FIN 361 - Chapter 6 HW

Trish receives $450 on the first of each month. Josh receives $450 on the last day of each month. Both Trish and Josh will receive payments for next four years. At a discount rate of 9.5 percent, what is the difference in the present value of these two sets of payments? a. $141.80 b. $151.06 c. $154.30 d. $159.08 e. $162.50

a. $141.80

Your parents have made you two offers. The first offer includes annual gifts of $5,000, $6,000, and $8,000 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 6.2 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer? a. $16,707.06 b. $16,407.78 c. $16,360.42 d. $17,709.48 e. $17,856.42

a. $16,707.06

Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year? a. $2,170.39 b. $2,511.07 c. $2,021.18 d. $2,027.94 e. $2,304.96

a. $2,170.39

You just won the grand prize in a national writing contest! As your prize, you will receive $500 a month for 50 months. If you can earn 7 percent on your money, what is this prize worth to you today? a. $21,629.93 b. $18,411.06 c. $21,338.40 d. $20,333.33 e. $19,450.25

a. $21,629.93

Assume you work for an employer who will contribute $60 a week for the next 20 years into a retirement plan for your benefit. At a discount rate of 9 percent, what is this employee benefit worth to you today? a. $28,927.38 b. $27,618.46 c. $29,211.11 d. $25,306.16 e. $25,987.74

a. $28,927.38

Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations? a. $519,799.59 b. $538,615.08 c. $545,920.61 d. $595,170.53 e. $538,407.71

a. $519,799.59

Your broker is offering 1.2 percent compounded daily on its money market account. If you deposit $7,500 today, how much will you have in your account 15 years from now? a. $8,979.10 b. $9,714.06 c. $8,204.50 d. $9,336.81 e. $9,414.14

a. $8,979.10

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent? a. Annual b. Semi-annual c. Monthly d. Daily e. Continuous

a. Annual

The Distribution Point plans to save $2,000 a month for the next 3 years for future emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit that would yield the same amount of savings as the monthly deposits after 3 years? a. $70,459.07 b. $67,485.97 c. $69,068.18 d. $69,333.33 e. $67,233.84

b. $67,485.97

Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, how much can he afford to borrow to purchase a car? a. $11,750.00 b. $12,348.03 c. $11,697.88 d. $10,266.67 e. $10,400.00

c. $11,697.88

You want to start a business that you believe can produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $250,000. At a discount rate of 16 percent, what is this business worth today? a. $258,803.02 b. $314,011.33 c. $280,894.67 d. $325,837.81 e. $297,077.17

c. $280,894.67

Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent? a. $38,418.80 b. $32,907.67 c. $36,121.08 d. $39,010.77 e. $33,445.44

c. $36,121.08

Waldo expects to save the following amounts: Year 1 = $50,000; Year 2 = $28,000; Year 3 = $12,000. If he can earn an average annual return of 10.5 percent, how much will he have saved in this account exactly 25 years from the time of the first deposit? a. $1,172,373 b. $935,334 c. $806,311 d. $947,509 e. $1,033,545

e. $1,033,545

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.) a. Both options are of equal value since they both provide $12,000 of income. b. Option A has the higher future value at the end of Year 3. c. Option B has a higher present value at Time 0. d. Option B is a perpetuity. e. Option A is an annuity.

c. Option B has a higher present value at Time 0.

An ordinary annuity is best defined as: a. increasing payments paid for a definitive period of time. b. increasing payments paid forever. c. equal payments paid at the end of regular intervals over a stated time period. d. equal payments paid at the beginning of regular intervals for a limited time period. e. equal payments that occur at set intervals for an unlimited period of time.

c. equal payments paid at the end of regular intervals over a stated time period.

One year ago, JK Mfg. deposited $12,000 in an investment account for the purpose of buying new equipment four years from today. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today. How much cash will be available when the company is ready to buy the equipment assuming an interest rate of 5.5 percent? a. $43,609.77 b. $45,208.61 c. $44,007.50 d. $46,008.30 e. $47,138.09

d. $46,008.30

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why? a. You should accept the $89,500 today because it has the higher net present value. b. You should accept the $89,500 today because it has the lower future value. c. You should accept the first offer as it is a lump sum payment. d. You should accept the second offer because it has the larger net present value. e. It does not matter which offer you accept as they are equally valuable.

d. You should accept the second offer because it has the larger net present value.

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed) a. Both projects have the same future value at the end of Year 4. b. Both projects have the same value at Time 0. c. Both projects are ordinary annuities. d. Project Y has a higher present value than Project X. e. Project X has both a higher present and a higher future value than Project Y.

e. Project X has both a higher present and a higher future value than Project Y.

Which one of the following statements correctly defines a time value of money relationship? a. Time and future values are inversely related, all else held constant. b. Interest rates and time are positively related, all else held constant. c. An increase in a positive discount rate increases the present value. d. An increase in time increases the future value given a zero rate of interest. e. Time and present value are inversely related, all else held constant.

e. Time and present value are inversely related, all else held constant.

As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why? a. You should accept the payments because they are worth $202,414 to you today. b. You should accept the payments because they are worth $201,846 to you today. c. You should accept the payments because they are worth $201,210 to you today. d. You should accept the $200,000 because the payments are only worth $189,311 to you today. e. You should accept the $200,000 because the payments are only worth $195,413 to you today.

e. You should accept the $200,000 because the payments are only worth $195,413 to you today.