Financial Management Exam 3
A home improvement firm has quoted a price of $9,800 to fix up John's backyard. Five years ago, John put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does John have enough money in his account to pay for the backyard fixup?


A twoyear investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?


A neverending stream of equal periodic, endoftheperiod cash flows is called a/an__________.


Your trust fund will pay you $100,000 in six years when you turn 25. A shady financial institution has encouraged you to sign away the rights to your trust fund in exchange for cash today. Would you prefer that the financial institution use a discount rate of 8% or 10% to determine the value of your lump sum payment? Why?


Which of the following actions will INCREASE the present value of an investment?


You have the opportunity to purchase mineral rights to a property in North Dakota with expected annual cash flows of $10,000 per year for eight years. If you discount these cash flows at a rate of 12% per year, what are these cash flows worth today if the cash flows occur at the end of each period?


You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years. If this bond is discounted at a rate of 3.875% per year, what is today's price (present value. for this bond?


What is the present value today of an ordinary annuity cash flow of $3,000 per year for 40 years at an interest rate of 6.0% per year?


A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an__________.


Which of the following is the correct formula for calculating the future value?


A twoyear investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?


A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.


Which of the following formulas is correct for finding the present value of an investment?


Your neighbor owns a perpetuity of $100 per year that has a discount rate of 6% per year. He offers to sell to you all but the next 20 cash flows (the first to be received one year from today. for $500. In other words, he keeps the first 20 cash flows of his perpetuity and you get all of the rest. Is this a good price for you if the appropriate discount rate is 6%?


Twelve years ago, you paid for the right to twelve $25,000 annual endoftheyear cash flows. If discounting the cash flows at an annual rate of 8%, what did you pay for these cash flows back then?


The onetime payment of money at a future date is often called a__________.


To determine the present value of a future amount, one should _________ the future cash flows.


Your grandparents leave on their dream vacation to Antarctica in two years. The cruise vacation will cost them $25,000. If they have already saved $23,500 and are investing it at a rate of 2.75% per year, will they have saved enough money for their trip?


An investment promises a payoff of $195 two and onehalf years from today. At a discount rate of 7.5% per year, what is the present value of this investment?


Which of the following will result in a future value greater than $100?
