Test 1: MOD 1-5

What is the correct formula for calculating the effective annual interest rate, when the nominal rate is denoted by r and the number of compounding periods per year is denoted by m?

ieff = (1 + r/m)^m - 1

The issuing organization of a bond is required to _____ the bond at face or par value upon its maturity.

redeem

With respect to bonds, the sales price equals the

Redemption value.

In which step of the seven-step systematic economic analysis technique (SEAT) would multiple criteria be considered rather than a single criterion to make a decision?

Select the preferred investment.

Compare investment alternatives over a(n)_____ period of time.

common

Wylie has been offered the choice of receiving $5,000 today or an agreed-upon amount in 1 year. While negotiating the future amount, Wylie notes that he would be willing to take no less than $5,700 if he has to wait a year. What is his TVOM in %?

14%

If a credit card charges 2% on the unpaid balance of an account each month, then what is the nominal annual interest rate?

24%

The "discounting" in a discounted cash flow approach requires the use of which of the following?

An interest rate

Cash flow diagrams are unable to depict variable interest rates.

False

For a cash flow diagram, a revenue would be depicted with a downward arrow.

False

Given multiple mutually exclusive alternatives, the alternative that is chosen is always the one that maximizes economic worth, even when considering nonmonetary factors.

False

If two cash flow profiles were equivalent at an interest rate of 6%, then they would be also always be equivalent for an interest rate of 8%.

False

If you purchase a $1000, 8% semiannual bond for $1000 and sell it after 5 years for $1000, then your effective annual yield on the bond is 8%.

False

It is acceptable to add and subtract quantities of money that occur many years apart.

False

Let r be the nominal annual rate, m be the number of compounding periods per year, and k be the number of cash flows per year. The effective interest rate when cash flow and compounding frequencies differ is i = (1 + r/m)^(k/m) - 1.

False

Past costs that have no carryover effect on the future are called fixed costs.

False

The face or par value of a bond can decrease over time.

False

You purchase a security system for your business. The installation cost is $100,000 with an initial annual monitoring cost of $2,000. The monitoring cost is expected to increase by $500 each year thereafter until a major reinstallation, which will happen after 10 years. This increase in annual monitoring cost can be categorized as a geometric series cash flow.

False

Which of the following explains why cash flow diagrams are important?

For both communication of cash flows and identification of cash flow patterns.

If a student's time value of money rate is 26%, then the student would be indifferent between $150 today and how much in 1 year?

$189

If a company's time value of money (TVOM) rate is 10%, then the company would be indifferent between $12,500 today and how much in one year?

$13,750

Consider the following sequence of year-end cash flows: End of Year: Cash Flow: 1 $8,000 2 $15,000 3 $22,000 4 $29,000 5 $36,000 What is the amount of the gradient series portion of the cash flows (do not include the uniform series portion)?

$7,000

What is the proper factor notation for calculating the uniform series from a future value of $1,000, with an interest rate of 3%, and five time periods?

A = $1,000(A|F 3%, 5)

If the loan payment begins more than one interest period after receipt of principal, then the type of loan is

A deferred payment loan.

Using the Rule of 72, approximately how long will it take for an investment to double at 5% per year compounded annually?

Between 10 and 15 years.(the Rule of 72 requires you to divide 72 by the interest rate. Seventy-two divided by 5 is 14.4; which is between 10 and 15 years.)

If a set of investment alternatives contains all possible choices that can be made, then the set is said to be which of the following?

Collectively exhaustive

_______________ means all possible investment alternatives are being considered.

Collectively exhaustive.

When comparing alternatives, all of the following choices are correct except -Only differences in cash flows among investment alternatives should be considered. -Two investment alternatives are equivalent if they have the same economic worth. -Costs and revenues common to all investments must be included in the analyses. -Investment alternatives should be compared over a common period of time.

Costs and revenues common to all investments must be included in the analyses.

What is the term for the movement of money backward or forward in time?

Discounted cash flow.

In engineering economic analyses, a state of being equal in value is known as

Equivalence.

If you open an account that pays 3% interest, compounded annually, by depositing $10,000 today, then what is the value of the account in 20 years?

F = $10,000(1.03)^20

What is the proper factor notation for calculating the future worth of a geometric series?

F = A1(F|A1 i%, j%, n)

Given a single sum of money (P) and discrete compounding and let it denote the interest rate appropriate for time period t, then the future worth equivalent for the single sum of money is

F = P(1 + i1)(1 + i2) ... (1 + in-1)(1 + in).

All of the following are steps in the seven-step systematic economic analysis technique (SEAT) except -Specify the discount rate. -Implement the investment alternative. -Identify the investment alternatives. -Perform supplementary analyses.

Implement the investment alternative.

Consider the following sequence of year-end cash flows: End of Year: Cash Flow: 1 $5,000 2 $7,000 3 $2,000 4 $1,000 5 $8,000 If the interest rate is 5%, then what is the correct formula for calculating the present worth?

P = $5,000(1.05)^-1 + $7,000(1.05)^-2 + $2,000(1.05)^-3 + $1,000(1.05)^-4 + $8,000(1.05)^-5

What is the proper factor notation for calculating the present worth of a gradient series, given a gradient amount of $500, an interest rate of 2%, and the number of periods equal to 10?

P = $500(P|G 2%, 10)

What is the proper method for calculating the present worth of irregular cash flows with annual compounding? Let At denote the magnitude of a cash flow at the end of time period t, with n denoting the number of time periods, and i denoting the interest rate.

P = A1(1 + i)-1 + A2(1 + i)-2 + A3(1 + i)-3 + ... + An-1(1 + i)-(n-1) + An(1 + i)-n

The present worth of a series of cash flows (At), assuming discrete compounding, and letting it denote the interest rate appropriate for time period t, is denoted by

P = A1(1 + i1)^-1 + A2(1 + i1)^-1(1 + i2) ^-1 + ... + An(1 + i1)^-1(1 + i2)^-1 ... (1 + in)^-1.

In which step of the seven-step systematic economic analysis technique (SEAT) are risk and uncertainty explicitly considered?

Perform supplementary analyses.

Answering "what if" questions with respect to an economic analysis is an example of which step in the Systematic Economic Analysis Technique?

Performing supplementary analysis

Risks and returns are generally ______________ correlated.

Positively

P, in the factor (P|F, i%, n), denotes the ______ value of a single sum of money.

Present

Today, Smalltown paid $1,000,000 for a farm on the outskirts of town. The town plans to use this farmland for a park. The $1,000,000 can be classified as the

Present value of the farmland.

All of the following are acceptable approaches for comparing investment choices where the lengths of the investments' lifespans differ except -Use an infinitely long planning horizon. -Set the planning horizon equal to the average life of the alternatives. -Set the planning horizon equal to the longest life among the alternatives. -Set the planning horizon equal to the shortest life among the alternatives.

Set the planning horizon equal to the average life of the alternatives.

(P|F i%, n) is known as the

Single sum, present worth factor.

Which of the following steps in the seven-step systematic economic analysis technique (SEAT) typically requires firms to calculate the weighted average cost of capital (WACC)?

Specify the minimum rate of return (MARR), also known as the discount rate.

The formulas and cash flow diagrams assume compounding, calculation of the interest accumulated to date, occurs at

The end-of-period.

What does a loan payment consist of?

The principal component and the interest component.

The fact that one should not add or subtract money unless it occurs at the same point in time is an illustration of what concept?

Time value of money

All of the following choices are one of the four discounted cash flow (DCF) rules for time value of money (TVOM) except -Money has a time value. -To move money backward one time unit, subtract one plus the discount or interest rate. -Quantities of money cannot be added or subtracted unless they occur at the same point in time. -To move money forward one time unit, multiply by one plus the discount or interest rate.

To move money backward one time unit, subtract one plus the discount or interest rate.

An approach to determine equivalence is to compare the present worth of cash flow profiles.

True

Smalltown expects the cost of maintaining its power lines to be $40,000 in the first year after reconstruction. The town also expects maintenance costs to increase by 10% each year thereafter until the next major reconstruction, which will happen after five years. This increase can be categorized as a geometric series cash flow.

True

You are an art collector and you purchase an insurance policy on your art collection with annual premiums of $500. Because you are still collecting new pieces, you anticipate the annual premium to increase at a rate of 10% per year. You estimate the time value of money to be 5%. For a 30-year period, the present worth of your insurance premium cash flows can be calculated using the factor P = $500(P|A1 5%, 10%, 30).

True

A monthly gym membership costs $20 per month. The $20 per month is what type of cash flow?

Uniform Series

What is an immediate payment loan?

When the loan payment begins one interest period after receipt of the principal.