Exam I

You have been offered the following investment opportunity, if you pay $2500 today, you will receive $1000 at the end of each of the next three years. Draw a timeline detailing this investment opportunity.

0------1------2------3 -2500, 1000,1000,1000

A) Your great aunt Matilda put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday the account balance was $5033.83. The amount of money that your great aunt Matilda originally put in the account is closest to: A) $600 B) $800 C) $1000 D) $1200 B) The amount of money that would be in the account if you left the money there until your 65th birthday is closest to: A) $29,556 B) $148,780 C) $168,824 D) $748,932

A - C) $1000 B- B) 148,779.85

4. At an annual interest rate of 7%, the present value of $5000 received in five years is closest to: A) $3565 B) $6750 C) $7015 D) $7035

A) $3565

4. Roy is going to receive a payment of $5,000 one year from today. He earns an average of 6%on his investments. What is the present value of this payment? A) $4,717 B) $4,821 C) $5,000 D) $5,300

A) $4,717

2. Bob's house has doubled in value since he bought it 30 years ago. The house's value has increased by an annual rate of A) 2.34% .B) 3.33%. C) 6.67%. D) 100%

A) 2.34%

If the current rate of interest is 8%, then the future value 20 years from now of an investment that pays $1000 per year and lasts 20 years is closest to: A) $45,762 B) $36,725 C) $9818 D) $93,219

A) 45,762

You are looking for a new truck and see the following advertisement. "Own a new truck! No money down. Just five easy annual payments of $8000." You know that you can get the same truck from the dealer across town for only $31,120. The interest rate for the deal advertised is closest to: A) 9% B) 8% C) 8.5% D) 10%

A) 9%

Suppose you are offered an investment that pays $10,000 in five years. If you expect to earn a10% return, what is the value of this investment today?

Answer. $6,209

6. Suppose you have a choice between receiving $5,000 today or $10,000 in five years. You believe you can earn 10% on the $5,000 today, but want to know what the $5,000 will be worth in five years

Answer. The future value of $5000 at 10% for five years is $8053.

Zachary has purchased an investment that he expects to produce income of $3,000 at the end of the first year and $4,000 at the end of the second year. If he pays $5,800 for this investment, what is the internal rate of return?

Answer: 12.8%.

Consider the following timeline detailing a stream of cash flows: 1 2. 3. 4 |------|-------|------| 1000, 2000, 3000, 4000 If the current market rate of interest is 8%, then the future value of this stream of cash flows is closest to: A) $11,699 B) $10,832 C) $12,635 D) $10,339

Answer: A

Wyatt oil is considering drilling a new self sustaining oil well at a cost of $1,000,000. This well willproduce $100,000 worth of oil during the first year, but as oil is removed from the well the amountof oil produced will decline by 2%, per year forever. If the Wyatt oil's appropriate interest rate is 8%,then the NPV of this oil well is closest to: A) -$250,000 B) $0 C) $250,000 D) $1,000,000

Answer: B

Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value, how much will Joe receive for selling the family business?

Answer: PV = $100,000 + $50,000/(1.06)1 + $50,000/(1.06)2 + $75,000/(1.06)3 = $254,641

5. The present value of $1,000 discounted at the rate of 5% per year, to be received at the end of 3 years is equal to A) $1,000/(1.03)^5. B) $1,000/(1.05)^3. C) $1,000 × (1.05)^3. D) $1,000 - ($1,000) × .03 × 5.

B) $1,000/(1.05)^3.

Consider the following time line 0 1 2 |--------------|-----------------| ? $1000 If the current market rate of interest is 8%, then the present value of this timeline is closest to: A) $1000 B) $857 C) $860 D) $926

B) $857

If the current rate of interest is 8%, then the present value of an investment that pays $1000 per year and lasts 20 years is closest to: A) $18,519 B) $45,761 C) $9818 D) $20,000

C) $9818

You are considering investing in a zero coupon bond that will pay you its face value of $1000 in ten years. If the bond is currently selling for $485.20, then the IRR for investing in this bond is closest to: A) 12% B) 8.0% C) 7.5% D) 10%

C) 7.5%

3. At an annual interest rate of 7%, the future value of $5000 in five years is closest to: A) $3565 B) $6750 C) $7015 D) $7035

C)7015

1. The present value of $10,000 discounted at 5% per year and received at the end of 5 years is A) $10,000/1.25. B) $10,000(1.05)^5. C) $10,000/(1.05)^5. D) $10,000 (1.05)^(1/5)

C. $10,000/(1.05)^5.

Consider the following four alternatives: 1. $132 received in two years. 2. $160 received in five years. 3. $200 received in eight years. 4. $220 received in ten years. 6. The ranking of the four alternatives from most valuable to least valuable if the interest rate is 7% per year would be: A) 1, 2, 3, 4 B) 4, 3, 2, 1 C) 3, 4, 2, 1 D) 3, 1, 2, 4

D)

Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their child's college education. Currently, college tuition, books, fees, and other costs, average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. Assuming that costs continue to increase an average of 4% per year, tuition and other costs for one year for this student in 18 years when she enters college will be closest to: A) $12,500 B) $21,500 C) $320,568 D) $25,323

D) $25,323

3. Christopher invests $400 today at a 4% rate of return which is compounded annually. What is the future value of this investment after four years? A) $342 B) $416 C) $464 D) $468

D) $468

An investment costs $3,500 today. This investment is expected to produce annual cash flows of $1,200, $1,400, $1,300 and $1,100, respectively, over the next four years. What is the internal rate of return on this investment? A) 8.1% B) 9.33% C) 14.6% D) 16.2%

D) 16.2%

You have an investment opportunity that will cost you $10,000 today, but return $12,500 to you in one year. The IRR of this investment opportunity is closest to A) 80% B) 125% C) 20% D) 25%

D) 25%

Which of the following statements is FALSE? A) The process of moving a value or cash flow forward in time is known as compounding. B) The effect of earning interest on interest is known as compound interest. C) It is only possible to compare or combine values at the same point in time. D) A dollar in the future is worth more than a dollar today.

D) A dollar in the future is worth more than a dollar today.

15. Which of the following statements is FALSE? A) The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments. B) Most car loans, mortgages, and some bonds are annuities. C) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constantrate forever. D) An annuity is a stream of N equal cash flows paid at irregular intervals.

D) An annuity is a stream of N equal cash flows paid at irregular intervals

1. Use the following information from Amazon's financial statements to calculate Amazon's profit margin, total asset turnover, equity multiplier, and return on equity: a. Net income = $3 billion b. Revenues = $178 billion c. Total assets = $131 billion d. Total liabilities = $58 billion

PM = 3/178 = 1.7% TAT = 178/131 = 135.9% EM = 131/(131-58) = 131/73 = 179.5% ROE = 3/73 = 4.1% Check if Dupont Identity is valid. (ROE=PM*TAT*EM)

Nielson Motors is considering an opportunity that requires an investment of $1,000,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. 1) If the appropriate interest rate is 10%, then the NPV of this opportunity is closest to: A) ($88,000) B) $88,000 C) $300,000 D) $1,300,000 2) If the appropriate interest rate is 10%, then Nielson Motors should: A) invest in this opportunity since the NPV is positive. B) not invest in this opportunity since the NPV is positive. C) invest in this opportunity since the NPV is negative. D) not invest in this opportunity since the NPV is negative

a- B) $88,000 b - A)