Financial MGT exam 2

You want to have $2.65 million when you retire in 36 years. You feel that you can save $550 per month until you retire. What APR do you have to earn in order to achieve your goal?

10.51%

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.

An investor who was not as astute as he believed invested $276,500 into an account 9 years ago. Today, that account is worth $213,600. What was the annual rate of return on this account?

-2.83 percent

Living Colour Co. has a project available with the following cash flows: Year Cash Flow 0 −$34,750 1 8030​ 2 9650​ 3 13,700​ 4 15,690​ 5 10,460​ If the required return for the project is 8.1 percent, what is the project's NPV?

$10,357.71

Thomas invests $103 in an account that pays 6 percent simple interest. How much money will Thomas have at the end of 4 years?

$127.72

You have just leased a car that has monthly payments of $340 for the next 5 years with the first payment due today. If the APR is 6.24 percent compounded monthly, what is the value of the payments today?

$17,576.50

You need to have $25,000 for a down payment on a house 7 in years. If you can earn an annual interest rate of 4.3 percent, how much will you have to deposit today?

$18,618.72

You are seeking a fixed-rate mortgage of $195,000 with a term of 30 years. Your bank quotes an APR of 6.2 percent, compounded monthly. You can only afford monthly payments of $1,000, so you offer to pay off any remaining loan balance at the end of the loan term in the form of a single balloon payment. What will be the amount of the balloon payment?

$202,828.59

Assuming an interest rate of 4.6 percent, what is the value of the following cash flows four years from today? Year Cash Flow 1 $2900​ 2 3960​ 3 5785​ 4 7855​

$21,557.70

Marko, Inc., is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $6300, $11,300, and $17,500 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 11 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?

$27,642.86

You have just started a new job and plan to save $4800 per year for 44 years until you retire. You will make your first deposit in one year. How much will you have when you retire if you earn an annual interest rate of 10.13 percent?

$3,259,964.17

Mo will receive a perpetuity of $11,000 per year forever, while Curly will receive the same annual payment for the next 35 years. If the interest rate is 5.5 percent, how much more are Mo's payments worth?

$30,703.93

What is the future value of $3068 invested for 9 years at 5.9 percent compounded annually?

$5139.48

Ken just purchased new furniture for his house at a cost of $16,400. The loan calls for weekly payments for the next 7 years at an annual interest rate of 10.99 percent. How much are his weekly payments?

$64.63

You just purchased two coins at a price of $310 each. Because one of the coins is more collectible, you believe that its value will increase at a rate of 6.5 percent per year, while you believe the second coin will only increase at 5.9 percent per year. If you are correct, how much more will the first coin be worth in 15 years?

$64.78

You are considering the following two mutually exclusive projects. The crossover rate between these two projects is ________ percent and Project ________ should be accepted if the required return is less than the crossover rate. Year Project A Project B 0 -$36,000​ -$36,000​ 1 21,500​ 13,690​ 2 13,500​ 11,500​ 3 13,500​ 25,300​

10.78%; A

The Friendly Bank wants to earn an EAR of 12 percent on its consumer loans. The bank uses daily compounding. What rate is the bank most apt to quote on these loans?

11.33 percent

Your credit card company charges you 1.31 percent per month. What is the APR on your credit card?

15.72%

Your credit card company charges you 1.34 percent per month. What is the EAR on your credit card?

17.32%

What is the effective annual rate for an APR of 17.30 percent compounded monthly?

18.74%

Filter Corp. has a project available with the following cash flows: Year Cash Flow 0 −$16,000 1 5800​ 2 7100​ 3 6100​ 4 4900​ What is the project's IRR?

18.84%

Bob bought some land costing $16,140. Today, that same land is valued at $46,317. How long has Bob owned this land if the price of land has been increasing at 5 percent per year?

21.61 years

You are considering the purchase of new living room furniture that costs $1440. The store will allow you to make weekly payments of $30.79 for one year to pay off the loan. What is the EAR of this arrangement?

23.58%

A project with an initial cost of $24,100 is expected to generate cash flows of $5700, $7800, $8650, $7550, and $6500 over each of the next five years, respectively. What is the project's payback period?

3.26 years

A project that costs $17,500 today will generate cash flows of $4500 per year for seven years. What is the project's payback period?

3.89 years

You just paid $455,000 for a policy that will pay you and your heirs $18,500 per year forever with the first payment in one year. What rate of return are you earning on this policy?

4.07%

Maxxie purchased a tract of land for $26,500. Today, the same land is worth $38,900. How many years have passed if the price of the land has increased at an annual rate of 6.2 percent?

6.38 years

Al's obtained a discount loan of $68,500 today that requires a repayment of $88,000, 3 years from today. What is the APR?

8.71 percent

When your father was born 47 years ago, his grandparents deposited $550 in an account for him. Today, that account is worth $29,000. What was the annual rate of return on this account?

8.80 percent

One of your customers has just made a purchase in the amount of $18,400. You have agreed to payments of $330 per month and will charge a monthly interest rate of 1.08 percent. How many months will it take for the account to be paid off?

85.81 months

Which one of the following statements related to annuities and perpetuities is correct?

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal

You are comparing two annuities that offer regular payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Annuity B has a smaller present value than annuity A.

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

Barb will earn more interest in Year 2 than Andy

Chang Lee is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

In today's dollars, Chang Lee's money is worth more than Soo Lee's

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

Future value

Phillippe invested $1,000 ten years ago and expected to have $1,800 today He has neither added nor withdrawn any money since his initial investment. All interest was reinvested and compounded annually. As it turns out, he only has $1,680 in his account today. Which one of the following must be true?

He earned a lower interest rate than he expected.

Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period.

You want to have $27,000 saved 5 years from today in order to make a down payment on a house. To fund this, you will make deposits each week from your paycheck into an account that will earn 5.08 percent compounded weekly. How much must you deposit each week?

$91.27

A small business has determined that the machinery they currently use will wear out in 17 years. To replace the new machine when it wears out, the company wants to establish a savings account today. If the interest rate on the account is 1.9 percent compounded quarterly and the cost of the machinery will be $340,000, how much will the company have to deposit today?

$94,544.09

You are evaluating two projects with the following cash flows: Year Project X Project Y 0 −$547,800 −$517,000 1 218,500​ 208,200​ 2 228,400​ 218,000​ 3 235,600​ 225,900​ 4 195,300​ 186,700​ What is the crossover rate for these two projects?

10.49%

You are set to receive an annual payment of $12,500 per year for the next 12 years. Assume the interest rate is 7.4 percent. How much more are the payments worth if they are received at the beginning of the year rather than the end of the year?

$7192.88

Al obtained a mortgage of $195,000 at 5.25 percent for 15 years. How much of the second monthly payment is applied to interest?

$850.00

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

Carland, Inc., has a project available with the following cash flows. If the required return for the project is 7.5 percent, what is the project's NPV? Year Cash Flow 0 −$254,000 1 62,500​ 2 86,400​ 3 115,800​ 4 67,300​ 5 -$11,600​

$14,432.90

Maud'Dib Intergalactic has a new project available on Arrakis. The cost of the project is $39,000 and it will provide cash flows of $22,200, $28,300, and $28,400 over each of the next three years, respectively. Any cash earned in Arrakis is "blocked" and must be reinvested in the country for one year at an interest of 2.9 percent. The project has a required return of 9.1 percent. What is the project's NPV?

$23,243.62

Kris borrowed $25,000 with an interest-only, 4-year loan at 4.75 percent. What is the amount of the loan payment in Year 4 if payments are made annually?

$26,187.50

You just won the $54 million Ultimate Lotto jackpot. Your winnings will be paid as $2,700,000 per year for the next 20 years. If the appropriate interest rate is 6.0 percent, what is the value of your windfall?

$30,968,787.29

Beatrice invests $1410 in an account that pays 3 percent simple interest. How much more could she have earned over a 4-year period if the interest had been compounded annually?

$7.77

A project that will last for 11 years is expected to have equal annual cash flows of $104,200. If the required return is 8.3 percent, what maximum initial investment would make the project acceptable?

$733,173.91

George Jefferson established a trust fund that will provide $170,500 per year in scholarships. The trust fund earns an annual return of 2.1 percent. How much money did Mr. Jefferson contribute to the fund assuming that only income is distributed?

$8,119,047.62

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?

Project A only

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate? (No calculations needed)

Project X has both a higher present and a higher future value than Project Y.

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

A project has a net present value of zero. Which one of the following best describes this project?

The project's cash inflows equal its cash outflows in current dollar terms.

Your company has a project available with the following cash flows: Year Cash Flow 0 −$81,300 1 21,400​ 2 24,800​ 3 30,600​ 4 25,900​ 5 19,600​ If the required return is 14 percent, should the project be accepted based on the IRR?

Yes, because the IRR is 15.38 percent.

You are comparing two mutually exclusive projects. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

always accept Project A if the required return exceeds the crossover rate.

Christina invested $3,000 five years ago and earns 2 percent annual interest. 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:

compounding

Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam:

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate.

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the:

discount rate

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ________ rate.

effective annual

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

have multiple rates of return.

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:

increase

Your goal is to have $1 million in your retirement savings on the day you retire. To fund this goal, you will make one lump sum deposit today. If you plan to retire ________ rather than ________ and earn a ________ rate of interest, then you can deposit a smaller lump sum today.

later; sooner; high

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive.

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:

present value