 12)]⁴⁸}) / (.0645 / 12)]

C = $184.80

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.4 Loan Types and Loan Amortization

Topic: Annuity payments

 

93. You have an outstanding loan with an EAR of 14.61 percent. What is the APR if interest is compounded monthly?
94. 13.48 percent
95. 13.71 percent
96. 14.60 percent
97. 15.41 percent
98. 15.62 percent

 

EAR = .1461 = [1 + (APR / 12)]¹² – 1

APR =.1371, or 13.71 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

94. Today, you are borrowing money and must repay the lender one year from now with a lump-sum payment of $12,800.How much money are you borrowing if the interest rate is 8.45 percent, compounded monthly?
95. $12,000.00
96. $10,550.00
97. $11,766.32
98. $10,762.14
99. $11,802.67

 

PV = $12,800 / [1 + (.0845 / 12)]¹²= $11,766.32

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.4 Loan Types and Loan Amortization

Topic: Present value – single cash flow

 

95. E-Z Loans is offering a special on one-year loans. The company will loan you $1,500 today with no waiting and no credit check, in exchange for one payment of $2,000 one year from now. What is the APR on this loan?
96. 30.63 percent
97. 21.20 percent
98. 25.63 percent
99. 17.93 percent
100. 33.33 percent

 

FV = $2,000 = $1,500 ×(1 + APR)¹

APR = 33.33 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.4 Loan Types and Loan Amortization

Topic: Annual, holding period, and effective rates

 

96. The Corner Bakery needs $86,000 today for remodeling. They have obtained a 2-year, pure-discount loan at an interest rate of 6.8 percent, compounded annually. How much must they repay in two years?
97. $94,064.20
98. $89,540.21
99. $90,860.00
100. $91,159.39
101. $98,093.66

 

FV = $86,000 ×(1 +.068)² = $98,093.66

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.4 Loan Types and Loan Amortization

Topic: Future value – single cash flow

 

97. What effective annual rate can a bank earn on an APR of 10.5 percent, compounded monthly?
98. 10.50 percent
99. 10.76 percent
100. 11.84 percent
101. 11.02 percent
102. 13.08 percent

 

EAR = [1 + (.105 / 12)]¹²– 1 = .1102, or 11.02%

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.4 Loan Types and Loan Amortization

Topic: Annual, holding period, and effective rates

 

98. Hometown Builders is borrowing $195,000 today for four years. The loan is an interest-only loan with an APR of 7.65 percent. Payments are to be made annually. What is the amount of the first annual payment?
99. $14,917.50
100. $20,610.90
101. $18,029.18
102. $58,416.55
103. $63,667.50

 

Payment _{Year 1} = $195,000 × .0765 = $14,917.50

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Loan payments

 

99. Best’s Fried Chicken just took out an interest-only loan of $50,000 for three years with an interest rate of 8.15 percent. Payments are to be made at the end of each year. What is the amount of the payment that will be due at the end of Year 3?
100. $19,454.21
101. $20,166.67
102. $50,000.00
103. $54,075.00
104. $52,824.60

 

Payment _{Year 3} = $50,000 + ($50,000 × .0815) = $54,075.00

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Loan payments

 

100. The Rent-to-Own Store has a six-year, interest-only loan at 7.6 percent interest. The firm originally borrowed $115,000. How much will the firm pay in total interest over the life of the loan?
101. $32,451.13
102. $53,666.67
103. $47,500.00
104. $69,000.00
105. $52,440.00

 

Total interest = $115,000 ×.076 ×6 = $52,440.00

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Loan payments

 

101. Jeffries & Sons is borrowing $95,000 for four years at an APR of 7.05 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for Year 3 of this loan?
102. $28,224.90
103. $27,098.75
104. $25,424.38
105. $30,447.50
106. $28,773.13

 

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Amortization

 

102. Julie is borrowing $14,950 to purchase a car. The loan terms are 48 months at 6.95 percent interest, compounded monthly. How much interest, rounded to the nearest dollar, will she pay on this loan if she pays the loan as agreed?
103. $2,338
104. $2,414
105. $1,959
106. $1,806
107. $2,217

 

PV = $14,950 = C ×[(1 – {1 / [1 + (.0695 / 12)]⁴⁸}) / (.0695 / 12)]

C = $357.65

Total interest paid = ($357.65 ×48) – $14,950 = $2,217

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Loan interest and rates

 

103. The Egg House just borrowed $660,000 to build a new restaurant. The loan terms call for equal annual payments at the end of each year. The loan is for 15 years at an APR of 8.35 percent. How much of the first annual payment will be used to reduce the principal balance?
104. $21,311.62
105. $23,653.18
106. $18,211.08
107. $48,911.08
108. $51,420.90

 

PV = $660,000 = C × ({1 – [1 / (1 + .0835)¹⁵]} / .0835)

C = $78,763.18

Principal payment = $78,763.18- ($660,000 ×.0835) = $23,653.18

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Amortization

 

104. Sheet Metals has an outstanding loan that calls for equal annual payments of $12,600.47 over the life of the loan. The original loan amount was $72,000 at an APR of 8.15 percent. How much of the third loan payment is interest?
105. $5,868.00
106. $4,725.89
107. $4,896.48
108. $5,009.16
109. $4,687.53

AACSB: Analytical Thinking

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Amortization

 

105. JK’s is borrowing $132,000 for three years at an APR of 7.6 percent. The loan calls for the principal balance to be reduced by equal amounts over the life of the loan. Interest is to be paid in full each year. The payments are to be made annually at the end of each year. How much will be paid in interest over the life of this loan?
106. $10,032
107. $30,096
108. $12,840
109. $20,064
110. $18,667

AACSB: Analytical Thinking

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-03 Describe how loans are amortized or paid off.

Section: 5.4 Loan Types and Loan Amortization

Topic: Amortization

 

106. Assume you pay $24,000 today in exchange for an annuity with monthly payments, an APR of 6.75 percent, and a life of 15 years.What is the payment amount?
107. $319.27
108. $266.67
109. $212.38
110. $203.16
111. $338.09

 

PV = $24,000 = C ×[(1 – {1 / [1 + (.0675 / 12)]¹⁸⁰}) / (.0675 / .12)]

C = $212.38

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

107. Appalachian Bank offers you a $30,000, 2-year term loan at an APR of 5.5 percent, compounded monthly. What will be your monthly loan payment?
108. $1,307.16
109. $1,250.00
110. $1,960.02
111. $1,389.20
112. $1,322.87

 

PV = $30,000 = C × [(1 – {1 / [1 + (.055 / 12)]²⁴}) / (.055 / .12)]

C = $1,322.87

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

108. Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the guaranteed rate of return on this investment is 3.6 percent, how much will you pay for the policy?
109. $266,576.83
110. $277,777.78
111. $254,211.50
112. $267,119.02
113. $241,160.91

 

PV = $10,000/.036 = $277,777.78

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

 

109. City Loans wants to earn an effective annual return on its consumer loans of 18.9 percent per year. The bank applies daily compounding. What interest rate is the firm required by law to report to potential borrowers?
110. 17.47 percent
111. 17.32 percent
112. 17.86 percent
113. 16.39 percent
114. 18.90 percent

 

EAR = .189 = [1 + (APR/365)]³⁶⁵-1

APR = .1732, or 17.32 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

110. Compass Bank is offering an APR of.8 percent, compounded daily, on its savings accounts. If you deposit $2,500 today, how much will you have in the account in 15 years?
111. $2,567.15
112. $2,675.10
113. $2,761.32
114. $2,818.74
115. $2,890.62

 

FV = $2,500 ×[1 + (.008/365)]^5,475 = $2,818.74

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Future value – single cash flow

 

111. You want to buy a new sports coupe for $84,600and the finance office at the dealership has quoted you an APR of 7.1 percent, compounded monthly, for 72 months. How much interest will you pay over the life of the loan assuming you make all payments on a timely basis?
112. $17,204
113. $16,048
114. $23,911
115. $20,686
116. $19,542

 

PV = $84,600 = C × [(1 – {1 / [1 + (.071 / 12)]⁷²}) / (.071 /.12)]

C = $1,446.41

Total interest = ($1,446.41 × 72) – $84,600 = $19,542

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Loan payments

 

112. Assume a project will produce cash flows of $22,400, $28,700, $30,300, $10,900 at the end of Years 1 to 4, respectively. If the discount rate is 14.7 percent, what is the current value of these cash flows?
113. $69,407.19
114. $64,221.80
115. $67,721.24
116. $70,407.16
117. $71,121.03

 

PV = $22,400 / 1.147 + $28,700 / 1.147² + $30,300 / 1.147³ + $10,900 / 1.147⁴ = $67,721.24

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 1 Basic

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.1 Future and Present Values of Multiple Cash Flows

Topic: Present value – multiple cash flows

 

113. You want to buy a new sports car from Roy’s Cars for $51,800. The contract is in the form of a 48-month annuity due at an APR of7.8 percent, compounded monthly. What would be your monthly payment?
114. $1,251.60
115. $1,109.29
116. $1,245.70
117. $1,152.98
118. $1,084.32

 

PV = $51,800 = C × [(1 – {1 / [1 + (.078 / 12)]⁴⁸}) / (.078 /.12)] × [1 + (.078 / 12)]

C = $1,251.60

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Annuity payments

 

114. You want to borrow $4,700 for 24 months and can afford monthly payments of $210, but no more. Assuming monthly compounding, what is the highest APR rate you can afford?
115. 5.95 percent
116. 6.33 percent
117. 6.80 percent
118. 6.25 percent
119. 7.13 percent

 

PV = $4,700 = $210× [(1 – {1 / [1 + (r / 12)]²⁴}) / (r /.12)] r= 6.80 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Time value of money – interest rates and inflation

 

115. Bulk Purchases just purchased a new warehouse. To finance the purchase, the firm arranged for a 25-year mortgage for 80 percent of the $1,800,000 purchase price. The monthly payment is $10,800. What is the APR? The EAR?
116. 7.67 percent; 7.94 percent
117. 7.67 percent; 8.03 percent
118. 7.72 percent; 7.94 percent
119. 7.72 percent; 8.03 percent
120. 7.75 percent; 8.03 percent

 

Loan amount =.80 ×$1,800,000 = $1,440,000

PV = .80($1,800,000) = $10,800× [(1 – {1 / [1 + (r / 12)]³⁰⁰}) / (r /12)]

r = 7.6687, or 7.67 percent EAR = [1 + (.076687/12)]¹²-1 = .0794, or 7.94 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).

Section: 5.3 Comparing Rates: The Effect of Compounding Periods

Topic: Annual, holding period, and effective rates

 

116. A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent, compounded semiannually, what is the value of this annuity 4 years from now?
117. $37,139.58
118. $38,399.20
119. $40,687.14
120. $41,811.67
121. $42,618.52

 

PV₆ = $6,200× [(1 – {1 / [1 + (.07 / 2)]⁸}) / (.07 / 2)] = $42,618.52

PV₄ = $42,618.52/[1 + (.07/2)]⁴ = $37,139.58

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Present value – annuity

 

117. Given an interest rate of 14.6 percent per year, what is the value at t = 8 of a perpetual stream of $1,250 annual payments that begin t =25?
118. $2,412.02
119. $967.39
120. $3,335.96
121. $2,235.06
122. $1,711.41

 

PV₂₄ = $1,250/ .146 = $8,561.64

PV _{t = 8} = $8,561.64/(1 + .146)¹⁶ = $967.39

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities

Topic: Perpetuities

 

118. Assume you can save $8,500 at the end of Year 2, $9,300 at the end of Year 3, and $7,100 at the end of Year 6. If today is Year 0, what is the future value of your savings 10 years from now if the rate of return is 7.8 percent annually?
119. $35,211.57
120. $37,235.16
121. $40,822.55
122. $42,321.68
123. $44,564.54

 

FV _{Year 10} = [$8,500 × (1 + .078)⁸] + [$9,300 × (1 + .078)⁷] + [$7,100 × (1 + .078)⁴] = $40,822.55

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Analyze

Difficulty: 2 Intermediate

Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.

Section: 5.1 Future and Present Values of Multiple Cash Flows

Topic: Future value – multiple cash flows

 

 

Chapter 05 Test Bank – Static Summary

Category	# of Questions
AACSB: Analytical Thinking	84
Accessibility: Keyboard Navigation	115
Blooms:  Analyze	85
Blooms:  Remember	10
Blooms:  Understand	23
Difficulty: 1 Basic	82
Difficulty: 2 Intermediate	36
Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows.	44
Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan.	36
Learning Objective: 05-03 Describe how loans are amortized or paid off.	14
Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted).	24
Section: 5.1 Future and Present Values of Multiple Cash Flows	7
Section: 5.2 Valuing Level Cash Flows: Annuities and Perpetuities	69
Section: 5.3 Comparing Rates: The Effect of Compounding Periods	23
Section: 5.4 Loan Types and Loan Amortization	19
Topic: Amortization	6
Topic: Annual, holding period, and effective rates	23
Topic: Annuities	9
Topic: Annuity payments	12
Topic: Future value – annuity	9
Topic: Future value – multiple cash flows	4
Topic: Future value – single cash flow	2
Topic: Loan interest and rates	1
Topic: Loan payments	8
Topic: Perpetuities	11
Topic: Present value – annuity	13
Topic: Present value – multiple cash flows	4
Topic: Present value – single cash flow	1
Topic: Stated interest rate	1
Topic: Time value of money – interest rates and inflation	8
Topic: Time value of money – number of periods	6