Managerial Finance Exam 1

You have just received notification that you have won the $2 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 80 years from now. What is the present value of your windfall if the appropriate discount rate is 9.1 percent?

$1,883.87

Compute FV: PV = $7,834 Years = 7 Interest Rate = 9%

$14,320.86

You are scheduled to receive $10,000 in two years. When you receive it, you will invest it for six more years at 6.8 percent per year. How much will you have in eight years?

$14,839.78

Compute PV: FV = $16,832 Years = 17 Interest Rate = 9%

$3,889.42

You need $75,000 in 10 years. If you can earn .76 percent per month, how much will you have to deposit today?

$30,233.07

Compute FV: PV = $81,286 Years = 14 Interest Rate = 12%

$397,253.81

Compute PV: FV = $886,073 Years = 23 Interest Rate = 13%

$53,292.40

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If the required return on this investment is 5.6 percent, how much will you pay for the policy?

$535,714.29

Compute FV: PV = $213,612 Years = 16 Interest Rate = 6%

$542,649.60

Compute PV: FV = $550,164 Years = 35 Interest Rate = 21%

$696.63

Compute FV: PV = $2,597 Years = 11 Interest Rate = 13%

$9,961.73

Solve for R: PV = $40,353 Years = 25 FV = $531,618

10.86%

If you deposit $5,300 at the end of each year for the next 20 years into an account paying 9.8 percent interest, how much money will you have in the account in 20 years? How much will you have if you make deposits for 40 years?

20 years = $296,748.26 40 years = $2,221,767.13

Christie, Inc., has identified an investment project with the following cash flows. If the discount rate is 6 percent, what is the future value of these cash flows in Year 4? What is the future value at an interest rate of 13 percent? At 27 percent? Year 1 = $1,075 2 = $1,210 3 = $1,340 4 = $1,420

6% = $5,480.30 13% = $6,030.36 27% = $7,275.42

Solve for R: PV = $181 Years = 8 FV = $317

7.26%

Assume the total cost of a college education will be $325,000 when your child enters college in 18 years. You presently have $85,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

7.74%

Solve for R: PV = $335 Years = 13 FV = $1,080

9.42%

First National Bank charges 13.8 percent compounded monthly on its business loans. First United Bank charges 14.1 percent compounded semiannually. As a potential borrower, which bank would you go to for a new loan?

FN = 14.71% FU = 14.6%

You have just made your first $5,500 contribution to your individual retirement account. Assuming you earn an annual rate of return of 10 percent and make no additional contributions, what will your account be worth when you retire in 45 years? What if you wait 10 years before contributing? (Does this suggest an investment strategy?)

FV1 = $400,897.66 FV2: $154,563.40

You have $4,300 to deposit. Regency Bank offers 12 percent per year compounded monthly (1 percent per month), while King Bank offers 12 percent but will only compound annually. How much will your investment be worth in 20 years at each bank?

FV1: $46,837.98 FV2: $41,479.06

You have decided that you want to be a millionaire when you retire in 45 years. If you can earn an annual return of 11.8 percent, how much do you have to invest today? What if you can earn 5.9 percent?

PV1: $6,608.74 PV2: $75,802.20

The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If the required return on this investment is 5.6 percent. A sales associate told you the policy costs $525,000. At what interest rate would this be a fair deal?"

r = 5.71%

Imprudential, Inc., has an unfunded pension liability of $450 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 5.2 percent, what is the present value of this liability?

$163,266,738.60

Mendez Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent? Year 1 = $470 2 = $610 3 = $735 4 = $920

$2,111.99 $1,758.27 $1,550.39

What is the future value of $5,500 in 17 years assuming an APR of 8.4 percent compounded semiannually?

$22,277.43

Compute PV: FV = $48,318 Years = 9 Interest Rate = 7%

$26,281.79

Your coin collection contains fifty 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2067, assuming they appreciate at an annual rate of 4.3 percent?

$6,333.82

Solve for R: PV = $48,000 Years = 11 FV = $185,382

13.07%

First City Bank pays 7.5 percent simple interest on its savings account balances, whereas Second City Bank pays 7.5 percent interest compounded annually. If you made a deposit of $8,600 in each bank, how much more money would you earn from your Second City Bank account at the end of eight years?

Simple: $13,760 Compound: $15,337.91 Answer = $1,577.91

Investment X offers to pay you $5,300 per year for eight years, whereas Investment Y offers to pay you $7,300 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is 15 percent?

X @ 5% = $34,255.03 Y @ 5% = $31,605.18 X @ 15% = $23,782.80 Y @ 15% = $24,470.73