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Exam 4: Discounted Cash Flow Valuation

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Question 51

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Kay owns two annuities that will each pay $500 a month for the next 12 years.One payment is received at the beginning of each month while the other is received at the end of each month.At a discount rate of 7.25 percent,compounded monthly,what is the difference in the present values of these annuities?

A) $289.98
B) $265.42
C) $299.01
D) $308.00
E) $312.50

F) A) and E)
G) B) and D)

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Question 52

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You would be making a wise decision if you chose to:

A) base decisions regarding investments on effective rates and base decisions regarding loans on annual percentage rates.
B) assume all loans and investments are based on simple interest.
C) accept the loan with the lower effective annual rate rather than the loan with the lower annual percentage rate.
D) invest in an account paying 6 percent,compounded quarterly,rather than an account paying 6 percent,compounded monthly.
E) ignore the effective rates and concentrate on the annual percentage rates for all transactions.

F) C) and D)
G) A) and C)

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Question 53

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U Do It Centers deposited $3,200 in an account two years ago and is depositing another $5,000 today.A final deposit of $3,500 will be made one year from now.What will the account balance be three years from now if the account pays 4.85 percent interest,compounded annually?

The interest rate charged per period multiplied by the number of periods per year is called the ________ rate.

Denise will receive annual payments of $10,000 for the next 25 years.The discount rate is 6.8 percent.What is the difference in the present value of these payments if they are paid at the beginning of each year rather than at the end of each year?

On the day she retired,Kate had $101,900 in retirement savings.She expects to earn 4.5 percent,compounded monthly,and live 24 more years.How much can she withdraw from her savings each month during her retirement if she plans to die on the day she spends her last penny?

The Smart Bank wants to be competitive based on quoted loan rates and thus must offer loans at an annual percentage rate of 7.9 percent.What is the maximum rate the bank can actually earn based on this quoted rate?

A flow of unending annual payments that increase by a set percentage each year and occur at regular intervals of time is called a(n) :

Your parents plan to give you $200 a month for four years while you are in college.At a discount rate of 6 percent,compounded monthly,what are these payments worth to you when you first start college?

You need some money today and the only friend you have that has any is your 'miserly' friend.He agrees to loan you the money you need,if you make payments of $20 a month for the next six months.In keeping with his reputation,he requires that the first payment be paid today.He also charges you 1.5 percent interest per month.How much total interest does he expect to earn?

You plan to invest $6,500 for three years at 4 percent simple interest.What will your investment be worth at the end of the three years?

Your credit card company charges you 1.35 percent per month.What is the annual percentage rate on your account?

What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?

You are considering two projects.Project A has projected cash flows of $6,500,$4,500,and $2,500 for the next three years,respectively.Project B has projected cash flows of $2,500,$4,500,and $6,500 for the next three years,respectively.Assuming both projects have the same initial cost,you know that:

Assume you could invest $25,000 at a continuously compounded rate of 10 percent.What would your investment be worth at the end of 50 years?

Jenni's Diner has expected net annual cash flows of $16,200,$18,600,$19,100,and $19,500 for the next four years,respectively.At the end of the fourth year,the diner is expected to be worth $57,900 cash.What is the present value of the diner at a discount rate of 11.6 percent?

An annuity costs $70,000 today,pays $3,500 a year,and earns a return of 4.5 percent.What is the length of the annuity time period?

The pawn shop adds 2 percent to loan balances for every two weeks a loan is outstanding.What is the effective annual rate of interest?

Given a stated interest rate,which form of compounding will yield the highest effective rate of interest?

Donaldson's purchased some property for $1.2 million,paid 25 percent down in cash,and financed the balance for 12 years at 7.2 percent,compounded monthly.What is the amount of each monthly mortgage payment?