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A home improvement firm has quoted a price of $9,800 to fix up John's backyard. Five years ago, John put $7,500

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Financial Management Exam 3

 

Question 1 of 20

5.0/ 5.0 Points

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 fix-up?

 

 

 

A. Yes; John now has exactly $9,800 in his home improvement account.

 

 

B. No; John has only $9,687 in his home improvement account.

 

 

C. Yes; John now has $10,519 in his home improvement account.

 

 

D. There is not enough information to answer this question.

 

 

Question 2 of 20

0.0/ 5.0 Points

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

 

 

 

A. The future value would be greater if the interest rate was higher.

 

 

B. The present value would be greater if the interest rate was higher.

 

 

C. The future value would be greater if the interest rate was lower.

 

 

D. The future value does not change as the interest rate changes.

 

 

Question 3 of 20

5.0/ 5.0 Points

A never-ending stream of equal periodic, end-of-the-period cash flows is called a/an__________.

 

 

 

A. annuity

 

 

B. annuity due

 

 

C. perpetuity

 

 

D. amortization

 

 

Question 4 of 20

0.0/ 5.0 Points

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?

 

 

 

A. Use 8% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.

 

 

B. Use 10% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.

 

 

C. Use 8% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.

 

 

D. Use 10% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.

 

 

Question 5 of 20

0.0/ 5.0 Points

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

 

 

 

A. decrease the interest rate

 

 

B. decrease the future value

 

 

C. increase the amount of time

 

 

D. All of the above will increase the present value.

 

 

Question 6 of 20

5.0/ 5.0 Points

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?

 

 

 

A. $55,637.57

 

 

B. $49,676.40

 

 

C. $80,000.00

 

 

D. $122,996.93

 

 

Question 7 of 20

5.0/ 5.0 Points

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?

 

 

 

A. $8,417

 

 

B. $8,500

 

 

C. $5,654

 

 

D. $10,000

 

 

Question 8 of 20

5.0/ 5.0 Points

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. $120,000.00

 

 

B. $1,327,777.67

 

 

C. $45,139.89

 

 

D. $32,270.87

 

 

Question 9 of 20

5.0/ 5.0 Points

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

 

 

 

A. ordinary annuity

 

 

B. annuity due

 

 

C. perpetuity

 

 

D. amortization

 

 

Question 10 of 20

5.0/ 5.0 Points

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

 

 

 

A.  FV = 

 

 

B.  FV = PV × (1 + r)n

 

 

C.  PV = FV × (1 + r)n

 

 

D.  PV = 

 

 

Question 11 of 20

0.0/ 5.0 Points

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

 

 

 

A. The PV is $178.00.

 

 

B. The FV is $224.00.

 

 

C. The FV is $224.72.

 

 

D. This question is irrelevant because there are no two-year investments that earn an average of 6% per year.

 

 

Question 12 of 20

5.0/ 5.0 Points

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.

 

 

 

A. $100

 

 

B. $120

 

 

C. $121

 

 

D. $122

 

 

Question 13 of 20

5.0/ 5.0 Points

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

 

 

 

A.  FV = 

 

 

B.  PV = FV × (1 + r)n

 

 

C.  PV = FVn × (1 + r)

 

 

D.  PV = FV × 

 

 

Question 14 of 20

0.0/ 5.0 Points

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%?

 

 

 

A. No, because the entire perpetuity is worth only $1,666.67 and your neighbor is taking the best cash flows worth more than $1,200 in present value terms

 

 

B. Yes, because the present value of the remaining cash flows is $519.68 and you are buying them for only $500.

 

 

C. No, because the cash flows you receive are only worth $482.16 and that is less than the $500 your neighbor is asking for the cash flows.

 

 

D. This question cannot be answered.

 

 

Question 15 of 20

0.0/ 5.0 Points

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

 

 

 

A. $474,428.16

 

 

B. $300,000.00

 

 

C. $203,474.11

 

 

D. $188,401.95

 

 

Question 16 of 20

5.0/ 5.0 Points

The one-time payment of money at a future date is often called a__________.

 

 

 

A. lump-sum payment

 

 

B. present value

 

 

C. principal amount

 

 

D. perpetuity payment

 

 

Question 17 of 20

5.0/ 5.0 Points

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

 

 

 

A. annuitize

 

 

B. compound

 

 

C. discount

 

 

D. multiply

 

 

Question 18 of 20

5.0/ 5.0 Points

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?

 

 

 

A. No, because they forgot to factor in long underwear expenses.

 

 

B. Yes, to have enough money they would have already needed to save $23,375.

 

 

C. Yes, to have enough money they would have already needed to save $23,680.

 

 

D. No, to have enough money they would have already needed to save $23,680.

 

 

Question 19 of 20

5.0/ 5.0 Points

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

 

 

 

A. $162.03

 

 

B. $162.75

 

 

C. $169.47

 

 

D. There is not enough information to answer this question.

 

 

Question 20 of 20

5.0/ 5.0 Points

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

 

 

 

A. PV = $50, r = an annual interest rate of 10%, and n = 8 years.

 

 

B. PV = $75, r = an annual interest rate of 12%, and n = 3 years.

 

 

C. PV = $90, r = an annual interest rate of 14%, and n = 1 year.

 

 

D. All of the future values are greater than $100.

 

 

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