Lesson 4 Practice

Somehow, you dig up $2,000, and you decide not to spend it. (Goodbye, Spring Break.) Instead, you invest it in an account earning 5% interest annually. You set a goal for yourself to leave this money untouched for 40 years. How much will you have to play with when you are older and wiser at the end of those 40 years? (A) $14,079.98 (B) $8,792.50 (C) $80,000.00

(A) $14,079.98

Here is your 25-year savings plan: - $3,600 each year for the next two years. You will earn just 1.0% interest, or return, on this savings. - $6,000 per year for years 3, 4, and 5. Because you will have learned to be a smart beginning investor by this time, you believe you can earn a 6.0% annual return on any invested funds. - $15,000 per year for the remaining 20 years. By this time you expect to earn a 12.0% annual return. If you never withdraw any funds from the account, if all funds earn the going rate of return for the time period, and if all of your savings is deposited at the end of each year, how much should you have in total at the end of 25 years? (A) about $1,348,178 (B) about $979,661 (C) about $749,303

(A) about $1,348,178

How much will you need to invest at the end of each year, for 30 years, in order to meet your retirement goal of $1 million - if you can only earn 4.0% annually? (A) about $17,800 (B) about $17,140 (C) about $12,500

(A) about $17,800

Here is yet another question about savings. Slightly more involved, however. As before, you believe you can save a certain amount each year for 30 years. That is $5,400. Your opportunity cost of money is 6.0%. How much more will you have in the future if this savings plan starts off with $10,000 already saved (and kept in your investment account, along with the annual payments) until the end of 30 years? (A) about $57,435 (B) about $369,479 (C) about $484,349

(A) about $57,435

You want to invest $3,000 in a certificate of deposit so that it will grow into $6,000 in 10 years. For this to work, what kind of interest rate to you need to have on that certificate of deposit? (A) about 7.2% (B) about 3.8% (C) about 1.4%

(A) about 7.2%

An aunt has agreed to give you $10,000 in one year and $15,000 in two years. This is to help you with your studies and prep for your career. If your opportunity cost of money is 5%, what is the value today of this help from your aunt? (A) $25,000.00 (B) $23,129.25 (C) $24,285.71

(B) $23,129.25

What is the value to you today of $10,000 you will receive at the end of seven years, assuming your opportunity cost of money is 12%? (A) $4,440.12 (B) $4,523.49 (C) $10,000.00

(B) $4,523.49

What is the value today of $8,000 you expect to receive in one year, with an opportunity cost of your money of 5%? (A) $8640.00 (B) $7,619.05 (C) $8,000.00

(B) $7,619.05

An investment product offered by your financial planner calls for you to receive $10,000 per year for 20 years. You receive these payments at the end of each year. If your opportunity cost of money is 9.0%, what is the most you would pay for this investment product? (A) $89,501.15 (B) $91,285.46 (C) $511,601.20

(B) $91,285.46

Your firm's bank has agreed to give you a five-year commercial loan of $7.5 million. The capital will fund a new product manufacturing operation that has a high chance of success, and the bank is happy to lend. Its loan officers, like your firm's management, believe the cash flow resulting from this new product is sufficiently large to pay off the loan. The terms of the loan call for you to receive $7.5 million right now. Your firm will be charged an annual interest rate of 5.8%, and you are expected to make quarterly payments until the loan balance is zero at the end of five years. What amount will you pay each quarter? (A) about $1,770,797 (B) about $434,693 (C) about $442,699

(B) about $434,693

How many annual payments of $1,000 are necessary in order to save a total of $20,000 with an annual interest rate of 6.0%? (A) about 17.25 payments (or just over 17 years) (B) about 13.5 payments (or 13.5 years) (C) about 20 payments (or 20 years)

(B) about 13.5 payments (or 13.5 years)

Say you earn 3.0% on a small savings. You can reasonably deposit $6,000 by the end of each year. How many years for this savings plan to produce $100,000? (A) just over 17 years (B) about 13.7 years (C) about 12.5 years

(B) about 13.7 years

You invest $50,000 now and another $50,000 at the beginning of next year. Your investments usually earn 10%. How much will your total be at the end of the second year? (A) $112,582.93 (B) $110,000.00 (C) $115,500.00

(C) $115,500.00

If you invest $5,000 today in an account earning 4% interest, what should the balance be at the end of three years? (A) $5,600.00 (B) $5,627.54 (C) $5,624.32

(C) $5,624.32

What is the present value of $1,000 promised to you at the end of five years if your opportunity cost of money is 8%? (A) $1,000.00 (B) $1,468.33 (C) $680.58

(C) $680.58

Instead of spending $70,000 on a Mercedes for transportation during four years at IU, you decide to buy a $20,000 Kia. You then save $50,000 in an account earning 11% interest. The money from this savings will then be donated to the Riley Hospital for Children in Indianapolis when you graduate. How much can you donate at the end of four years? (A) $105,000.00 (B) $76,872,70 (C) $75,903.52

(C) $75,903.52

If you invest $3,600 at the end of each year for 15 years earning 7.5% per year, how much will you have in total at the end of the 15th year? (A) $10,651.96 (B) $102,512.12 (C) $94,026.11

(C) $94,026.11

You would like to retire in 30 years and have $1 million on hand at that time. If you can reasonably earn 8.0% annually on your invested funds, how much should you invest at by end of each year in order to meet your goal? (A) about $9,600 (B) about $10,200 (C) about $8,800

(C) about $8,800

Your young company's revenues have been growing consistently at about 15% per year, and you believe this is sustainable for the next several years. About how many years will it take to double those revenues? (A) almost 11 years (B) about 7 years (C) about 4.8 years

(C) about 4.8 years

As a financial manager for Fake Company Zeta, you have been evaluating your company's preferred shares. The dividend on those shares is $2.12 and has been at that number for many years. The market price of these shares hovers around $51.27. What does this imply about the opportunity cost of investing in these preferred shares, based on market prices? Your answer for this question should be entered as a decimal and with four decimal places. For example, a rate you calculated as 0.045 should be entered as 0.0450. This should NOT be entered as 4.5%. Again, round to the nearest fourth decimal. No percent signs, dollar signs, or commas. If your calculator is set up as done in class and on the videos, then it should display exactly what you enter here.

0.0413

Your firm is considering an investment in new capital equipment that is expected to generate the annual cash flows indicated in the table below. If the initial investment required is $161 and the company's opportunity cost of capital is 9.3%, what is the net present value of these cash flows? Year 1 - Year 2 - Year 3 Cash inflows: $100 - $267 - $291 Cash outflows: $75 - $25 - $59 Of course, you will have been working with four decimals on all the calculations. But for your final answer entered below, round to the nearest dollar. Do not enter dollar signs or commas. For example, if your calculated answer is $2,841.78, then enter: 2842. Again, rounded to nearest dollar. No dollar signs or commas.

242.1183

If you stick to a savings plan that includes investing $10976 now and then $5459 at the end of each year, what will the balance be at the end of five years? Assume you can earn 5.3% annually on whatever you save. Of course, you will have been working with four decimals on all the calculations. But for your final answer entered below, round to the nearest dollar. Do not enter dollar signs or commas. For example, if your calculated answer is $2,841.78, then enter: 2842. Again, rounded to nearest dollar. No dollar signs or commas.

44555.0

You would like to have saved $11973 by the end of 8 years. You believe you can earn about 8% per year on any invested funds. How much should you invest right now in order for it to grow to $11973 at the end of those 8 years? Of course, you will have been working with four decimals on all the calculations. But for your final answer entered below, round to the nearest dollar. Do not enter dollar signs or commas. For example, if your calculated answer is $2,841.78, then enter: 2842. Again, rounded to nearest dollar. No dollar signs or commas.

6469.0

You plan to invest $5108 now for 9 years. You believe you can earn an average of 6% per year on this investment. What should your balance be at the end of this investment period (of 9 years)? Of course, you will have been working with four decimals on all the calculations. But for your final answer entered below, round to the nearest dollar. Do not enter dollar signs or commas. For example, if your calculated answer is $2,841.78, then enter: 2842. Again, rounded to nearest dollar. No dollar signs or commas.

8630.0