FIN 301 Exam 2 Practice

A perpetuity is defined as:

unending equal payments paid at equal time intervals

Assume the total cost of a college education will be $245,000 when your child enters college in 15 years. You presently have $108,000 to invest for this purpose. What annually compounded rate of interest must you earn to cover the cost of your child's college education?

5.61%

Alina's Cafe is expanding and expects the expansion to cause an increase in operating cash flows of $42,000 per year for seven years. This expansion requires $78,000 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires an investment of $6,000 in net working capital at the start of the project, which will be recovered at the end of the project. What is the net present value of this expansion project at a required rate of return of 14 percent?

$98,507

A project has cash flows of -$343,200, $56,700, $138,500, and $245,100 for Years 0 to 3, respectively. The required rate of return is 10.5 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project.

10.93; accept

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate

Which one of the following is an example of a sunk cost?

$2,000 paid last year to rent equipment

Your credit card company charges you 1.15 percent interest per month. What is the APR?

13.80%

What is the future value in 60 years of $7,440 invested today at 9 percent interest, compounded annually?

$1,309,673

Meek's is considering a five-year project that will require $738,000 for new fixed assets that will be depreciated straight-line to a zero book value over five years. No bonus depreciation will be taken. At the end of the project, the fixed assets can be sold for 18 percent of their original cost. The project is expected to generate annual sales of $679,000 with costs of $321,000. The tax rate is 22 percent and the required rate of return is 15.2 percent. What is the amount of the aftertax salvage value?

$103,615.20

Your parents have made you two offers. The first offer includes annual gifts of $4,000, $4,500, and $5,200 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 9.7 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

$11,325

Aidan can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, what is the most he can afford to borrow?

$11,697.88

Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years?

$12,093.38

Claire's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much is the collection expected to be worth in 2025?

$14,077.16

Assume your mother invested a lump sum 28 years ago at 4.05 percent interest, compounded annually. Today, she gave you the proceeds of that investment, totaling $48,613.24. How much did your mother originally invest?

$15,994.70

A relative will support your education by paying you $500 a month for 50 months. If you can earn 7 percent on your money, what is this gift worth to you today?

$21,629.93

A project will produce operating cash inflows of $61,000 per year for 10 years in a row. The initial fixed asset investment in the project will be $94,000. The net aftertax salvage value is estimated at $7,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 14.5 percent?

$219,878

Newson Minerals is considering a project that will require the purchase of $479,000 of equipment. The equipment will be depreciated straight-line to a zero book value over the five-year life of the project after which it will be worthless. The required return is 12 percent and the tax rate is 25 percent. What is the value of the depreciation tax shield in Year 4 of the project assuming no bonus depreciation is taken?

$23,950

Jonathan invested $6,220 in an account that pays 11 percent simple interest. How much money will he have at the end of 40 years?

$33,588

Pham & Davis currently sells 9,820 motor homes per year at $45,500 each, and 3,680 luxury motor coaches per year at $89,700 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 4,000 of these campers per year at $14,750 each. An independent consultant has determined that if the new campers are introduced, sales of its existing motor homes will most likely increase by 250 units per year while the sales of its motor coaches will probably decline by 368 units per year. What is the amount that should be used as the annual sales figure when evaluating the portable camper project?

$37,365,400

A project will require $512,000 for fixed assets and $47,000 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the six-year life of the project. No bonus depreciation will be taken. At the end of the project, the fixed assets will be worthless. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $965,000 and costs of $508,000. The tax rate is 21 percent and the required rate of return is 14.7 percent. What is the amount of the annual operating cash flow?

$378,950.00

What is the future value of $8,500 invested at the end of each year for 40 years, at 10.8 percent interest compounded annually?

$4,681,062.12

Twenty years from now, you hope to have $175,000 to buy a parcel of land. How much must you deposit as a lump sum today to achieve this goal at an interest rate of 6.6 percent, compounded annually?

$48,740.95

Assume an investment has cash flows of −$105,000, $140,000, $200,000, and $485,000 for Years 0 to 3, respectively. What is the NPV if the required return is 13.5 percent? Should the project be accepted or rejected?

$505,307; accept

A project will produce cash inflows of $5,400 per year for 3 years with a final cash inflow of $2,400 in Year 4. The project's initial cost is $13,400. What is the net present value if the required rate of return is 14.2 percent?

$505.92

A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value?

-$11,748.69

Integrity Materials is considering expanding on some land that it currently owns. The initial cost of the land was $364,500 and it is currently valued at $357,900. The company has some unused equipment that it currently owns valued at $29,000 that could be used for this project if $8,200 is spent for equipment modifications. Other equipment costing $157,900 will also be required. What is the amount of the initial cash flow for this expansion project?

-$553,000

The Whey Station is considering a project with an initial cost of $146,500 and cash inflows for Years 1 to 3 of $56,700, $68,500, and $71,200, respectively. What is the IRR?

15.56%

A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 per year over the next four years, respectively. What is the payback period?

2.70 years

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy?

3.125%

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?

3.13 years

What is the EAR if a bank charges you an APR of 7.65 percent compounded quarterly?

7.87%

Sixty years ago, your grandmother invested $4,500. Today, that investment is worth $430,065.11. What is the average annually compounded rate of return she earned on this investment?

7.90%

Fifteen years ago, you invested $5,000. Today, it is worth $18,250. What annually compounded rate of interest did you earn?

9.01%

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?

Accept Project B and reject Project A based on the NPVs

On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?

Age 31

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule?

Project X only

The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?

Stand-alone principle

Which one of the following types of costs was incurred in the past and cannot be recouped?

Sunk

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

compounding

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav:

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero.

Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

future value

Net present value:

is the best method of analyzing mutually exclusive projects.

If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive.

Salazar's Salads is considering two projects. Project X consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project Z would instead use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

net present value

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

simple interest