Fin Man 2

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?

6220 x 11%x 40 = 27368 27368+6220 = 33588

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?

5*12 N 8.5/12 IY 240 PMT CPT PV 11697.88

Frodo offers to sell Sam an annuity today for $73,600. The annuity pays $5,700 a year and the annual rate of return is 6 percent. How many years does the annuity last if the first payment is in one year? (Do not round intermediate calculations.)

73600 PV 5700 +- PMT 6 IY CPT N 25.58

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at Time 0

It will cost $15,000 to acquire a used food truck that is expected to produce cash inflows of $8,500 per year for five years. After the five years, the truck is expected to be worthless. What is the payback period?

15000/8500 = 1.8

Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value 570 ? 8 1293 820 ? 12 2173 18,500 ? 18 343,880 21,600 ? 14 363, 176

570 PV 8 IY 1293 +- FV CPT N 10.64 820 PV 12 IY 2173 +- FV CPT N 8.60 18500 PV 18 IY 343880 +- FV CPT N 17.66 21600 PV 14 IY 363176 +- FV CPT N 21.54

Five years from today, you plan to invest $5,050 for 7 additional years at 7.9 percent compounded annually. How much will you have in your account 12 years from today?

7 N 7.9 IY 5050 PV CPT FV 8598.87

Lionel has to pay a penalty for filing his taxes 78 months late. The IRS charges 35% annual interest on late payments. How much does Lionel owe if his original tax bill was $6,000?

78/12 = 6.5 N 35 IY 6000 PV CPT FV 42,200.81

Lionel has to pay a penalty for filing his taxes late. The IRS charges 1% in interest for each month the payment is late. Lionel's original tax bill was $8,000, but he now owes $9,014.6. How many years late is his payment?

8000 PV 9014.60 +- FV 1 IY CPT N 12 Divide the answer by 12 12/12 1

Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:

increase

The internal rate of return:

is easy to understand

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

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

net present value

Consider the following two mutually exclusive projects: X Year Cash Flow 0 -19700 1 8775 2 8950 3 8725 Y Year Cash Flow 0 -19700 1 9950 2 7725 3 8625 What is the crossover rate for these two projects?

subtract Y from X to get the new values CF CF0 0 ENTER arrow down CF1 1175 +- ENTER arrow down arrow down CF2 1225 ENTER arrow down arrow down CF3 100 ENTER IRR CPT 11.86

Javangula Foods is considering two mutually exclusive projects and has determined that the crossover rate for these projects is 12.3 percent. Given this information, you know that:

the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent.

What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 25 annual payments?

$9,417.69 1400 PMT 8 IY 25 N CPT PV $14,944.69 PV = $14,944.69/1.08^6 PV = $9,417.69

Consider the following two mutually exclusive projects: X Year Cash Flow 0 -19700 1 8775 2 8950 3 8725 Y Year Cash Flow 0 -19700 1 9950 2 7725 3 8625 Calculate IRR for each project.

CF CF0 19700 +- ENTER arrow down CF1 8775 ENTER arrow down arrow down CF2 8950 ENTER arrow down arrow down CF3 8725 ENTER IRR CPT X = 16.33 CF CF0 19700 +- ENTER arrow down CF1 9950 ENTER arrow down arrow down CF2 7725 ENTER arrow down arrow down CF3 8625 ENTER IRR CPT Y = 16.46

What is the IRR of the following set of cash flows? Year Cash Flow 0 −$ 9,314 1 5,300 2 3,700 3 4,600

CF CF0 9314 +- ENTER arrow down CF1 5300 ENTER arrow down arrow down CF2 3700 ENTER arrow down arrow down CF3 4600 ENTER IRR CPT 22.36

Which of the following are advantages of the payback method of project analysis?

Liquidity bias; ease of use

Big Dom's Pawn Shop charges an interest rate of 26.5 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. a.What rate should the shop report? b.What is the effective annual rate?

a. 26.5*12 = 318 B. 2nd - 2 NOM should appear 318 ENTER arrow down arrow down CY 12 ENTER arrow up (back to EFF) CPT 1579.14

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest

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

15 N 5000 PV 18250 +- FV CPT IY 9.01

You are scheduled to receive $18,000 in two years. When you receive it, you will invest it for eight more years at 9 percent per year. How much will you have in ten years?

18000 PV 8 N 9 IY CPT FV 35866.13

Todd will gain access to his inheritance of $12,900 in exactly 2 years. Todd discounts cash at 6 percent annually. What is the minimum amount Todd would accept today in exchange for his inheritance?

2 N 6 IY 12,9000 FV CPT PV 11,480.95

Javier and Alex plan on retiring 27 years from today. At that time, they plan to have saved the same amount. Javier is depositing $15,000 today at an annual interest rate of 5.2 percent. How will Alex's deposit amount vary from Javier's if Alex also makes a deposit today, but earns an annual interest rate of 6.2 percent? Alex's deposit will need to be ______ than Javier's. (Assume annual compounding on both accounts.)

27 N 15000 PV 5.2 IY CPT FV 58954.40 58954.40 FV 27 N 6.2 IY CPT PV 11618.61 11618.61-15000 - 3381.39

What is the future value of $2,938 invested for 9 years at 4.6 percent compounded annually?

2938 PV 9 N 4.6 IY CPT FV 4403.89

Find the APR, or stated rate, in each of the following cases. semiannually 10.5% monthly 11.4% weekly 9.1% infinite 12.8%

2nd - 2 NOM should appear arrow down EFF 10.5 ENTER arrow down CY 2 ENTER arrow up twice (back to NOM) CPT 10.24 EFF 11.4 ENTER CY 12 ENTER arrow back to NOM CPT 10.84 EFF 9.1 ENTER CY 52 ENTER arrow back to NOM CPT 8.72

Kathleen invests $122 with Mr. Madoff, her accountant. Mr. Madoff promises that the account will pay 5 percent simple interest each year. How much money will Kathleen have at the end of 5 years?

122 x 5% x 5 = 30.50 30.50 + 122 = 152.50 152.50

What is the present value of $12,400 to be received 3 years from today if the discount rate is 5 percent?

12400 FV 3 N 5 IY CPT PV 10711.59

Today you paid $353,000 for an investment that provides $12,500 a year forever. What rate of return are you earning on this investment? Assume the first payment is in one year.

353000/12500 = 3.54

You plan to invest $1,070 a year for 4 years at a 6 percent annually? How much will you have in 4 years? Assume the first investment is made in one year.

4 N 6 IY 1070 PMT CPT FV $4,680.84

Paige wants to have $40,000 for a down payment on a house five years from now. She can either deposit one lump sum today or wait one year and deposit a lump sum then. Assume an interest rate of 3.5 percent, compounded annually. How much additional money must she deposit if she waits for one year rather than making the deposit today?

40000 FV 3.5 IY 5 Y CPT PV 33678.93 40000 FV 3.5 IY 4 Y CPT PV 34857.69 34857.69-33678.93 = 1178.76

What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent, compounded annually?

45000 FV 50 N 8 IY CPT PV 959.46

Solve for the unknown interest rate in each of the following: Present Value years Interest Rate Future Value 310 5 ? 418 430 19 ? 1553 46000 20 ? 269914 45261 30 ? 1285194

5 N 310 PV 418 +- FV CPT IY 6.16 19 N 430 PV 1553 +- FV CPT IY 6.99 20 N 46000 PV 269914 +- FV CPT IY 9.25 30 N 45261 PV 1285194 +- FV CPT IY 11.80

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: Year Cash Flow 0 −$ 28,700 1 12,700 2 15,700 3 11,700 What is the NPV for the project if the required return is 12 percent? At a required return of 12 percent, should the firm accept this project? Yes/No What is the NPV for the project if the required return is 24 percent? As a required return of 24 percent, should the firm accept this project? Yes/No

CF CFO 28700 +- ENTER arrow down CO1 12700 ENTER arrow down arrow down CO2 15700 ENTER arrow down arrow down CO3 11700 ENTER NPV I 12 ENTER arrow down CPT 3483.06 Yes because positive arrow back to I 24 ENTER arrow down CPT -2110.85 No because negative

Consider the following two mutually exclusive projects: X Year Cash Flow 0 -19700 1 8775 2 8950 3 8725 Y Year Cash Flow 0 -19700 1 9950 2 7725 3 8625 What is the NPV of Projects X and Y at discount rates of 0 percent, 15 percent, and 25 percent?

For X CF CF0 19700 +- ENTER arrow down CF1 8775 ENTER arrow down arrow down CF2 8950 ENTER arrow down arrow down CF3 8725 ENTER NPV I 0 ENTER arrow down CPT 6750 arrow back to I 15 ENTER arrow down CPT 434.75 arrow back to I 25 ENTER arrow down CPT -2484.80 For Y CF CF0 19700 +- ENTER arrow down CF1 9950 ENTER arrow down arrow down CF2 7725 ENTER arrow down arrow down CF3 8625 ENTER NPV I 0 ENTER arrow down CPT 6600 arrow back to I 15 ENTER arrow down CPT 464.46 arrow back to I 25 ENTER arrow down CPT -2380.00

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.)

Option B has a higher present value at Time 0.

Sophia and Mallory are the same age. At age 25, Sophia invests $6,000 at 7 percent, compounded annually. At age 30, Mallory invests $6,000 at 7 percent, compounded annually. All else constant, when they both reach age 60:

Sophia will have more money than Mallory.

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 these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of the following statements correctly defines a time value of money relationship?

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

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.