Question 1
A furniture store has a sofa on sale for $399.00, with the payment due one year from today. The store is willing to discount the price at an annual rate of 5% if you pay today. What is the amount if you pay today?
A. $380
B. $399
C. $419
D. $394
Question 2
The school district needs to pass a bond levy for funding to remodel existing schools and to build new schools. Expenditures for the new and remodeled buildings will begin 18 months after passage of the bond. If the school district receives all funding immediately after the passage of the bond and can invest the funds at a rate of 3.75% per year, how large must the bond be for the district to have $45,000,000 at the start of construction?
A. $45,000,000
B. $47,554,834
C. $42,556,397
D. $42,582,422
Question 3
Which of the following formulas is correct for finding the present value of an investment?
A. FV =
B. PV = FV × (1 + r)n
C. PV = FVn × (1 + r)
D. PV = FV ×1/(1+r)n
Question 4
Johnson has an annuity due that pays $600 per year for 15 years. What is the present value of the cash flows if they are discounted at an annual rate of 7.50%?
A. $5,296.27
B. $5,693.49
C. $9,000.00
D. $9,675.00
Question 5
A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?
A. The PV is $178.00.
B. The FV is $224.00.
C. The FV is $224.72.
D. This question is irrelevant because there are no two-year investments that earn an average of 6% per year.
Question 6
The one-time payment of money at a future date is often called a__________.
A. lump-sum payment
B. present value
C. principal amount
D. perpetuity payment
Question 7
What is the present value today of an ordinary annuity cash flow of $3,000 per year for 40 years at an interest rate of 6.0% per year?
A. $120,000.00
B. $1,327,777.67
C. $45,139.89
D. $32,270.87
Question 8
Which of the following is the correct formula for calculating the future value?
A. FV =
B. FV = PV × (1 + r)n
C. PV = FV × (1 + r)n
D. PV =
Question 9
Which of the following will result in a future value greater than $100?
A. PV = $50, r = an annual interest rate of 10%, and n = 8 years.
B. PV = $75, r = an annual interest rate of 12%, and n = 3 years.
C. PV = $90, r = an annual interest rate of 14%, and n = 1 year.
D. All of the future values are greater than $100.
Question 10
Which of the following actions will DECREASE the present value of an investment?
A. decrease the interest rate
B. decrease the future value
C. decrease the amount of time
D. All of the above will decrease the present value.
Question 11
Your company just sold a product with the following payment plan: $50,000 today, $25,000 next year, and $10,000 the following year. If your firm places the payments into an account earning 10% per year, how much money will be in the account after collecting the last payment?
A. $99,000
B. $98,000
C. $88,500
D. $85,000
Question 12
A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.
A. $100
B. $120
C. $121
D. $122
Question 13
Which of the following actions will INCREASE the present value of an investment?
A. decrease the interest rate
B. decrease the future value
C. increase the amount of time
D. All of the above will increase the present value.
Question 14
Your university is running a special offer on tuition. This year's tuition cost is $18,000. Next year's tuition cost is scheduled to be $19,080. The university offers to discount next year's tuition at a rate of 6% if you agree to pay both years' tuition in full today. How much is the total tuition bill today if you take the offer?
A. $18,000
B. $34,981
C. $37,080
D. $36,000
Question 15
You have the opportunity to purchase mineral rights to a property in North Dakota with expected annual cash flows of $10,000 per year for eight years. If you discount these cash flows at a rate of 12% per year, what are these cash flows worth today if the cash flows occur at the end of each period?
A. $55,637.57
B. $49,676.40
C. $80,000.00
D. $122,996.93
Question 16
Which is greater, the present value of a five-year ordinary annuity of $300 discounted at 10%, or the present value of a five-year ordinary annuity of $300 discounted at 0% that has its first cash flow six years from today?
A. The first annuity because the cash flows occur sooner.
B. The second annuity because the cash flows are discounted at a lower interest rate.
C. The two annuities are of equal value.
D. The answer to this question cannot be determined.
Question 17
Twelve years ago, you paid for the right to twelve $25,000 annual end-of-the-year cash flows. If discounting the cash flows at an annual rate of 8%, what did you pay for these cash flows back then?
A. $474,428.16
B. $300,000.00
C. $203,474.11
D. $188,401.95
Question 18
A home improvement firm has quoted a price of $9,800 to fix up John's backyard. Five years ago, John put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does John have enough money in his account to pay for the backyard fix-up?
A. Yes; John now has exactly $9,800 in his home improvement account.
B. No; John has only $9,687 in his home improvement account.
C. Yes; John now has $10,519 in his home improvement account.
D. There is not enough information to answer this question.
Question 19
Your aunt places $13,000 into an account earning an interest rate of 7% per year. After five years the account will be valued at $18,233.17. Which of the following statements is correct?
A. The present value is $13,000, the time period is seven years, the present value is $18,233.17, and the interest rate is 5%.
B. The future value is $13,000, the time period is five years, the principal is $18,233.17, and the interest rate is 7%.
C. The principal is $13,000, the time period is five years, the future value is $18,233.17, and the interest rate is 7%.
D. The principal is $13,000, the time period is seven years, the future value is $18,233.17, and the interest rate is 5%.
Question 20
Your neighbor owns a perpetuity of $100 per year that has a discount rate of 6% per year. He offers to sell to you all but the next 20 cash flows (the first to be received one year from today. for $500. In other words, he keeps the first 20 cash flows of his perpetuity and you get all of the rest. Is this a good price for you if the appropriate discount rate is 6%?
A. No, because the entire perpetuity is worth only $1,666.67 and your neighbor is taking the best cash flows worth more than $1,200 in present value terms
B. Yes, because the present value of the remaining cash flows is $519.68 and you are buying them for only $500.
C. No, because the cash flows you receive are only worth $482.16 and that is less than the $500 your neighbor is asking for the cash flows.
D. This question cannot be answered.
