FIN 5-6 practice problems

Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true?

Martin earned a lower interest rate than he expected

What is the relationship between present value and future value interest factors?

The factors are reciprocals of each other.

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

compounding

Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

decreases

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

discount rate

The process of determining the present value of the future cash flows in order to know their worth today is called which of the following?

discounted cash flow valuation

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:

discounting

You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?

future value

Shelley won a lottery and will receive $1,00 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following?

present value

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. What type of interest is Sara earning?

simple interest

Which one of the following variables is the exponent in the present value formula?

time

You bought a painting 7 years ago as an investment. You originally paid $191,000 for it. If you sold it for $564,000, what is your annual return on the investment? Assume annual compounding. (Round to 100th of a percent and enter your answer as a percentage, e.g., 12.34 for 12.34%)

where FV = PV * (1 + r)^n The correct answer is: 16.73

Mickey & Minnie have $49 million in cash. Before they retire, they want the $49 million to grow to $114 million. How many years before Mickey & Minnie can retire if they earn 8.7% per annum on their stash of cash? Assume annual compounding. (Enter your answer in years to 2 decimal places, e.g., 12.34)

10.12

You just purchased a parcel of land for $59,000. To earn a 7% annual rate of return on your investment, how much must you sell the land for in 8 years? Assume annual compounding.

101372.98

Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?

17444.86

You bought a painting 5 years ago as an investment. You originally paid $191,000 for it. If you sold it for $449,000, what is your annual return on the investment? Assume annual compounding.

18.64

At 16% compounded annually, approximately how long will it take $750 to double based on the Rule of 72?

4.50

Based on the rule of 72, what per annum interest rate must Oprah earn on her savings of $50 million to double these savings in 14 years?

5.14

Which one of the following will produce the highest present value interest factor

6 percent interest for 5 years

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Bard also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her earnings into her account. Given this, which one of the following statements is true?

Barb will earn interest on interest.

You just purchased a parcel of land for $59,000. To earn a 12% annual rate of return on your investment, how much must you sell the land for in 5 years? Assume annual compounding. (Round to nearest penny, e.g. 1234.56)

$103978.16

Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years?

$13020

You would like to give your daughter $75,000 towards her college education 17 years from now. How much money must you set aside today for this purpose if you can earn 8 percent on your investments?

$20270.17

You own a classic automobile that is currently valued at %150,000. If the value increases by 6.5 percent annually, how much will the automobile be worth ten years from now?

$281,570.62

What is the present value of $150,000 to be received 10 years from today if the discount rate is 11 percent?

$52827.67

Today, you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent?

$55,032.54

What is the present value of $324,000 to be received in 11 years from today. Assume a per annual discount rate of 15%, compounded annually.

$69641.60