AGEC 330 all post test questions

A machine is purchased for $12,000 and the marginal tax rate is 20%. What is the taxable depreciation in the 10th year if the depreciable life is 12 years, the life of the machinery is 14 years and straight-line depreciation is used?

$1,000 Solution: 12000/10 - 200

What is the total amount accumulated after three years if someone invests $1000 today with a simple interest of 5%? With a compound interest of 5%?

$1,150, $1,158

The future value at the end of 11 years of $500 invested today at an interest rate of 8% is

$1,165.92 FV=500*(1+.08)^11

If you borrow $8,000 and pay it back in 9 equal annual payments (principal and interest) at 7% interest. What are the annual payments?

$1,228 Calculation: N=9 %=7 PV=8000 PMT=? FV=0

If you borrow $12,000 and pay it back in 11 equal annual payments (principal and interest) at 11% interest. What are the annual payments?

$1,934 Calculation: N=11 %=11 PV=12000 PMT=? FV=0

What would you be willing to pay for an annuity that paid you $450 at the end of each of the next 6 years? Assume savings account pays 10% compounded annually.

$1,960

How much interest is gained if $150 is deposited in your bank account at the end of the year for each of the next 4 years? Savings account pays 12% compounded annually.

$116.90

A five-year project, if undertaken, will require an initial investment of $500,000. The discount rate is 5% and The expected end-of-year cash flows are: year 1: $120,000 year 2: $120,000 year 3: $150,000 year 4: $150,000 year 5: $180,000 The NPV is:

$117,145 Solution: NPV(5,-500000,{120000,120000,150000,150000,180000})

If it costs $80,000 to put a student through Texas A&M today, how much will it cost in 8 years if costs increase at an annual rate of 5 percent?

$118,196 N=8 %=5 PV=80000 FV=?

Rebecca Smith just graduated from college and received a job managing a ranch. Her salary will be $35,000 per year. If she is guaranteed a 5% raise each year, what will the salary be in 25 years?

$118,522

Consider a bond with a Par Value of $1,000. It pays a coupon of 12% and the coupon is paid monthly. It matures in 10 years. Calculate the NPV if the yield on the bond is 11% and the price of the bond is $892.66.

$167.84

Suppose you have been hired by Aggie-Business. They are willing to pay you a signing bonus of $2,000 per year starting in one year for each of the next seven years (7-year annuity) or a lump-sum bonus today of $11,000. Suppose you take the $11,000 today and put this money in a bank account paying 6% interest. Calculate how much money you have in your bank account at the end of 10 years.

$19,699

If $2000 is invested today at 6%, in 3 years the future value would be

$2,382 Solution: PV -2,000 N 3 I/Y 6 → FV?

Tyler would like to send his parents on a cruise for their 50th wedding anniversary. He expects the cruise will cost $15,000 and he has 5 years to accumulate this money. How much must Lance deposit at the end of each year in an account paying 10 percent interest in order to have enough money to send his parents on the cruise? Pick the closest answer.

$2,457 Solution: FV 15,000 PV 0 N 5 I/Y 10 → PMT = -$2,456.96

What would you be willing to pay for an annuity that paid you $575 at the end of each of the next 7 years? Assume savings account pays 8% compounded annually.

$2,994

Consider a bond with a par value of $2,000. It pays a coupon of 12% and the coupon is paid monthly. It matures in 12 years. What is the coupon Payment?

$20 Calculation: 2000*1%=20

If you could buy an investment now and six years later sell it for $43,000, what would you be willing to buy it for, assuming a 7% discount rate and no other cash flows?

$28,653 Solutions: N=6 %=7 PV=? PMT=0 FV=43000

What is the present value of $750 received 10 years from now if the interest rate compounded annually is 10%?

$289

Suppose you are considering the purchase of a special livestock trailer for $15,000. It can be financed over five years with no down payment. Calculate the monthly debt payments if the annual interest rate is 6% compounded monthly and the payments are uniform (equal monthly payments including principal and interest).

$290 Calculation: N:60 %:.5 PV:15000 PMT:? FV:0

Suppose you are considering the purchase of an investment. The Net Returns for this investment is $5,000. Given the marginal tax rate is 28%, what is the after-tax net returns?

$3,600 Calculation: 5000-(5000*.28)

How much money will be in a savings account in 15 years if $150 is deposited today and it earns 6% compounded annually?

$359.48 Calculation: N: 15 %: 6 PV: 150 PMT:0 FV:?

An investor wants to do capital budgeting for his new investment project. He has the following information: IRS will allow the investor to depreciate the investment using straight-line over 10 years. The marginal tax rate will be 20% over the next 5 years & it will be 10% from the 6th to the 10th year. The investor expects that the terminal value for the investment is $40,000 at the end of 4 years.(a 4-year project) What is the after-tax terminal value of this investment if the initial cost is $60,000?

$39,200

How much interest is gained if $250 is deposited in your bank account at the end of the year for each of the next 7 years? Savings account pays 8% compounded annually.

$480.70

What is the present value of $1,000 that is to be received 5 years from today and interest rates are 12% compounded annually?

$567 Calculation: N=10 %=8 PV=1000 PMT=0 FV=?

Suppose you wish to withdraw $80,000 in four years to buy a Mercedes. How much money will you need to deposit today in the Aggie First National Bank if the bank pays eight-percent interest, compounded annually?

$58,802.39 Calculation: V= 80000(1+.08)^-4 N=4, %=8, FV=80,000, pymt =0.0, PV=?

Suppose you are considering the purchase of an investment. The Cash Revenues for this investment is $10,000 and the Cash Expenses in $3,000. Given the marginal tax rate is13%, what is the after-tax net returns?

$6,090 calculation: 7000-(7000*.13)

When you retire, you want to have $875,000 saved. If you plan to retire in 35 years, and you can receive 7% interest annually on a savings account, what is the fixed amount you have to save each year?

$6,330 Calculation: N=35 %=7 PV=0 PMT=? FV=875,000

Assume that the marginal tax rate is 20%. Assume further that IRS will allow the investor to depreciate the investment using straight-line over 15 years. If the initial cost of an investment is $50,000, What is the tax saving value for each year?

$666.67 Solution: 3333.33*.2

Suppose you can put your money in a savings account that pays 5%, compounded annually. How much money would you have in your savings account in 23 years if you invested $2,500 today?

$7,679 N=23 %=5 PV =2500 PMT=0 FV=?

You are analyzing a project and have prepared the following data (assume the discount rate is 8.5%): Year cash flow 0 -$169,000 1 $46,200 2 $87,300 3 $41,000 4 $39,000 (i) Based on the net present value of _____ for this project, you should _____ the project.

$7,978.72; accept Solution: NPV(8.5,-169000,{46200,87300,41000,39000})

Suppose you are considering the purchase of a new Tundra truck for $45,000. You are required to put $5,000 down and need to finance $40,000. It can be financed over five years. Calculate the monthly debt payments if the annual interest rate is 3% compounded monthly and the payments are uniform (equal monthly payments including principal and interest).

$718.75 Calculation: N: 60 %: .25 PV: 40,000 PMT: 718.75 FV: 0

Consider a bond with a Par Value of $1,000. It pays a coupon of 8% and the coupon is paid semiannually. It matures in 10 years. Calculate the market value of the bond if the market rate is 12%.

$770.60 Calculation: 20 N, 6%, FV = 1,000, PMT = 40, CPT PV = $770.60

Suppose you buy a tractor for $55,000 and sell it for $10,000 in 10 years. What is the annualized cost (capital recovery) if interest rates are 10%?

$8,324 Calculation: Vo=-55000+10000(1+.1)-10 N=10 %=10 PV=-51,144.57 PMT=? FV=0

Consider a bond with a Par Value of $1,000. It pays a coupon of 12% and the coupon is paid semiannually. It matures in 5 years. Calculate the market value of the bond if the market rate is 15%.

$897.04 Calculation: 10 N, 7.5%, FV = 1,000, PMT = 60, CPT PV = $897.04

Suppose you buy a tractor for $45,000 and sell it for $5,000 in 7 years. What is the annualized cost (capital recovery) if interest rates are 12%?

$9,365 Calculation: Vo= -45000+5000(1+.12)^-7 N=7 %=12 PV=-42,738.25 PMT=? FV=0

You are analyzing a project and have prepared the following data (assume the discount rate is 7.5%): Year Cash Flow 0 -87,000 1 12,000 2 24,000 3 36,000 4 48,000 (i) Based on the net present value of _____ for this project, you should _____ the project.

$9,851.78; accept

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for six years?

0.57% Solution: irr(-100000,{17000,17000,17000,17000,17000,17000})

What interest rate would a bank have to pay on a $10,000 deposit if you wanted to withdraw $96,463 from your bank account in 20 years? Assuming that interest is compounded yearly.

12% Calculation: N=20 %=? PV=10,000 PMT=0 FV= 96,463

Consider a bond with a Par Value of $1,000. It pays a coupon of 12% and the coupon is paid quarterly. It matures in 10 years. Calculate the annual yield on the bond if the price of the bond is $845.87.

15%

What is the rate of return on an investment that costs $100 and promises to return $115 in one years?

15%

How many years would it take before you had $484,012 in your bank account if you deposited $40,000 today in a bank that pays 12% interest annually?

22 Calculation: N=? %=12 PV=40,000 PMT=0 FV= 484,012

What is the yield on an investment that costs $115, and promises to pay $200 in two years?

31.9%

Assume you can buy a new car, currently selling for $32,000 by putting $2,000 down and making payments of $450 per month for 60 months. What is the annual rate of interest you would be paying?

4.068 Solutions: N=60 %=? (.339) PV=30000 PMT=450 FV=0 .339*12= 4.068

Consider a bond with a Par Value of $1,000. It pays a coupon of 8% and the coupon is paid annually. It matures in 8 years. Calculate the yield on the bond if the price of the bond is $1,091.33.

6.5%

Sacramento Paper is considering two mutually exclusive projects. Project A has an internal rate of return (IRR) of 12 percent, while Project B has an IRR of 14 percent. The two projects have the same risk, and when the cost of capital is 7 percent the projects have the same net present value (NPV). Assume each project has an initial cash outflow followed by a series of inflows. Given this information, which of the following statements is most correct?

All of the statements above are correct.

The present value will be greater if the number of payments in a uniform annuity is shorter, holding everything else constant.

false

The rate per period is considered as an exchange price between real and inflated dollars

false

The secondary market is the part of the capital market that deals with issuing of new securities.

false

______________ is the period of time that principal accrues interest before interest is added to principal (e.g., daily, monthly, quarterly, and annually).

Conversion period

The terminal value that should be used in calculating depreciation for capital budgeting is the sale price of the investment.

false

The theory of accounting is the concern with how individuals and firms allocate resources through time.

false

How much money will be in a savings account in 10 years if $1,000 is deposited today and it earns 8% compounded monthly?

NOT $2,158.92

How much is an oil well worth today if it will pay royalties of $25,000 per year at the end of the next 12 years and will be sold for $250,000 at the end of the 12th year? Assume that the interest rate is 8% compounded quarterly

NOT $287,680.39

Edelman Engineering is considering including two pieces of equipment, truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firm's cost of capital is 14%. Cash flows are as follows: Year truck pulley 1 $5,100 $7,500 2 $5,100 $7,500 3 $5,100 $7,500 4 $5,100 $7,500 5 $5,100 $7,500 Calculate the IRR and the NPV for Truck:

NOT 20%; $530

Suppose a particular investment project will require an initial cash outlay of $1,000,000 and will generate a cash inflow of $500,000 in each of the next three years. What is the project's IRR? Suppose a company's hurdle rate is 15%, should it accept the project?

NOT 23%; reject the project

You are analyzing a project and have prepared the following data: Year cash flow 0 -$169,000 1 $46,200 2 $87,300 3 $41,000 4 $39,000 (i) Based on the internal rate of return of _____ for this project, you should _____ the project.

NOT 8.95%; accept

What is the yield on an investment that costs $110, and promises to pay $115 in one year?

NOT none of the above 4.5 -4.35 2.25

Suppose Aggie International has hired you and are willing to pay you a signing bonus. They give will you one of three option. Option A: $10,000 today. Option B: Pay you a bonus of $1,500 per year at the beginning of the year for eight years (eight annual payments). They first bonus payment will be given today. Option C: $17,000 in 10 years. Calculate the how much you would have in your savings account in ten years for option A, B, and C if the bonus is put in a savings account drawing six percent compounded annually. Which option should you choose?

NOT option B

Which of the following is true about the NPV and IRR techniques?

The NPV and IRR techniques explicitly consider the cost of capital and the time value of money.

Should a firm invest in projects with NPV = $0?

The firm is indifferent between accepting or rejecting projects with zero NPVs

The last step of the strategic management process is to establish the future direction of the firm and to articulate a mission statement

false

Assuming that an annual interest rate is 4%, an investor would be indifferent between $850 today and $2,757 in 30 years from today.

True Calculation: N=30 %=4 PV=850 PMT=0 FV=?

The major institutional sources of loan funds for US agriculture include

all of the above

The methods used for capital budgeting includes

all of the above

___________ is the orderly sequence of steps that produces information relevant to an investment choice

capital budgeting

An interest where each time interest is paid, it is added to the principal and therefore earns interest.

compound interest

"Machinery Sales," "Cost Reduction," and "Income Generating" are categories of alternative investments.

false

A partial budget is a financial management tool used to project all costs and returns for an activity- such as livestock, grain or vegetable production

false

A primary market is a market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.

false

An enterprise budget helps farm owners/managers evaluate the financial effect of incremental changes.

false

An options contract is a contract for the sale of a good at some point in the future at a specified price

false

Bond holders are in a residual position in regards to claims on income and assets.

false

Capital Budgeting is a chronological overview of expected cash income and expenses over a given period of time.

false

Capital Budgeting is a series of payments of a fixed amount for a specified number of periods.

false

Financial management involves the acquisition and use of marketing resources and the protection of debt capital from all kinds of risk.

false

High risk reaps a high return is not one of the keys to financial investing.

false

People use money to invest in real goods and financial goods only

false

Planning Horizon is the length of time required for an investment to pay itself out or to recover the initial outlay of funds.

false

Securities give you the title to underlying real assets only

false

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital.

false

The Net Cash Flow is calculated as Cash Revenues minus Cash Expenses plus the marginal tax rate times the taxable income

false

The USPV factor assumes infinity number of periods

false

The book value of a contract is the present value of future payments of any contract discounted at the market rate.

false

The conversion period is the length of time it takes to retire the principal of a loan.

false

The first step of the strategic management process is to formulate objectives.

false

The future value is higher if one dollar today is compounded annually rather than monthly, holding everything else constant

false

The future value of $100 deposited today for 10 years at 10% compounded annually is $38.55

false

The future value will be smaller if the number of payments in a uniform annuity is longer, holding everything else constant.

false

The impacts of time and risk are not important in financial management.

false

With compound interest, interest is earned only on the investment's original principle

false

Yield is calculated as the discount rate that makes the future value of cash inflows equal to the present value of cash outflows.

false

The ______ of a business, agency, household, or another economics unit involves the acquisition and use of financial resources and the protection of equity capital from various sources of risk

financial management

Modified Internal Rate-of-return (MIRR) is the rate of interest that equates the present value of all outflows with the ____ value of all inflows.

future

Suppose that Jim plans to borrow money for an education at Texas A&M University. Jim will need to borrow $20,000 at the end of each year for the next five years (total=$100,000). Jim wishes his parents could pay for his education but they can't. At least, he qualifies for government loans with a reduced interest rate while he is in school. He has a special arrangement with AggieBank to lend him the money at a subsidized rate of 2% over five years without having to make a payment until the end of the fifth year. However, at the end of the fifth year, Jim agrees to pay off the loan by borrowing from Longhorn Bank. Longhorn Bank will lend him the money he needs at an annual interest rate of 8%. Jim agrees to pay back the Longhorn Bank with 15 annual payments and the payments will be uniform (equal annual payments including principal and interest). (i) Calculate how much money Jim has to borrow at the end of 5 years to pay off the loan with AggieBank. (ii) Calculate the annual payment Jim must pay to the Longhorn Bank if the first payment is due at the end of the sixth year (one-year after borrowing the money from Longhorn Bank). (iii) Calculate the total interest Jim must pay because of borrowing money to attend TAMU

i. $94,269 ii. $11,683 iii. $12,159

Tax basis is equal to:

initial cost basis - accumulated depreciation

_______ is defined as the addition of durable assets to a business

investment

As the discount rate increases, the IRR of a project:

is unaffected

Suppose you have been hired by Aggie-Business. They are willing to pay you a signing bonus of $2,000 per year starting in one year for each of the next seven years (7-year annuity) or a lump-sum bonus today of $11,000. Suppose you take the 7-year annuity and put this money in a bank account paying 6% interest for 10 years. How much money will you have in your bank account at the end of 10 years? (Hint: (1) Calculate how much money you have in your bank account at the end of 7 years. (2) Then, calculate how much money you have in your bank account at the end of 10 years.)

not $16,788

Suppose you have the opportunity to purchase a 7-year annuity that pays you $2,000 per year starting in one year for each of the next seven years and you can purchase the annuity for $11,000. Suppose you take the 7-year annuity and put this money in a bank account paying 6% interest for 10 years. How much money will you have in your bank account at the end of 10 years? (Hint: (1) Calculate how much money you have in your bank account at the end of 7 years. (2) Then, calculate how much money you have in your bank account at the end of 10 years.)

not $27,633

In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT -sunk costs -opportunity costs -changes in working capital resulting from the project, net spontaneous changes -effects of inflation

not opportunity costs

Investment Analysis is a procedure for evaluating the effects of investment choices on a business's profitability, ____, and liquidity.

risk

The IRR method assumes that the reinvestment rate of cash flows is

the IRR

The focal point of financial management in a corporate firm is

the creation of value for shareholders

The internal rate of return for a project will increase if:

the initial cost of the project can be reduced.

Accepting positive NPV projects benefits the stockholders because:

the present value of the expected cash flows are greater than the cost.

A project may have multiple IRRs when

the project generates an alternating series of net cash inflows and outflows

The taxable gain or loss on the terminal value of an investment is

the terminal value of the investment minus the tax basis

The Net Cash Flow is calculated as the after-tax net returns plus the annual depreciation multiplied by the marginal tax rate

true

The Net Present Value can be calculated as the PV(Cash Inflows)-PV(Cash Outflows) where cash flows are discounted at the required rate of return on an investment.

true

The Net Present Value is an investments profit over the required return to capital.

true

"Income Generating," "Cost Reduction," and "Maintenance and Replacement" are categories of alternative investments.

true

A futures contract is a contract for the sale of a good at some point in the future at a specified price.

true

A secondary market is a market where investors purchase securities or assets from other investors, rather than from issuing companies themselves

true

Accounting tools consist of the balance sheet, income statement, and cash flow statement.

true

An enterprise budget is a financial management tool used to project costs and returns for an activity- such as livestock, grain or vegetable production.

true

At the start of the accounting period, the firm's beginning balance sheet is the source of current and non-current assets.

true

Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.

true

Budgeting Methods are used to evaluate the future directions of a firm.

true

Businesses are net Suppliers of securities.

true

Capital Budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure.

true

Compounding implies that interest is added to principal and interest is paid on earned interest thereafter.

true

Financial Management evaluates the future directions of a firm. For agricultural firms, emphasis is typically placed on enterprise budgets, cash flow budgets, and capital budgets.

true

Financial management involves the acquisition and use of financial resources.

true

If you have already purchased bonds, you want interest rates (market rates) on bonds to decrease, holding everything else constant.

true

In compound interest, at the end of the transaction period, the total principal amount is called the compound amount.

true

Information Flows are information about past, present, and expected business performance. This information comes in part from a financial accounting system that reports the firm's profitability, liquidity, and solvency positions.

true

Interest is compensation for foregone investments or consumption

true

Interest is compensation for foregone investments or consumption.

true

Life Insurance Companies make loans to farmers.

true

Mutual funds are a pool of funds from investors. These funds are invested in a portfolio of securities.

true

One of the key components of financial investing is that there is no expected high return without bearing high risk.

true

People use money to invest in real goods, invest in financial goods, and consumption

true

Terminal Value is the value of an investment at the end of the planning horizon

true

The Market Value of any contract is the present value of the remaining payments discounted at the market rate.

true

The Tax savings from Depreciation is subtracted from the cash flows when calculating the NPV using the component method

true

The balance sheet can be used to measure the firm's financial position at a specific point in time.

true

The conversion period is the period of time that the principal accrues interest before interest is added to principal

true

The depreciable life of an investment (allowable by the IRS) may be different from the life of an investment

true

The first step of the strategic management process is to establish the future direction of the firm and to articulate a mission statement.

true

The future value of $100 deposited today for 10 years at 10% compounded annually is $259.37

true

The marginal tax rate is the percentage taken from the next dollar of taxable income above a pre-defined income threshold.

true

The present value is lower if one dollar in the future is discounted monthly rather than annually, holding everything else constant.

true

The present value will be less if the interest rate in a uniform annuity is greater, holding everything else constant.

true

The price of bond and the interest rate are inversely related.

true

The rate per period is considered as an exchange price between present and future dollars

true

The theory of finance is the concern with how individuals and firms allocate resources through time.

true

Yield is calculated as the discount rate that makes the present value of cash inflows equal to the present value of cash outflows.

true

The return provided by a $100 ordinary annuity deposited for 10 years that results in a future value of $1,593.74 is 10%

true Solution: PMT -100 FV 1,593.74 N 10 PV 0 → I/Y = 10%

The future value of a $100 ordinary annuity deposited for 10 years at 10% is $1,593.74.

true Solution: PV 0 PMT 100 N 10 I/Y 10 → FV?