finance 301, exam 2, quiz 4

1. Given the following information, in which order would you choose the following projects based on the profitability index? Project A (NPV of cash flows: $960,000, Investment Cost: $730,000) Project B (NPV of cash flows: $1,000,000, Investment Cost: $860,000) Project C (NPV of cash flows: $1,340,000, Investment Cost: $1,500,000) A. Project A, Project B then Project C B. Project A, Project C then Project B C. Project C, Project A then Project B D. Project B, Project A then Project C E. Project B, Project C then Project A

a

An investor will receive a 10-year annuity of $8,000 per year. If the annual interest rate is 3.5%, what is the present value of this annuity? A. $66,533 B. $93,851 C. $80,000 D. $228,571 E. $22,857

a

An investor will receive a 20-year annuity of $3,000 per year. If the annual interest rate is 4.50%, what is the present value of this annuity? A. $39,024 B. $94,114 C. $60,000 D. $66,667 E. $33,333

a

How much would you pay in total interest if you bought a car for $31,000 that was fully financed with a 4.25% auto loan that lasted 4 years (assuming that you make payments annually)? A. $3,362 B. $7,134 C. $5,270 D. $1,318 E. $4,464

a

Megan makes a payment of $50,000 a year on her boat. At the end of 25 years, she's paid off her initial $500,000 loan. What was her approximate annual interest rate? A. 8.8% B. 10.0% C. 40.0% D. 1.6% E. 10.2%

a

Suppose you plan to invest $400 every year in savings account for the next 22 years. The bank offers you an 8% interest rate and the current tax rate is 20%. An alternative investment is an IRA (tax-free investment), which has an expected return of 8%. Which one of the following is true about the future values of these two investments? A. You will get $3,965 more if you choose the IRA B. You will get $3,965 more if you choose the savings account C. You will get $6,938 more if you choose the IRA D. You will get $6,938 more if you choose the savings account E. Both investments will have the same future value

a

Suppose you plan to invest $950 every year in savings account for the next 14 years. The bank offers you an 11% interest rate and the current tax rate is 35%. An alternative investment is an IRA (tax-free investment), which has an expected return of 11%. Which one of the following is true about the future values of these two investments? A. You will get $6,938 more if you choose the IRA B. You will get $6,938 more if you choose the savings account C. You will get $3,965 more if you choose the IRA D. You will get $3,965 more if you choose the savings account E. Both investments will have the same future value

a

What payment would you need to make yearly into your savings account if you wanted $500,000 in 15 years, with a tax rate of 35% and an average market return of 9.0%? A. $21,728 B. $17,029 C. $33,333 D. $23,963 E. $2,222

a

Which of the following is CERTAINLY true regarding interest rates? A. Decreases in interest rates lead to increases in bond prices. B. Decreases in interest rates lead to decreases in bond prices. C. Decreases in interest rates lead to decreases in stock prices. D. The effect of a change in interest rates on bond and stock prices is unknown. E. Interest rates do not affect stock or bond prices.

a

Your uncle needs $1,500,000 upon retirement in 30 years to live comfortably. He can invest $20,000 a year to his retirement. What interest rate would his investment need to appreciate at in order for him to meet his goals? A. 5.7% B. 2.5% C. 8.3% D. 0.3% E. 6.8%

a

8 years ago, you invested $16,750. The investment has grown to $27,500. What is your average rate of return? A. 3.8% B. 6.4% C. 7.2% D. 2.9% E. 4.6%

b

8 years ago, you invested $7,500. The investment has grown to $12,000. What is your average rate of return? A. 7.5% B. 6.1% C. 18.7% D. 16.2% E. 11.4%

b

A company's investment rule when using the calculated Net Present Value (NPV) of a project is: A. Invest in the project if the NPV is negative. B. Invest in the project if the NPV is positive. C. Invest in the project only if the NPV is zero. D. Invest in the project only if its NPV is higher than last year's project. E. NPV is not useful in making investment decisions.

b

How much interest would you pay if you bought a car for $55,000 that was fully financed with a 3.6% auto loan that lasted 6 years (assuming that you make payments annually)? A. $3,362 B. $7,134 C. $11,880 D. $1,980 E. $9,167

b

Scranton Paper Company recently bought a new manufacturing plant for $4 million and expects cash flows generated from the investment in the next three years to be: $30 million, $43 million, and $51 million. Using a discount rate of 13%, calculate the company's NPV. A. $124.0 million B. $91.6 million C. $107.9 million D. $85.6 million E. $74.8 million

b

Upon graduating from Penn State, Christian has $86,000 worth of student loans with an interest rate of 6.25%. How many years must the loan be if his annual payment budget is $9,000? A. 10 Years B. 15 Years C. 20 years D. 25 Years E. 30 Years

b

What is the future value of an investment if you make a deposit of $10,000 at the end of each year for a total of 15 years (assume 4.5% interest and no taxes)? A. $150,000 B. $207,841 C. $107,395 D. $23,586 E. $222,222

b

. A company plans to invest in a new project that is expected to cost $1,350,000. The new project will generate cash flows of $540,000 per year. The discount rate is 9%. Calculate the payback period in years. A. 1.8 B. 2.0 C. 2.5 D. 4.0 E. 5.0

c

1. Discounted Cash Flow analysis is used to determine the ______ of an investment based on the _______, discounted for risk and timing. A. price, present value of future cash flows B. value, future value of future cash flows C. value, present value of future cash flows D. price, present value of historical cash flows E. value, future value of historical cash flows

c

A company plans to invest in a new project that is expected to cost $870,000. The new project will generate cash flows of $290,000 per year. The discount rate is 7%. Calculate the payback period in years. A. 3.5 B. 2.0 C. 3.0 D. 2.5 E. 4.0

c

Assuming you are in the 35% tax bracket, what is your after-tax rate on a 9% CD (Certificate of Deposit)? A. 3.2% B. 12.2% C. 5.9% D. 25.7% E. 9.0%

c

If you took out a $450,000 mortgage loan to be repaid over 20 years at 5.5%, calculate the amount of principal reduction in the first year. A. $37,656 B. $66,942 C. $12,906 D. $89,442 E. $24,750

c

Jasmine makes a payment of $20,000 a year on her home. At the end of 30 years, she's paid off her initial $400,000 loan. What was her approximate interest rate? A. 20.0% B. 66.7% C. 2.8% D. 2.2% E. 8.8%

c

What is the future value of an investment if you make a deposit of $500 at the end of each year for a total of 20 years (assume 3.5% interest and no taxes)? A. $10,000 B. $7,106 C. $14,140 D. $1,179 E. $14,286

c

Which of the following is CERTAINLY true regarding interest rates? A. Increases in interest rates lead to increases in stock prices. B. Increases in interest rates lead to increases in bond prices. C. Increases in interest rates lead to decreases in bond prices. D. The effect of a change in interest rates on bond and stock prices is unknown. E. Interest rates do not affect stock or bond prices.

c

Which of the following is true concerning the difference between simple and compound interest? A. With compound interest, interest is earned only on the original investment whereas with simple interest, interest is earned on interest. B. Simple interest always leads to a higher ending investment value when compared to compound interest. C. With simple interest, interest is earned only on the original investment whereas with compound interest, interest is earned on both the original investment and the accumulated interest. D. With compound interest, the assumption is that interest earned on the original investment is not reinvested. With simple interest, interest is reinvested. E. Simple interest and compound interest always lead to the same ending investment value so there is no difference between the two methods.

c

York Industries recently bought a new machine for $300 million and expects cash flows generated from the investment in the next four years to be: $185 million, $203 million, $224 million, and $228 million. Using a discount rate of 15%, calculate the company's NPV. A. $714 million B. $840 million C. $292 million D. $408 million E. $1,246 million

c

2. Which of the following is NOT part of the Discounted Cash Flow approach? A. Developing a set of expected cash flows B. Determining the correct discount rate C. Adding the present value of all expected future cash flows D. Calculating the price of an investment E. Multiplying future cash flows by correct discount factors

d

Assuming you are in the 30% tax bracket, what is your after-tax rate on an 8% CD (Certificate of Deposit)? A. 2.4% B. 10.4% C. 8.0% D. 5.6% E. 26.7%

d

Charlie and Dennis open separate accounts worth $4,000 that both have a return of 13%. However, Charlie's account accrues Simple Interest and Dennis' accrues Compound Interest. Which of the following statements is true about their accounts in 9 years? A. Charlie's Account is worth $6119 more than Dennis' B. Charlie's Account is worth $3336 more than Dennis' C. Both Accounts are worth the same D. Dennis' Account is worth $3336 more than Charlie's E. Dennis' Account is worth $6119 more Charlie's

d

The IRR of a project is _______. A. The discount rate that makes the NPV of an investment less than zero. B. The maximum desired rate of return on a project. C. The discount rate that makes the NPV of an investment greater than zero. D. The discount rate that makes the NPV of an investment equal to zero. E. Not used in making investment decisions.

d

Upon graduating from Penn State, Gloria has $120,000 worth of student loans with an interest rate of 3.75%. How many years must the loan be if her annual payment budget is $7,480? A. 10 Years B. 15 Years C. 20 years D. 25 Years E. 30 Years

d

Which of the following is TRUE regarding the calculation of Net Present Value (NPV)? A. NPV does not use cash flows in its calculation B. The NPV of a project is the sum of the value of a project and cost of the investment C. Projects with a negative NPV may be appropriate investments if the IRR meets the hurdle rate D. When using NPV you discount the projected cash flows for risk and time E. NPV doesn't take into account the cost of the investment, only the projected future cash flows

d

Which of the following is true about IRR as an investment rule? A. Invest if IRR is greater than zero. B. Invest if IRR is equal to zero. C. Invest if IRR is less than a predetermined rate of return. D. Invest if IRR is greater than a predetermined rate of return. E. Invest if IRR is equal to the rate of return on treasury bills.

d

Which of the following is true concerning the difference between simple and compound interest? A. With compound interest, interest is earned only on the original investment whereas with simple interest, interest is earned on interest. B. Simple interest always leads to a higher ending investment value when compared to compound interest. C. With compound interest, interest is earned only on the original investment whereas with simple interest, interest is earned on both the original investment and the accumulated interest. D. With simple interest, the assumption is that interest earned on the original investment is not reinvested. With compound interest, interest is reinvested. E. Simple interest and compound interest always lead to the same ending investment value so there is no difference between the two methods.

d

Your uncle needs $2,000,000 upon retirement in 20 years to live comfortably. He can invest $50,000 a year to his retirement. What interest rate would his investment need to appreciate at in order for him to meet his goals? A. 2.0% B. 10.0% C. 5.7% D. 6.8% E. 0.5%

d

. Given the following information, in which order would you choose the following projects based on the profitability index? Project A (NPV of cash flows: $630,000, Investment Cost: $420,000) Project B (NPV of cash flows: $1,200,000, Investment Cost: $760,000) Project C (NPV of cash flows: $380,000, Investment Cost: $230,000) A. Project A, Project B then Project C B. Project A, Project C then Project B C. Project C, Project A then Project B D. Project B, Project A then Project C E. Project C, Project B then Project A

e

Hailey took out a $100,000 home mortgage with 4.3% interest rate and equal annual payments. How much will she have to pay annually to repay the loan in 30 years? A. $943 B. $647 C. $4,300 D. $3,333 E. $5,995

e

If you invest $10,000 today at a rate of 5.0% (tax-free), how much will it be worth 20 years from now? A. $210,000 B. $190,476 C. $124,622 D. $330,660 E. $26,533

e

If you invest $15,000 today, assuming it grows at 7.0% per year (tax-free), how much will this be worth in 30 years? A. $481,500 B. $420,561 C. $186,136 D. $147,230 E. $114,184

e

If you invest $5,100 a year, what would be the value of this investment at the end of 4 years at an interest rate of 7.75% and a tax rate of 17%? A. $16,986 B. $14,099 C. $19,004 D. $18,968 E. $22,454

e

If you invest $7,450 a year, what would be the value of this investment at the end of 9 years at an interest rate of 4.25% and a tax rate of 28%? A. $39,433 B. $54,768 C. $57,351 D. $22,454 E. $75,871

e

If you took out $800,000 mortgage loan to be repaid over 10 years at 3.9%, calculate the amount of principal reduction in the first year. A. $12,906 B. $98,142 C. $16,026 D. $31,200 E. $66,942

e

Josh will inherit a lump sum amount of $750,000 that is payable in 30 years. The current rate of return is 4.0%. What is the present value of the lump sum? A. $900,000 B. $26,000 C. $81,085 D. $2,432,548 E. $231,239

e

Phil and Claire open separate accounts worth $7,250 that both have a return of 10.5%. However, Phil's Account accrues Simple Interest and Claire's accrues Compound Interest. Which of the following statements is true about their accounts in 11 years? A. Phil's Account is worth $6119 more than Claire's Account B. Phil's Account is worth $3336 more than Claire's Account C. Both Accounts are worth the same D. Claire's Account is worth $3336 more than Phil's E. Claire's Account is worth $6119 more than Phil's

e

Stuart will inherit a lump sum amount of $500,000 that is payable in 20 years. The current rate of return is 6.0%. What is the present value of the lump sum? A. $1,603,568 B. $80,178 C. $26,500 D. $600,000 E. $155,902

e

Travis took out a $225,000 home mortgage with 3.4% interest rate and equal annual payments. How much will he have to pay annually to repay the loan in 15 years? A. $9,084 B. $7,650 C. $5,995 D. $15,000 E. $19,397

e

What interest rate would you have to earn if you wanted to double an investment in 10 years? A. 6.4% B. 4.7% C. 12.5% D. 9.6% E. 7.2%

e

What interest rate would you have to earn if you wanted to double an investment in 30 years? A. 9.2% B. 13.7% C. 11.4% D. 4.8% E. 2.4%

e

What payment would you need to make yearly into your savings account if you wanted $300,000 in 10 years, with a tax-rate of 30% and an average market return of 7.0%? A. $21,713 B. $30,000 C. $3,000 D. $57,133 E. $23,963

e