Questions in Chapter 5 concept.

qz 1) Given the following end-of-year cash flows, what is the present value of the second cash flow if the discount rate is 6 percent? Year:Cash Flow 1:$500 2:$750 3:$1,000 [A] $471.70 [B] $667.50 [C] $707.55 [D] $750.00 [E] $839.62 [A] :It appears you found the first cash flow, not the second. Review section 5.2. [B] :You are correct! [C] :The second cash flow is two years away. It appears you found the present value for only one year. Review section 5.2. [D] :This is not the present value of any of the three cash flows. Review section 5.2. [E] :It appears you found the present value of the third cash flow, not the second. Review section 5.2.

2) Andy promises to give Opie $5,000 when he graduates from college at Mayberry U. How much must Andy invest today to make good on his promise if Opie is expected to graduate in 12 years and Andy can earn 5 percent on his money? [A] $2,135.32 [B] $2,784.19 [C] $2,881.11 [D] $3,012.88 [E] $8,979.28 [A] :This is a present value of a lump sum problem. Review section 5.2. [B] :You are correct! [C] :This is a present value of a lump sum problem. Review section 5.2. [D] :This is a present value of a lump sum problem. Review section 5.2. [E] :This is a present value of a lump sum problem. Review section 5.2.

3) You have $950 in your account today. How much will you have 5 years from now if the account earns 8 percent compounded annually? [A] $1,341.05 [B] $1,347.82 [C] $1,395.86 [D] $1,406.23 [E] $1,491.15 [A] :This is a future value of a lump sum problem. Review section 5.1. [B] :This is a future value of a lump sum problem. Review section 5.1. [C] :You are correct! [D] :This is a future value of a lump sum problem. Review section 5.1. [E] :This is a future value of a lump sum problem. Review section 5.1.

4) One hundred years ago, a painting sold for $125. Today it sold for $36 million. Had the painting been purchased by your great-grandfather and passed on to you, approximately how much would your average annually compounded rate of return have been? [A] 9.11 percent [B] 10.09 percent [C] 11.88 percent [D] 11.99 percent [E] 13.40 percent [A] :You need to review section 5.3 to see how to find an unknown interest rate. [B] :You need to review section 5.3 to see how to find an unknown interest rate. [C] :You need to review section 5.3 to see how to find an unknown interest rate. [D] :If you are using the time value functions on a financial calculator, be sure to indicate the direction of your cash flows. Review section 5.3. [E] :You are correct!

5) What is the future value of $25,000 received today if it is invested at 6.5 percent compounded annually for six years? [A] $17,133.35 [B] $27,476.42 [C] $36,478.56 [D] $39,521.75 [E] $41,374.89 [A] :This is a future value of a lump sum problem. Review section 5.1. [B] :This is a future value of a lump sum problem. Review section 5.1. [C] :You are correct! [D] :This is a future value of a lump sum problem. Review section 5.1. [E] :This is a future value of a lump sum problem. Review section 5.1.

6) What is the future value of the following set of cash flows 4 years from now? Assume an interest rate of 5.5 percent. Year:Cash Flow 0:-$800 1:$100 2:$300 3:$500 4:$700 [A] $555.18 [B] $585.72 [C] $642.12 [D] $687.77 [E] $800.00 [A] :You need to find five future values and sum them, paying close attention to the signs on the cash flows. Review section 5.1. [B] :Note that the first cash flow is invested for four years. Review section 5.1. [C] :Year 0 indicates today. Year 4 indicates the end of year 4. Review section 5.1. [D] :You are correct! [E] :This answer is irrational given the amount of the cash flows and an interest rate greater than zero. Review section 5.1.

7) What is the future value at the end of year four of the following set of end-of-year cash flows? Assume an interest rate of 8 percent. Year:Cash Flow 1:$1,000 2:-$1,000 3:$1,000 4:-$1,000 [A] $0.00 [B] $127.38 [C] $173.31 [D] $379.41 [E] $3,312.13 [A] :This answer is irrational given the differing times of the cash flows. Review section 5.1. [B] :Note that the first cash flow earns interest for three years. Review section 5.1. [C] :You are correct! [D] :You need to find four future values and sum them, paying close attention to the signs on the cash flows. Review section 5.1. [E] :This answer is irrational given the amounts and the timing of the cash flows. Review section 5.1.

8) All else equal, the higher the interest rate, the lower the present value of an amount to be received at some point in the future. [A] True [B] False [A] :You are correct! [B] :Consider the present value of $1 to be received ten years from now at 5 percent versus 10 percent. Review section 5.2.

9) An account was opened with an investment of $1,000 ten years ago. The ending balance in the account is $1,500. If interest paid on the account was compounded annually, how much compound interest was earned? [A] $86 [B] $93 [C] $102 [D] $414 [E] $500 [A] :Compound interest is the total interest earned on the account. Review section 5.1. [B] :Compound interest is the total interest earned on the account. Review section 5.1. [C] :Compound interest is the total interest earned on the account. Review section 5.1. [D] :Compound interest is the total interest earned on the account. Review section 5.1. [E] :You are correct!

10) What is the total present value of $50 received in one year, $200 received in two years, and $800 received in six years if the discount rate is 8 percent? [A] $482.72 [B] $661.68 [C] $697.25

[D] $721.90 [E] $852.83 [A] :You need to find three present values and sum them. Did you get $46.30 and $171.47 as the present values of the first two cash flows, respectively? Review section 5.2. [B] :You need to find three present values and sum them. Did you get $46.30 and $171.47 as the present values of the first two cash flows, respectively? Review section 5.2. [C] :You need to find three present values and sum them. Did you get $46.30 and $171.47 as the present values of the first two cash flows, respectively? Review section 5.2. [D] :You are correct! [E] :You need to find three present values and sum them. Did you get $46.30 and $171.47 as the present values of the first two cash flows, respectively? Review section 5.2.

11) An account was opened with an investment of $1,000 ten years ago. The ending balance in the account is $1,500. If interest was compounded annually, what rate was earned on the account? [A] 1.00 percent [B] 2.27 percent [C] 2.99 percent [D] 3.80 percent [E] 4.14 percent [A] :You need to review section 5.3 to see how to solve for unknown interest rates. [B] :You need to review section 5.3 to see how to solve for unknown interest rates. [C] :If you are using the time value function on a financial calculator, be sure to indicate the direction of your cash flows. Review section 5.3. [D] :You need to review section 5.3 to see how to solve for unknown interest rates. [E] :You are correct!

12) Suppose you are trying to find the present value of two different cash flows using the same interest rate for each cash flow. The first cash flow is $1,000 ten years from now. The second is $800 seven years from now. Which one of the following is true about the discount factors used to value the cash flows? [A] The factor for the cash flow ten years away is always less than or equal to the factor for the cash flow that is received seven years from now. [B] Both factors are greater than 1. [C] Regardless of the interest rate, the discount factors are such that the present value of the $1,000 will always be higher than the present value of the $800. [D] Since the payments are different, no statement can be made regarding the factors to be used. [E] The astute investor will factor in the time differential and choose the payment that arrives the soonest. [A] :You are correct! [B] :This is not correct for present values. Review section 5.2. [C] :This may be true for some interest rates, but not for all. Review section 5.2. [D] :This statement is incorrect. Review section 5.2. [E] :The astute investor will choose the one with the highest present value. Review section 5.2.

13) If you are given a present value, the length of time the money is to be invested, and the future value of that investment, you can solve for the interest rate. [A] True [B] False

[A] :You are correct! [B] :Given any three components, you can determine the fourth. Review section 5.3.

14) Discounting is the process of finding the present value of some future amount. [A] True [B] False [A] :You are correct! [B] :This is a correct definition of a present value. Review section 5.2.

15) A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. Over the first four years, the account earned _____ compounded annually. [A] 11.47 percent [B] 12.82 percent [C] 14.63 percent [D] 15.57 percent [E] 23.06 percent [A] :You are correct! [B] :The present value is $500. The future value is $772. Review section 5.3. [C] :The present value is $500. The future value is $772. Review section 5.3. [D] :The present value is $500. The future value is $772. Review section 5.3. [E] :The present value is $500. The future value is $772. Review section 5.3.

16) Given the following end-of-year cash flows, what is the present value if the discount rate is 8 percent? Year:Cash Flow 1:$200 2:$350 3:$800 4:$1,125 [A] $1,115.07 [B] $1,947.23 [C] $2,165.70 [D] $2,358.96 [E] $2,922.62 [A] :You need to find four present values and sum them. Did you get $185.18 and $300.07 for the first two, respectively? Review section 5.2. [B] :You are correct! [C] :You need to find four present values and sum them. Did you get $185.18 and $300.07 for the first two, respectively? Review section 5.2. [D] :You need to find four present values and sum them. Did you get $185.18 and $300.07 for the first two, respectively? Review section 5.2. [E] :You need to find four present values and sum them. Did you get $185.18 and $300.07 for the first two, respectively? Review section 5.2.

17) You will receive a $100,000 inheritance in 20 years. You could invest that money today at 6 percent compounded annually. What is the present value of your inheritance? [A] $27,491.53 [B] $29,767.15 [C] $31,180.47 [D] $35,492.34 [E] $100,000.00 [A] :This is a present value of a lump sum problem. Review section 5.2. [B] :This is a present value of a lump sum problem. Review section 5.2. [C] :You are correct! [D] :This is a present value of a lump sum problem. Review section 5.2. [E] :This choice is irrational since the interest rate is greater than zero. Review section 5.2.

18) If a lump sum of $10,000 is invested for five years at 10 percent compounded annually, it will earn total simple interest of $6,105 over that period. [A] True [B] False [A] :This is the amount of compound interest, not simple interest. Review section 5.1. [B] :You are correct! Simple interest is $5,000 in this case.

19) Which of the following statements is (are) correct? Assume that "r" and "t" are greater than zero. I. Present value interest factors are less than 1.0. II. Future value interest factors are less than 1.0. III. Present value interest factors are greater than future value interest factors. IV. Present value interest factors grow as "t" grows, provided "r" is held constant. [A] I only [B] I and III only [C] I and IV only [D] II and III only [E] II and IV only [A] :You are correct! [B] :At least one of these is incorrect. Review section 5.3. [C] :At least one of these is incorrect. Review section 5.3. [D] :At least one of these is incorrect. Review section 5.3. [E] :At least one of these is incorrect. Review section 5.3.

20) All County Insurance, Inc. promises to pay Ted $1 million on his 65th birthday in return for a onetime payment of $75,000 today. Ted just turned 25. At what rate of interest would Ted be indifferent between accepting the company's offer and investing the premium on his own? [A] 2.39 percent [B] 5.51 percent [C] 6.09 percent [D] 6.69 percent [E] 7.18 percent [A] :Did you get a time period of 40 years? Review section 5.3.

[B] :Did you get a time period of 40 years? Review section 5.3. [C] :If you are using the time value functions on a financial calculator, be sure to indicate the direction of the cash flows. Review section 5.3. [D] :You are correct! [E] :What rate of interest is needed to allow $75,000 to grow to $1 million over 40 years? Review section 5.3.

21) If the interest rate at which you can invest is greater than zero percent, then $1 to be received five years from now is worth less than $1 today. [A] True [B] False [A] :You are correct! [B] :The key here is that the interest rate is greater than zero. Review section 5.1.

22) A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. During years 2 and 3 combined, the account earned $10 in interest on interest. How much was earned in simple interest for those two years? [A] $30 [B] $80 [C] $100 [D] $110 [E] $120 [A] :The account earned compound interest of $30 during year two and $80 during year three. Review section 5.1. [B] :The account earned compound interest of $30 during year two and $80 during year three. Review section 5.1. [C] :You are correct! [D] :What is the difference between simple interest and compound interest? Review section 5.1. [E] :The account earned compound interest of $30 during year two and $80 during year three. Review section 5.1.

23) In a growing Midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 143; Year 2 = 149; Year 3 = 162; Year 4 = 171; Year 5 = 178. If, over the next five years, eating establishments are expected to grow at the same rate as they did during year 5, forecast the number of eating establishments at the end of year 10. [A] 217 [B] 219 [C] 221 [D] 223 [E] 225 [A] :You are correct! [B] :Did you find the growth rate in year 5 to be 4.094 percent? Review section 5.3. [C] :Did you find the growth rate in year 5 to be 4.094 percent? Review section 5.3. [D] :Did you find the growth rate in year 5 to be 4.094 percent? Review section 5.3. [E] :Did you find the growth rate in year 5 to be 4.094 percent? Review section 5.3.

24) All else equal, the more years an investment compounds, the lower the future value will be. [A] True [B] False [A] :Consider the future value of $1,000 invested at 10 percent for five years versus the same amount invested at 10 percent for ten years. Review section 5.1. [B] :You are correct!

25) You are supposed to receive $2,000 five years from now. At an interest rate of 6 percent, what is that $2,000 worth today? [A] $1,491.97 [B] $1,492.43 [C] $1,494.52 [D] $1,497.91 [E] $1,499.01 [A] :This is a present value of a lump sum problem. Review section 5.2. [B] :This is a present value of a lump sum problem. Review section 5.2. [C] :You are correct! [D] :This is a present value of a lump sum problem. Review section 5.2. [E] :This is a present value of a lump sum problem. Review section 5.2.

26) You invest $1,000 in an account which pays 5 percent interest, compounded annually. At the same time, you invest $1,000 in another account which pays 5 percent simple interest. The amount of interest you earn each year in each account will be equivalent regardless of how many years you leave your money in the accounts. [A] True [B] False [A] :What is the difference between simple and compound interest? Review section 5.1. [B] :You are correct!

27) You are choosing between investments offered by two different banks. One promises a return of 10 percent for three years in simple interest while the other offers a return of 10 percent for three years in compound interest. You should choose the: [A] simple interest option because both have the same basic interest rate. [B] compound interest option because it provides a higher return than the simple interest option. [C] compound interest option only if the compounding is for monthly periods. [D] simple interest option only if compounding occurs more than once a year. [E] compound interest option only if you are investing less than $5,000. [A] :You need to review the value of compounding. Review section 5.1. [B] :You are correct! [C] :You need to review the basics of compounding. Review section 5.1. [D] :You need to review the basics of compounding. Review section 5.1. [E] :You should always choose the compound interest option, regardless of the amount invested. Review section 5.1.

28) Compound interest is the interest earned on both the initial principal and the interest reinvested from prior periods. [A] True [B] False [A] :You are correct! [B] :This definition is correct. Review section 5.1.

29) Your parents agree to pay half the purchase price of a new car when you graduate from college. You will graduate and buy the car 2 years from now. You have $6,000 to invest today and can earn 10 percent on invested funds. If your parents match the amount of money you have in two years, what is the maximum you will be able to spend on the new car? [A] $7,260 [B] $11,948 [C] $12,000 [D] $13,250 [E] $14,520 [A] :Remember, you get to spend your money plus an equal sum of your parents' money. Review section 5.1. [B] :This choice is irrational since you already have a total of $12,000 to spend even before earning interest on the $6,000 you have to invest. Review section 5.1. [C] :This choice is irrational since you already have a total of $12,000 to spend even before earning interest on the $6,000 you have to invest. Review section 5.1. [D] :You need to review this computation in section 5.1. [E] :You are correct!

30) Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000 or a lump sum payment of $2,500 at the end of three years from now. You can earn 7 percent on your investments. You should: [A] take the signing bonus because it has the lower present value. [B] take the signing bonus because it has the higher future value. [C] take the lump sum because it has the higher present value. [D] take the lump sum because it has the lower future value. [E] flip a coin because both cash flows have the same present value today. [A] :Why would you choose the one with the lower present value? Review section 5.2. [B] :The signing bonus does not have the higher future value. Review section 5.1. [C] :You are correct! [D] :The lump sum does not have the lower future value. Review section 5.1. [E] :The cash flows do not have equivalent present or future values. Review sections 5.1 and 5.2.

31) If a lump sum of $10,000 is invested for three years at 10 percent compounded annually, it will earn a total of $3,310 in interest over that period. [A] True [B] False [A] :You are correct!

[B] :The total interest earned over the three-year life of the investment is $3,310. Review section 5.1.

32) The future value of $5,000 invested for four years at 8 percent compounded annually is $6,802.44. [A] True [B] False [A] :You are correct! [B] :The future value is equal to the initial investment plus the total interest earned. Review section 5.1.

33) If the interest rate at which you can invest is zero percent, then $1 to be received five years from now is worth $1 today. [A] True [B] False [A] :You are correct! [B] :The key here is that the interest rate is zero percent. Review section 5.1

34) A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. If the account earned a total of $300 in simple interest over its life, how much was earned in interest on interest? [A] $50 [B] $75 [C] $100 [D] $125 [E] $150 [A] :The account earned compound interest of $950 - $500 - $50 = $400 over the five-year period. Review section 5.1. [B] :The account earned compound interest of $950 - $500 - $50 = $400 over the five-year period. Review section 5.1. [C] :You are correct! [D] :The account earned compound interest of $950 - $500 - $50 = $400 over the five-year period. Review section 5.1. [E] :Did you forget about the extra $50 that was deposited? Review section 5.1.

35) Your grandfather placed $2,000 in a trust fund for you. In 10 years the fund will be worth $5,000. What is the rate of return on the trust fund? [A] 5.98 percent [B] 8.76 percent [C] 9.60 percent [D] 9.98 percent [E] 10.14 percent

[A] :Will $2,000 today grow to $5,000 at the end of 10 years at this rate of interest? Review section 5.3. [B] :Try again! If you are using the present value function on a financial calculator, be sure to indicate the direction of each cash flow. Review section 5.3. [C] :You are correct! [D] :Will $2,000 today grow to $5,000 at the end of 10 years at this rate of interest? Review section 5.3. [E] :Try again! If you are using the present value function on a financial calculator, be sure to indicate the direction of each cash flow. Review section 5.3.

36) Which of the following statements is (are) correct, all else equal. I. Present values increase as the discount rate increases. II. Present values increase the further away in time the future value is. III. Present values are always smaller than future values when both the interest rate and the number of years are positive. [A] I only [B] I and II only [C] II only [D] III only [E] II and III only [A] :Present values decrease as the discount rate increases. Review section 5.2. [B] :At least one of these statements is incorrect. Review section 5.2. [C] :Present values decrease the further away in time the future value is. Review section 5.2. [D] :You are correct! [E] :At least one of these statements is incorrect. Review section 5.2.

37) You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5 percent compounded annually, how long will you have to wait to buy the stereo? [A] 6.58 years [B] 8.42 years [C] 14.58 years [D] 15.75 years [E] 18.78 years [A] :Will $800 invested today grow to $2,000 if invested for this long at 5 percent? Review section 5.3. [B] :If you are using the present value function on a financial calculator, remember to indicate the direction of your cash flows. Review section 5.3. [C] :Will $800 invested today grow to $2,000 if invested for this long at 5 percent? Review section 5.3. [D] :If you are using the present value function on a financial calculator, remember to indicate the direction of your cash flows. Review section 5.3. [E] :You are correct!

38) Grannie puts $35,000 into a bank account for you. The account earns 4.0 percent interest. Grannie has stipulated that you can not withdraw the money until the balance has doubled. How long will you have to leave the money in the account? [A] 14 years [B] 16 years [C] 18 years [D] 20 years

[E] 22 years [A] :Did you use the Rule of 72? Review section 5.3. [B] :Did you use the Rule of 72? Review section 5.3. [C] :You are correct! [D] :Did you use the Rule of 72? Review section 5.3. [E] :Did you use the Rule of 72? Review section 5.3.

39) Assuming a 3 percent annual increase in the price of automobiles, how much will a new BMW cost you 5 years from now if today's price is $38,000? [A] $32,779.18 [B] $36,110.09 [C] $40,575.63 [D] $42,813.89 [E] $44,052.41 [A] :This answer is irrational since the BMW's price is already $38,000. Review section 5.1. [B] :This answer is irrational since the BMW's price is already $38,000. Review section 5.1. [C] :Note that, in terms of our formulas, the interest rate is 3 percent. Review section 5.1. [D] :Note that, in terms of our formulas, the interest rate is 3 percent. Review section 5.1. [E] :You are correct!

40) You just won the lottery and want to put some money away for your child's college education. When your child goes to college 18 years from now, the cost will be $65,000. You can earn 8 percent compounded annually. How much do you need to invest today? [A] $9,828.18 [B] $11,763.07 [C] $13,690.82 [D] $15,258.17 [E] $16,266.19 [A] :Will this present value grow to $65,000 at 8 percent compounded annually for 18 years? Review section 5.2. [B] :Will this present value grow to $65,000 at 8 percent compounded annually for 18 years? Review section 5.2. [C] :Will this present value grow to $65,000 at 8 percent compounded annually for 18 years? Review section 5.2. [D] :Will this present value grow to $65,000 at 8 percent compounded annually for 18 years? Review section 5.2. [E] :You are correct!

41) An account was opened with an investment of $1,000 three years ago. Today, the account balance is $1,157.63. If the account earns a fixed annual interest rate, how long will it take until the account has earned a total of $225 in simple interest? [A] less than one more year [B] between one and two more years [C] between two and three more years [D] between three and four more years [E] between four and five more years

[A] :To answer this question, you first need to find the interest rate earned on the account. Did you get 5 percent per year? Review sections 5.1 and 5.3. [B] :You are correct! [C] :To answer this question, you first need to find the interest rate earned on the account. Did you get 5 percent per year? Review sections 5.1 and 5.3. [D] :Did you note that the answers are stated as the number of years it will take beyond the three that have already passed? Review sections 5.1 and 5.3. [E] :Did you note that the answers are stated as the number of years it will take beyond the three that have already passed? Review sections 5.1 and 5.3.

42) Simple interest is interest earned only in the first year of an investment. [A] True [B] False [A] :Simple interest is interest earned on the principal and may be for multiple years. Review section 5.1. [B] :You are correct!

43) An account was opened with an investment of $1,000 ten years ago. The ending balance in the account is $1,500. If interest paid on the account was compounded annually, how much interest on interest was earned? [A] $86 [B] $93 [C] $102 [D] $414 [E] $500 [A] :You are correct! [B] :You first need to find the interest rate earned on the account. Did you get 4.14 percent per year? Review sections 5.1 and 5.3. [C] :You first need to find the interest rate earned on the account. Did you get 4.14 percent per year? Review sections 5.1 and 5.3. [D] :You first need to find the interest rate earned on the account. Did you get 4.14 percent per year? Review sections 5.1 and 5.3. [E] :You first need to find the interest rate earned on the account. Did you get 4.14 percent per year? Review sections 5.1 and 5.3.

44) An account was opened with an investment of $1,000 ten years ago. The ending balance in the account is $1,500. If interest paid on the account was compounded annually, how much simple interest was earned? [A] $86 [B] $92 [C] $414 [D] $436 [E] $500 [A] :You first need to find the interest rate earned on the account. Did you get 4.14 percent per year? Review sections 5.1 and 5.3. [B] :You first need to find the interest rate earned on the account. Did you get 4.14 percent per year? Review sections 5.1 and 5.3. [C] :You are correct!

[D] :You first need to find the interest rate earned on the account. Did you get 4.14 percent per year? Review sections 5.1 and 5.3. [E] :You first need to find the interest rate earned on the account. Did you get 4.14 percent per year? Review sections 5.1 and 5.3.

45) The future value is the amount an investment is worth after one or more time periods. [A] True [B] False [A] :You are correct! [B] :This is a correct definition of future value. Review section 5.1.

46) You loan your best friend $500 today. The loan is to be repaid in one lump sum payment one year from now. You are charging your friend 5 percent interest. How much interest are you earning on this loan? [A] $25 [B] $50 [C] $125 [D] $500 [E] $525 [A] :You are correct! [B] :This is a future value problem. Review section 5.1. [C] :This is a future value problem. Review section 5.1. [D] :This is a future value problem. Review section 5.1. [E] :What is the question in this problem? Review section 5.1.

47) Given the following end-of-year cash flows, what is the present value of the third cash flow if the discount rate is 9 percent? Year:Cash Flow 1:$600 2:$930 3:$1,250 [A] $550.46 [B] $689.97 [C] $782.76 [D] $965.23 [E] $1,052.10 [A] :Did you use three years as the time period? Review section 5.2. [B] :Did you use three years as the time period? Review section 5.2. [C] :Did you use three years as the time period? Review section 5.2. [D] :You are correct! [E] :Did you use three years as the time period? Review section 5.2.

48) Given the following end-of-year cash flows, what is the future value at the end of year 3 of the second cash flow if the interest rate is 6 percent? Year:Cash Flow 1:$500

2:$750 3:$1,000 [A] $750 [B] $795 [C] $843 [D] $893 [E] $1,000 [A] :This is not the future value of any of the cash flows. Review section 5.1. [B] :You are correct! [C] :The second cash flow earns interest for only one year, not two. Review section 5.1. [D] :The second cash flow earns interest for only one year, not three. Review section 5.1. [E] :It appears you have found the future value of the third cash flow, not the second. Review section 5.1.

49) In a growing Midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 143; Year 2 = 149; Year 3 = 162; Year 4 = 171; Year 5 = 178. From the end of year 1 to the end of year 5, the number of eating establishments grew at a rate of _____ compounded annually. [A] 4.21 percent [B] 4.48 percent [C] 5.63 percent [D] 8.74 percent [E] 9.33 percent [A] :Note that four years elapse between the end of year 1 and the end of year 5. Review section 5.3. [B] :Note that four years elapse between the end of year 1 and the end of year 5. Review section 5.3. [C] :You are correct! [D] :Note that four years elapse between the end of year 1 and the end of year 5. Review section 5.3. [E] :Note that four years elapse between the end of year 1 and the end of year 5. Review section 5.3.

50) All else equal, the higher the interest rate, the higher the future value of an investment will be. [A] True [B] False [A] :You are correct! [B] :Consider investing for 5 years at 5 percent versus investing the same amount for 5 years at 10 percent. Review section 5.1.

51) What is the total future value six years from now of $50 received in one year, $200 received in two years, and $800 received in six years if the discount rate is 8.00 percent? [A] $1,050.00 [B] $1,047.93 [C] $1,145.56 [D] $1,237.21 [E] $1,269.15 [A] :You need to find three future values and sum them. Review section 5.1. [B] :The first cash flow earns interest for 5 years, the second for 4 years, and the third earns no interest. Review section 5.1.

[C] :You are correct! [D] :You need to find three future values and sum them. Review section 5.1. [E] :The first cash flow earns interest for 5 years, the second for 4 years, and the third earns no interest. Review section 5.1.

52) Your best friend gave you $100 as a present six years ago. You invested this money at a 7 percent rate of interest. How much will this money be worth ten years from today? [A] $150.07 [B] $196.72 [C] $248.09 [D] $295.22 [E] $303.03 [A] :Did you get a time period of 16 years? Review section 5.1. [B] :Did you get a time period of 16 years? Review section 5.1. [C] :Did you get a time period of 16 years? Review section 5.1. [D] :You are correct! [E] :Did you get a time period of 16 years? Review section 5.1.

53) All else equal, the present value decreases as the time until a lump sum is to be received increases. [A] True [B] False [A] :You are correct! [B] :Consider the present value of a lump sum to be received five years from now versus the same lump sum to be received ten years from now. Review section 5.2.

54) A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. During year 5, the account earned _____ compounded annually. [A] 11.64 percent [B] 12.78 percent [C] 14.63 percent [D] 15.57 percent [E] 23.10 percent [A] :The present value is $822. The future value is $950. Review section 5.3. [B] :The present value is $822. The future value is $950. Review section 5.3. [C] :The present value is $822. The future value is $950. Review section 5.3. [D] :You are correct! [E] :The present value is $822. The future value is $950. Review section 5.3.

55) Most investments, whether they involve real assets or financial assets, can be analyzed using the discounted cash flow approach. [A] True [B] False

[A] :You are correct! [B] :Discounted cash flow valuation is broadly applicable and widely used in practice. Review section 5.2.

56) You are going to receive $100 four years from today. If the discount rate is 5 percent compounded annually, what will be the present value of the $100 two years from today? [A] $67.68 [B] $68.30 [C] $82.27 [D] $82.64 [E] $90.70 [A] :Note that there are only two years between the present and future values. Review section 5.3. [B] :Note that there are only two years between the present and future values. Review section 5.3. [C] :Note that there are only two years between the present and future values. Review section 5.3. [D] :Note that there are only two years between the present and future values. Review section 5.3. [E] :You are correct!

57) You opened a savings account five years ago and deposited $500 at that time. Two years ago you added another $500 to the account. The interest rate is 3 percent compounded annually. How much money is in your account today? [A] $579.64 [B] $1,110.09 [C] $1,126.01 [D] $1,159.28 [E] $1,179.75 [A] :This answer is illogical since you deposited a total of $1,000 into the account. Review section 5.1. [B] :You are correct! [C] :The second deposit earned interest for two years. Review section 5.1. [D] :Try again! Review section 5.1. [E] :Try again! Review section 5.1.

58) The Rule of 72 tells us how long into the future we must wait before an investment's value is equal to three times the initial amount. [A] True [B] False [A] :This rule tells you how long it will take for an investment to double in value at a given rate of interest. Review section 5.3. [B] :You are correct!

59) In a growing Midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 143; Year 2 = 149; Year 3 = 162; Year 4 = 171; Year 5 = 178. If the number of eating establishments is expected to grow in year 6 at the same rate as the percentage increase in year 5, how many new eating establishments will be added in year 6?

[A] 4 [B] 6 [C] 7 [D] 9 [E] 10 [A] :Did you find the growth rate in year 5 to be 4.094 percent? Review section 5.3. [B] :Did you find the growth rate in year 5 to be 4.094 percent? Review section 5.3. [C] :You are correct! [D] :Did you find the growth rate in year 5 to be 4.094 percent? Review section 5.3. [E] :Did you find the growth rate in year 5 to be 4.094 percent? Review section 5.3.

60) A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. During year 2, the account earned _____: [A] 1.39 percent. [B] 2.80 percent. [C] 4.36 percent. [D] 5.45 percent. [E] 7.25 percent. [A] :The present value is $550. The future value is $580. Review section 5.3. [B] :The present value is $550. The future value is $580. Review section 5.3. [C] :The present value is $550. The future value is $580. Review section 5.3. [D] :You are correct! [E] :The present value is $550. The future value is $580. Review section 5.3.

61) In a growing Midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 143; Year 2 = 149; Year 3 = 162; Year 4 = 171; Year 5 = 178. Between the end of year 2 and the end of year 3, the number of eating establishments grew at a rate of _____ compounded annually. [A] 4.28 percent [B] 4.74 percent [C] 5.61 percent [D] 8.72 percent [E] 9.33 percent [A] :The present value is 149. The future value is 162. Review section 5.3. [B] :The present value is 149. The future value is 162. Review section 5.3. [C] :The present value is 149. The future value is 162. Review section 5.3. [D] :You are correct! [E] :The present value is 149. The future value is 162. Review section 5.3.

62) A savings account, which started with a balance of $500, has the following end of year balances: Year 1 = $550; Year 2 = $580; Year 3 = $660; Year 4 = $772; Year 5 = $950. No withdrawals were made over the life of the account, but there was one additional deposit of $50 made at the beginning of year 5. In which year did the account earn its highest annually compounded return? [A] Year 1 at 10 percent [B] Year 2 at 5.45 percent [C] Year 3 at 13.80 percent

[D] Year 4 at 16.97 percent [E] Year 5 at 23.06 percent [A] :This is the correct return for this year, but it is not the highest annually compounded return earned over the five-year period. Review section 5.3. [B] :This is the correct return for this year, but it is not the highest annually compounded return earned over the five-year period. Review section 5.3. [C] :This is the correct return for this year, but it is not the highest annually compounded return earned over the five-year period. Review section 5.3. [D] :You are correct! [E] :It appears you have forgotten to include the $50 deposit made at the beginning of year 5. Review section 5.3.

63) You received a $1 savings account earning 5 percent on your 1st birthday. How much will you have in the account on your 40th birthday if you don't withdraw any money before then? [A] $5.89 [B] $6.34 [C] $6.70 [D] $7.00 [E] $7.04 [A] :You need to review future value computations in section 5.1. [B] :You need to review future value computations in section 5.1. [C] :You are correct! [D] :You need to review future value computations in section 5.1. [E] :There are 39 periods between your 1st and 40th birthdays, not 40 periods. Review section 5.1.

64) What is the present value of the following set of end-of-year cash flows? Assume a discount rate of 8 percent. Year:Cash Flow 1:$1,000 2:-$1,000 3:$1,000 4:-$1,000 [A] $0.00 [B] $127.39 [C] $173.31 [D] $379.41 [E] $3,312.13 [A] :This answer is irrational given the differing times of the cash flows. Review section 5.2. [B] :You are correct! [C] :You need to find four present values and sum them, paying close attention to the signs on the cash flows. Did you get $925.93 and -$857.34 for the first two, respectively? Review section 5.2. [D] :You need to find four present values and sum them, paying close attention to the signs on the cash flows. Did you get $925.93 and -$857.34 for the first two, respectively? Review section 5.2. [E] :This answer is irrational given the amounts and the timing of the cash flows. Review section 5.2.

65) Calculating the present value of a future cash flow to determine its value today is known as the discount rate. [A] True

[B] False [A] :This is the definition of discounted cash flow valuation. Review section 5.2. [B] :You are correct!

66) How much would you have to invest today at 8 percent compounded annually to have $25,000 to buy a car in 4 years? [A] $18,267.26 [B] $18,375.75 [C] $19,147.25 [D] $21,370.10 [E] $22,149.57 [A] :This is a present value of a lump sum problem. Review section 5.2. [B] :You are correct! [C] :This is a present value of a lump sum problem. Review section 5.2. [D] :This is a present value of a lump sum problem. Review section 5.2. [E] :This is a present value of a lump sum problem. Review section 5.2.

67) In a growing Midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 143; Year 2 = 149; Year 3 = 162; Year 4 = 171; Year 5 = 178. If the town's population was 62,000 at the end of year 5, and the population grew at the same annual rate as the number of eating establishments between the end of year 1 and the end of year 5, what was the town's population at the end of year 1? [A] 49,809 [B] 51,435 [C] 53,230 [D] 54,330 [E] 56,730 [A] :You are correct! [B] :Note that there are only 4 years between the end of year 1 and the end of year 5. Did you get a growth rate of 5.626 percent over those four years? Review section 5.3. [C] :Note that there are only 4 years between the end of year 1 and the end of year 5. Did you get a growth rate of 5.626 percent over those four years? Review section 5.3. [D] :Note that there are only 4 years between the end of year 1 and the end of year 5. Did you get a growth rate of 5.626 percent over those four years? Review section 5.3. [E] :Note that there are only 4 years between the end of year 1 and the end of year 5. Did you get a growth rate of 5.626 percent over those four years? Review section 5.3.

68) Compounding is the process of accumulating interest in an investment over time to earn more interest. [A] True [B] False [A] :You are correct! [B] :This is why an investment earns an increasing amount of interest each year as time passes. Review section 5.1.

69) Interest on interest is interest earned on the reinvestment of previous interest payments. [A] True [B] False [A] :You are correct! [B] :This is a correct definition of interest on interest. Review section 5.1.

70) You have $500 in a savings account that earns 5 percent compounded annually. How much additional interest would you earn over the next 4 years if you moved the money to an account that earns 6 percent compounded annually? [A] $21.89 [B] $23.49 [C] $24.93 [D] $25.88 [E] $29.94 [A] :You need to compare the future value at 5 percent with the future value at 6 percent. Review section 5.1. [B] :You are correct! [C] :Did you get a future value of $607.75 at 5 percent? Review section 5.1. [D] :You need to compare the future value at 5 percent with the future value at 6 percent. Review section 5.1. [E] :Did you get a future value of $607.75 at 5 percent? Review section 5.1.