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LELEwasfinallyrevisedonthemorningofDecember16,2020

Chapter04DiscountedCashFlowValuationAnswerKey

MultipleChoiceQuestions

1.Anannuitystreamofcashflowpaymentsisasetof:

A.levelcashflowsoccurringeachtimeperiodforafixedlengthoftime.

B.levelcashflowsoccurringeachtimeperiodforever.

C.increasingcashflowsoccurringeachtimeperiodforafixedlengthoftime.

D.increasingcashflowsoccurringeachtimeperiodforever.

E.arbitrarycashflowsoccurringeachtimeperiodfornomorethan10years.

Difficultylevel:Easy

Topic:ANNUITY

Type:DEFINITIONS

2.Annuitieswherethepaymentsoccurattheendofeachtimeperiodarecalled_____,

whereas_____refertoannuitystreamswithpaymentsoccurringatthebeginningofeach

timeperiod.

A.ordinaryannuities;earlyannuities

B.lateannuities;straightannuities

C.straightannuities;lateannuities

D.annuitiesdue;ordinaryannuities

E.ordinaryannuities;annuitiesdue

Difficultylevel:Easy

Topic:ANNUITIESDUE

Type:DEFINITIONS

3.Anannuitystreamwherethepaymentsoccurforeveriscalleda(n):

A.annuitydue.

B.indemnity.

C.perpetuity.

D.amortizedcashflowstream.

E.amortizationtable.

Difficultylevel:Easy

Topic:PERPETUITY

Type:DEFINITIONS

4.Theinterestrateexpressedintermsoftheinterestpaymentmadeeachperiodiscalledthe

_____rate.

A.statedannualinterest

B.compoundannualinterest

C.effectiveannualinterest

D.periodicinterest

E.dailyinterest

Difficultylevel:Easy

Topic:STATEDINTERESTRATES

Type:DEFINITIONS

5.Theinterestrateexpressedasifitwerecompoundedonceperyeariscalledthe_____rate.

A.statedinterest

B.compoundinterest

C.effectiveannual

D.periodicinterest

E.dailyinterest

Difficultylevel:Easy

Topic:EFFECTIVEANNUALRATE

Type:DEFINITIONS

6.Theinterestratechargedperperiodmultipliedbythenumberofperiodsperyeariscalled

the_____rate.

A.effectiveannual

B.annualpercentage

C.periodicinterest

D.compoundinterest

E.dailyinterest

Difficultylevel:Easy

Topic:ANNUALPERCENTAGERATE

Type:DEFINITIONS

7.Payingofflong-termdebtbymakinginstallmentpaymentsiscalled:

A.foreclosingonthedebt.

B.amortizingthedebt.

C.fundingthedebt.

D.callingthedebt.

E.Noneoftheabove.

Difficultylevel:Easy

Topic:AMORTIZATION

Type:DEFINITIONS

8.Youarecomparingtwoannuitieswhichoffermonthlypaymentsfortenyears.Both

annuitiesareidenticalwiththeexceptionofthepaymentdates.AnnuityApaysonthefirstof

eachmonthwhileannuityBpaysonthelastdayofeachmonth.Whichoneofthefollowing

statementsiscorrectconcerningthesetwoannuities?

A.Bothannuitiesareofequalvaluetoday.

B.AnnuityBisanannuitydue.

C.AnnuityAhasahigherfuturevaluethanannuityB.

D.AnnuityBhasahigherpresentvaluethanannuityA.

E.Bothannuitieshavethesamefuturevalueasoftenyearsfromtoday.

Difficultylevel:Medium

Topic:ORDINARYANNUITYVERSUSANNUITYDUE

Type:CONCEPTS

9.Youarecomparingtwoinvestmentoptions.Thecosttoinvestineitheroptionisthesame

today.Bothoptionswillprovideyouwith$20,000ofincome.OptionApaysfiveannual

paymentsstartingwith$8,000thefirstyearfollowedbyfourannualpaymentsof$3,000each.

OptionBpaysfiveannualpaymentsof$4,000each.Whichoneofthefollowingstatementsis

correctgiventhesetwoinvestmentoptions?

A.Bothoptionsareofequalvaluegiventhattheybothprovide$20,000ofincome.

B.OptionAisthebetterchoiceofthetwogivenanypositiverateofreturn.

C.OptionBhasahigherpresentvaluethanoptionAgivenapositiverateofreturn.

D.OptionBhasalowerfuturevalueatyear5thanoptionAgivenazerorateofreturn.

E.OptionAispreferablebecauseitisanannuitydue.

Difficultylevel:Medium

Topic:UNEVENCASHFLOWSANDPRESENTVALUE

Type:CONCEPTS

10.Youareconsideringtwoprojectswiththefollowingcashflows:

Whichofthefollowingstatementsaretrueconcerningthesetwoprojects?

I.Bothprojectshavethesamefuturevalueattheendofyear4,givenapositiverateofreturn.

II.Bothprojectshavethesamefuturevaluegivenazerorateofreturn.

III.Bothprojectshavethesamefuturevalueatanypointintime,givenapositiverateof

return.

IV.ProjectAhasahigherfuturevaluethanprojectB,givenapositiverateofreturn.

A.IIonly

B.IVonly

C.IandIIIonly

D.IIandIVonly

E.I,II,andIIIonly

Difficultylevel:Medium

Topic:UNEVENCASHFLOWSANDFUTUREVALUE

Type:CONCEPTS

11.Aperpetuitydiffersfromanannuitybecause:

A.perpetuitypaymentsvarywiththerateofinflation.

B.perpetuitypaymentsvarywiththemarketrateofinterest.

C.perpetuitypaymentsarevariablewhileannuitypaymentsareconstant.

D.perpetuitypaymentsnevercease.

E.annuitypaymentsnevercease.

Difficultylevel:Easy

Topic:PERPETUITYVERSUSANNUITY

Type:CONCEPTS

12.Whichoneofthefollowingstatementsconcerningtheannualpercentagerateiscorrect?

A.Theannualpercentagerateconsidersinterestoninterest.

B.Therateofinterestyouactuallypayonaloaniscalledtheannualpercentagerate.

C.Theeffectiveannualrateislowerthantheannualpercentageratewhenaninterestrateis

compoundedquarterly.

D.Whenfirmsadvertisetheannualpercentageratetheyareviolating.truth-in-lendinglaws.

E.Theannualpercentagerateequalstheeffectiveannualratewhentherateonanaccountis

designatedassimpleinterest.

Difficultylevel:Medium

Topic:ANNUALPERCENTAGERATE

Type:CONCEPTS

13.Whichoneofthefollowingstatementsconcerninginterestratesiscorrect?

A.Thestatedrateisthesameastheeffectiveannualrate.

B.Aneffectiveannualrateistheratethatappliesifinterestwerechargedannually.

C.Theannualpercentagerateincreasesasthenumberofcompoundingperiodsperyear

increases.

D.Banksprefermorefrequentcompoundingontheirsavingsaccounts.

E.Foranypositiverateofinterest,theeffectiveannualratewillalwaysexceedtheannual

percentagerate.

Difficultylevel:Medium

Topic:INTERESTRATES

Type:CONCEPTS

14.Whichofthefollowingstatementsconcerningtheeffectiveannualratearecorrect?

I.Whenmakingfinancialdecisions,youshouldcompareeffectiveannualratesratherthan

annualpercentagerates.

II.Themorefrequentlyinterestiscompounded,thehighertheeffectiveannualrate.

III.Aquotedrateof6%compoundedcontinuouslyhasahighereffectiveannualratethanif

theratewerecompoundeddaily.

IV.Whenborrowingandchoosingwhichloantoaccept,youshouldselecttheofferwiththe

highesteffectiveannualrate.

A.IandIIonly

B.IandIVonly

C.I,II,andIIIonly

D.II,III,andIVonly

E.I,II,III,andIV

Difficultylevel:Medium

Topic:EFFECTIVEANNUALRATE

Type:CONCEPTS

15.Thehighesteffectiveannualratethatcanbederivedfromanannualpercentagerateof9%

iscomputedas:

A..09e-1.

B.q.

C.e(1+.09).

D.-1.

E.(1+.09)q.

Difficultylevel:Medium

Topic:CONTINUOUSCOMPOUNDING

Type:CONCEPTS

16.Thetimevalueofmoneyconceptcanbedefinedas:

A.therelationshipbetweenthesupplyanddemandofmoney.

B.therelationshipbetweenmoneyspentversusmoneyreceived.

C.therelationshipbetweenadollartobereceivedinthefutureandadollartoday.

D.therelationshipbetweeninterestratestatedandamountpaid.

E.Noneoftheabove.

Difficultylevel:Easy

Topic:TIMEVALUE

Type:CONCEPTS

17.Discountingcashflowsinvolves:

A.discountingonlythosecashflowsthatoccuratleast10yearsinthefuture.

B.estimatingonlythecashflowsthatoccurinthefirst4yearsofaproject.

C.multiplyingexpectedfuturecashflowsbythecostofcapital.

D.discountingallexpectedfuturecashflowstoreflectthetimevalueofmoney.

E.takingthecashdiscountofferedontrademerchandise.

Difficultylevel:Easy

Topic:CASHFLOWS

Type:CONCEPTS

18.Compoundinterest:

A.allowsforthereinvestmentofinterestpayments.

B.doesnotallowforthereinvestmentofinterestpayments.

C.isthesameassimpleinterest.

D.providesavaluethatislessthansimpleinterest.

E.BothAandD.

Difficultylevel:Easy

Topic:INTEREST

Type:CONCEPTS

19.Anannuity:

A.isadebtinstrumentthatpaysnointerest.

B.isastreamofpaymentsthatvarieswithcurrentmarketinterestrates.

C.isalevelstreamofequalpaymentsthroughtime.

D.hasnovalue.

E.Noneoftheabove.

Difficultylevel:Easy

Topic:ANNUITY

Type:CONCEPTS

20.Thestatedrateofinterestis10%.Whichformofcompoundingwillgivethehighest

effectiverateofinterest?

A.annualcompounding

B.monthlycompounding

C.dailycompounding

D.continuouscompounding

E.Itisimpossibletotellwithoutknowingthetermoftheloan.

Difficultylevel:Easy

Topic:COMPOUNDING

Type:CONCEPTS

21.Thepresentvalueoffuturecashflowsminusinitialcostiscalled:

A.thefuturevalueoftheproject.

B.thenetpresentvalueoftheproject.

C.theequivalentsumoftheinvestment.

D.theinitialinvestmentriskequivalentvalue.

E.Noneoftheabove.

Difficultylevel:Easy

Topic:PRESENTVALUE

Type:CONCEPTS

22.Findthepresentvalueof$5,325tobereceivedinoneperiodiftherateis%.

A.$5,

B.$5,

C.$5,

D.$5,

E.Noneoftheabove.

Difficultylevel:Easy

Topic:PRESENTVALUE-SINGLESUM

Type:PROBLEMS

23.Ifyouhaveachoicetoearnsimpleintereston$10,000forthreeyearsat8%orannually

compoundedinterestat%forthreeyearswhichonewillpaymoreandbyhowmuch?

A.Simpleinterestby$

B.Compoundinterestby$

C.Compoundinterestby$

D.Compoundinterestby$

E.Noneoftheabove.

SimpleInterest=$10,000(.08)(3)=$2,400;

CompoundInterest=$10,000(3-1)=$2,;

Difference=$2,-$2,400=$

Difficultylevel:Easy

Topic:SIMPLE&COMPOUNDINTEREST

Type:PROBLEMS

24.BradleySnapphasdeposited$7,000inaguaranteedinvestmentaccountwithapromised

rateof6%compoundedannually.Heplanstoleaveittherefor4fullyearswhenhewillmake

adownpaymentonacaraftergraduation.Howmuchofadownpaymentwillhebeableto

make?

A.$1,

B.$2,

C.$8,

D.$8,

E.$9,

$7,0004=$8,

Difficultylevel:Easy

Topic:FUTUREVALUE-SINGLESUM

Type:PROBLEMS

25.Yourparentsaregivingyou$100amonthforfouryearswhileyouareincollege.Ata6%

discountrate,whatarethesepaymentsworthtoyouwhenyoufirststartcollege?

A.$3,

B.$4,

C.$4,

D.$4,

E.$4,

Difficultylevel:Easy

Topic:ORDINARYANNUITYANDPRESENTVALUE

Type:PROBLEMS

26.Youjustwonthelottery!Asyourprizeyouwillreceive$1,200amonthfor100months.

Ifyoucanearn8%onyourmoney,whatisthisprizeworthtoyoutoday?

A.$87,

B.$87,

C.$87,

D.$88,

E.$90,

Difficultylevel:Easy

Topic:ORDINARYANNUITYANDPRESENTVALUE

Type:PROBLEMS

27.Toddisabletopay$160amonthforfiveyearsforacar.Iftheinterestrateis%,how

muchcanToddaffordtoborrowtobuyacar?

A.$6,

B.$8,

C.$8,

D.$8,

E.$9,

Difficultylevel:Easy

Topic:ORDINARYANNUITYANDPRESENTVALUE

Type:PROBLEMS

28.Youarethebeneficiaryofalifeinsurancepolicy.Theinsurancecompanyinformsyou

thatyouhavetwooptionsforreceivingtheinsuranceproceeds.Youcanreceivealumpsum

of$50,000todayorreceivepaymentsof$641amonthfortenyears.Youcanearn%onyour

money.Whichoptionshouldyoutakeandwhy?

A.Youshouldacceptthepaymentsbecausetheyareworth$56,today.

B.Youshouldacceptthepaymentsbecausetheyareworth$56,today.

C.Youshouldacceptthepaymentsbecausetheyareworth$56,today.

D.Youshouldacceptthe$50,000becausethepaymentsareonlyworth$47,today.

E.Youshouldacceptthe$50,000becausethepaymentsareonlyworth$47,today.

Difficultylevel:Medium

Topic:ORDINARYANNUITYANDPRESENTVALUE

Type:PROBLEMS

29.Youremployercontributes$25aweektoyourretirementplan.Assumethatyouworkfor

youremployerforanothertwentyyearsandthattheapplicablediscountrateis5%.Given

theseassumptions,whatisthisemployeebenefitworthtoyoutoday?

A.$13,

B.$15,

C.$16,

D.$16,

E.$16,

Difficultylevel:Medium

Topic:ORDINARYANNUITYANDPRESENTVALUE

Type:PROBLEMS

30.Youhaveasub-contractingjobwithalocalmanufacturingfirm.Youragreementcallsfor

annualpaymentsof$50,000forthenextfiveyears.Atadiscountrateof12%,whatisthisjob

worthtoyoutoday?

A.$180,

B.$201,

C.$210,

D.$223,

E.$224,

Difficultylevel:Medium

Topic:ORDINARYANNUITYANDPRESENTVALUE

Type:PROBLEMS

31.TheAjaxCo.justdecidedtosave$1,500amonthforthenextfiveyearsasasafetynet

forrecessionaryperiods.Themoneywillbesetasideinaseparatesavingsaccountwhich

pays%interestcompoundedmonthly.Itdepositsthefirst$1,500today.Ifthecompanyhad

wantedtodepositanequivalentlumpsumtoday,howmuchwouldithavehadtodeposit?

A.$82,

B.$83,

C.$83,

D.$83,

E.$84,

Difficultylevel:Medium

Topic:ANNUITYDUEANDPRESENTVALUE

Type:PROBLEMS

32.Youneedsomemoneytodayandtheonlyfriendyouhavethathasanyisyour'miserly

friend.Heagreestoloanyouthemoneyyouneed,ifyoumakepaymentsof$20amonthfor

thenextsixmonths.Inkeepingwithhisreputation,herequiresthatthefirstpaymentbepaid

today.Healsochargesyou%interestpermonth.Howmuchmoneyareyouborrowing?

A.$

B.$

C.$

D.$

E.$

Difficultylevel:Medium

Topic:ANNUITYDUEANDPRESENTVALUE

Type:PROBLEMS

33.Youbuyanannuitywhichwillpayyou$12,000ayearfortenyears.Thepaymentsare

paidonthefirstdayofeachyear.Whatisthevalueofthisannuitytodayata7%discount

rate?

A.$84,

B.$87,

C.$90,

D.$96,

E.$116,

Difficultylevel:Medium

Topic:ANNUITYDUEANDPRESENTVALUE

Type:PROBLEMS

34.Youarescheduledtoreceiveannualpaymentsof$10,000foreachofthenext25years.

Yourdiscountrateis%.Whatisthedifferenceinthepresentvalueifyoureceivethese

paymentsatthebeginningofeachyearratherthanattheendofeachyear?

A.$8,699

B.$9,217

C.$9,706

D.$10,000

E.$10,850

Difference=$111,-$102,=$8,=$8,699(rounded)

Note:Thedifference=.085

$102,=$8,

Difficultylevel:Medium

Topic:ORDINARYANNUITYVERSUSANNUITYDUE

Type:PROBLEMS

35.Youarecomparingtwoannuitieswithequalpresentvalues.Theapplicablediscountrate

is%.Oneannuitypays$5,000onthefirstdayofeachyearfortwentyyears.Howmuchdoes

thesecondannuitypayeachyearfortwentyyearsifitpaysattheendofeachyear?

A.$4,651

B.$5,075

C.$5,000

D.$5,375

E.$5,405

Becauseeachpaymentisreceivedoneyearlater,thenthecashflowhastoequal:$5,000

+.075)=$5,375

(1

Difficultylevel:Medium

Topic:ORDINARYANNUITYVERSUSANNUITYDUE

Type:PROBLEMS

36.Marthareceives$100onthefirstofeachmonth.Stewartreceives$100onthelastdayof

eachmonth.BothMarthaandStewartwillreceivepaymentsforfiveyears.Atan8%discount

rate,whatisthedifferenceinthepresentvalueofthesetwosetsofpayments?

A.$

B.$

C.$

D.$

E.$

Difference=$4,-$4,=$

Difficultylevel:Medium

Topic:ORDINARYANNUITYVERSUSANNUITYDUE

Type:PROBLEMS

37.Whatisthefuturevalueof$1,000ayearforfiveyearsata6%rateofinterest?

A.$4,

B.$5,

C.$5,

D.$6,

E.$6,

Difficultylevel:Easy

Topic:ORDINARYANNUITYANDFUTUREVALUE

Type:PROBLEMS

38.Whatisthefuturevalueof$2,400ayearforthreeyearsatan8%rateofinterest?

A.$6,

B.$6,

C.$7,

D.$7,

E.$8,

Difficultylevel:Easy

Topic:ORDINARYANNUITYANDFUTUREVALUE

Type:PROBLEMS

39.Janetplansonsaving$3,000ayearandexpectstoearn%.HowmuchwillJanethaveat

theendoftwenty-fiveyearsifsheearnswhatsheexpects?

A.$219,

B.$230,

C.$236,

D.$244,

E.$256,

Difficultylevel:Easy

Topic:ORDINARYANNUITYANDFUTUREVALUE

Type:PROBLEMS

40.Toniadds$3,000tohersavingsonthefirstdayofeachyear.Timadds$3,000tohis

savingsonthelastdayofeachyear.Theybothearna9%rateofreturn.Whatisthe

differenceintheirsavingsaccountbalancesattheendofthirtyyears?

A.$35,

B.$36,

C.$38,

D.$39,

E.$40,

Difference=$445,-$408,=$36,

Note:Difference=$408,

.09=$36,

Difficultylevel:Medium

Topic:ANNUITYDUEVERSUSORDINARYANNUITY

Type:PROBLEMS

41.Youborrow$5,600tobuyacar.Thetermsoftheloancallformonthlypaymentsforfour

yearsata%rateofinterest.Whatistheamountofeachpayment?

A.$

B.$

C.$

D.$

E.$

Difficultylevel:Easy

Topic:ORDINARYANNUITYPAYMENTS

Type:PROBLEMS

42.Youborrow$149,000tobuyahouse.Themortgagerateis%andtheloanperiodis30

years.Paymentsaremademonthly.Ifyoupayforthehouseaccordingtotheloanagreement,

howmuchtotalinterestwillyoupay?

A.$138,086

B.$218,161

C.$226,059

D.$287,086

E.$375,059

Totalinterest=($1,3012)-$149,000=$226,=$226,059(rounded)

Difficultylevel:Medium

Topic:ORDINARYANNUITYPAYMENTSANDCOSTOFINTEREST

Type:PROBLEMS

43.TheGreatGiantCorp.hasamanagementcontractwithitsnewlyhiredpresident.The

contractrequiresalumpsumpaymentof$25millionbepaidtothepresidentuponthe

completionofherfirsttenyearsofservice.Thecompanywantstosetasideanequalamount

offundseachyeartocoverthisanticipatedcashoutflow.Thecompanycanearn%onthese

funds.Howmuchmustthecompanysetasideeachyearforthispurpose?

A.$1,775,

B.$1,798,

C.$1,801,

D.$1,852,

E.$1,938,

Difficultylevel:Easy

Topic:ORDINARYANNUITYPAYMENTSANDFUTUREVALUE

Type:PROBLEMS

44.Youretireatage60andexpecttoliveanother27years.Onthedayyouretire,youhave

$464,900inyourretirementsavingsaccount.Youareconservativeandexpecttoearn%on

yourmoneyduringyourretirement.Howmuchcanyouwithdrawfromyourretirement

savingseachmonthifyouplantodieonthedayyouspendyourlastpenny?

A.$2,

B.$2,

C.$2,

D.$2,

E.$2,

Difficultylevel:Medium

Topic:ORDINARYANNUITYPAYMENTSANDPRESENTVALUE

Type:PROBLEMS

45.TheMcDonaldGrouppurchasedapieceofpropertyfor$million.Itpaidadownpayment

of20%incashandfinancedthebalance.Theloantermsrequiremonthlypaymentsfor15

yearsatanannualpercentagerateof%compoundedmonthly.Whatistheamountofeach

mortgagepayment?

A.$7,

B.$8,

C.$9,

D.$9,

E.$9,

Amountfinanced=$1,200,000

(1-.2)=

$960,000

Difficultylevel:Medium

Topic:ORDINARYANNUITYPAYMENTSANDPRESENTVALUE

Type:PROBLEMS

46.Youestimatethatyouwillhave$24,500instudentloansbythetimeyougraduate.The

interestrateis%.Ifyouwanttohavethisdebtpaidinfullwithinfiveyears,howmuchmust

youpayeachmonth?

A.$

B.$

C.$

D.$

E.$

Difficultylevel:Medium

Topic:ORDINARYANNUITYPAYMENTSANDPRESENTVALUE

Type:PROBLEMS

47.Youarebuyingapreviouslyownedcartodayatapriceof$6,890.Youarepaying$500

downincashandfinancingthebalancefor36monthsat%.Whatistheamountofeachloan

payment?

A.$

B.$

C.$

D.$

E.$

Amountfinanced=$6,890-$500=

$6,390

Difficultylevel:Medium

Topic:ORDINARYANNUITYPAYMENTSANDPRESENTVALUE

Type:PROBLEMS

48.TheGoodLifeInsuranceCo.wantstosellyouanannuitywhichwillpayyou$500per

quarterfor25years.Youwanttoearnaminimumrateofreturnof%.Whatisthemostyou

arewillingtopayasalumpsumtodaytobuythisannuity?

A.$26,

B.$27,

C.$27,

D.$28,

E.$28,

Difficultylevel:Medium

Topic:ORDINARYANNUITYPAYMENTSANDPRESENTVALUE

Type:PROBLEMS

49.Yourcardealeriswillingtoleaseyouanewcarfor$299amonthfor60months.

Paymentsaredueonthefirstdayofeachmonthstartingwiththedayyousignthelease

contract.Ifyourcostofmoneyis%,whatisthecurrentvalueofthelease?

A.$15,

B.$15,

C.$15,

D.$16,

E.$16,

Difficultylevel:Medium

Topic:ANNUITYDUEPAYMENTSANDPRESENTVALUE

Type:PROBLEMS

50.Yourgreat-auntleftyouaninheritanceintheformofatrust.Thetrustagreementstates

thatyouaretoreceive$2,500onthefirstdayofeachyear,startingimmediatelyand

continuingforfiftyyears.Whatisthevalueofthisinheritancetodayiftheapplicablediscount

rateis%

A.$36,

B.$37,

C.$39,

D.$39,

E.$40,

Difficultylevel:Medium

Topic:ANNUITYDUEPAYMENTSANDPRESENTVALUE

Type:PROBLEMS

51.Beatriceinvests$1,000inanaccountthatpays4%simpleinterest.Howmuchmorecould

shehaveearnedoverafive-yearperiodiftheinteresthadcompoundedannually?

A.$

B.$

C.$

D.$

E.$

Endingvalueat4%simpleinterest=$1,000+($1,000.045)=$1,;Endingvalueat4%

compoundedannually=$1,000(1+.04)5=$1,;

Difference=$1,-$1,=$

Difficultylevel:Easy

Topic:SIMPLEVERSUSCOMPOUNDINTEREST

Type:PROBLEMS

52.Yourfirmwantstosave$250,000tobuysomenewequipmentthreeyearsfromnow.The

planistosetasideanequalamountofmoneyonthefirstdayofeachyearstartingtoday.The

firmcanearna%rateofreturn.Howmuchdoesthefirmhavetosaveeachyeartoachieveits

goal?

A.$75,

B.$76,

C.$78,

D.$

E.$83,

Difficultylevel:Medium

Topic:ANNUITYDUEPAYMENTSANDFUTUREVALUE

Type:PROBLEMS

53.TodayisJanuary1.Startingtoday,Samisgoingtocontribute$140onthefirstofeach

monthtohisretirementaccount.Hisemployercontributesanadditional50%oftheamount

contributedbySam.IfbothSamandhisemployercontinuetodothisandSamcanearna

monthlyrateof?of1percent,howmuchwillhehaveinhisretirementaccount35years

fromnow?

A.$199,

B.$200,

C.$249,

D.$299,

E.$300,

Difficultylevel:Medium

Topic:ANNUITYDUEPAYMENTSANDFUTUREVALUE

Type:PROBLEMS

54.Youareconsideringanannuitywhichcosts$100,000today.Theannuitypays$6,000a

year.Therateofreturnis%.Whatisthelengthoftheannuitytimeperiod?

A.years

B.years

C.years

D.years

E.years

Difficultylevel:Medium

Topic:ORDINARYANNUITYTIMEPERIODSANDPRESENTVALUE

Type:PROBLEMS

55.Today,yousignedloanpapersagreeingtoborrow$4,at9%compoundedmonthly.The

loanpaymentis$amonth.Howmanyloanpaymentsmustyoumakebeforetheloanispaid

infull?

A.

B.

C.

D.

E.

Difficultylevel:Medium

Topic:ORDINARYANNUITYTIMEPERIODSANDPRESENTVALUE

Type:PROBLEMS

56.WinstonEnterpriseswouldliketobuysomeadditionallandandbuildanewfactory.The

anticipatedtotalcostis$136million.Theownerofthefirmisquiteconservativeandwill

onlydothiswhenthecompanyhassufficientfundstopaycashfortheentireexpansion

project.Managementhasdecidedtosave$450,000amonthforthispurpose.Thefirmearns

6%compoundedmonthlyonthefundsitsaves.Howlongdoesthecompanyhavetowait

beforeexpandingitsoperations?

A.months

B.months

C.months

D.months

E.months

Difficultylevel:Medium

Topic:ORDINARYANNUITYTIMEPERIODSANDFUTUREVALUE

Type:PROBLEMS

57.Today,youareretiring.Youhaveatotalof$413,926inyourretirementsavingsandhave

thefundsinvestedsuchthatyouexpecttoearnanaverageof3%,compoundedmonthly,on

thismoneythroughoutyourretirementyears.Youwanttowithdraw$2,500atthebeginning

ofeverymonth,startingtoday.Howlongwillitbeuntilyourunoutofmoney?

A.months

B.months

C.months

D.months

E.months

Difficultylevel:Medium

Topic:ANNUITYDUETIMEPERIODSANDPRESENTVALUE

Type:PROBLEMS

58.TheBadGuysCo.isnotoriouslyknownasaslow-payer.Itcurrentlyneedstoborrow

$25,000andonlyonecompanywillevendealwithBadGuys.Thetermsoftheloancallfor

dailypaymentsof$.Thefirstpaymentisduetoday.Theinterestrateis21%compounded

daily.Whatisthetimeperiodofthisloan?

A.years

B.years

C.years

D.years

E.years

Difficultylevel:Medium

Topic:ANNUITYDUETIMEPERIODS

Type:PROBLEMS

59.TheRobertsonFirmisconsideringaprojectwhichcosts$123,900toundertake.The

projectwillyieldcashflowsof$4,monthlyfor30months.Whatistherateofreturnonthis

project?

A.%

B.%

C.%

D.%

E.%

Thiscannotbesolveddirectly,soit'seasiesttojustusethecalculatormethodtogetan

answer.Youcanthenusethecalculatoranswerastherateintheformulajusttoverifythat

youransweriscorrect.

Difficultylevel:Medium

Topic:ORDINARYANNUITYINTERESTRATE

Type:PROBLEMS

60.Yourinsuranceagentistryingtosellyouanannuitythatcosts$100,000today.Bybuying

thisannuity,youragentpromisesthatyouwillreceivepaymentsof$amonthforthenext40

years.Whatistherateofreturnonthisinvestment?

A.%

B.%

C.%

D.%

E.%

Thiscannotbesolveddirectly,soit'seasiesttojustusethecalculatormethodtogetan

answer.Youcanthenusethecalculatoranswerastherateintheformulajusttoverifythat

youansweriscorrect.

Difficultylevel:Medium

Topic:ORDINARYANNUITYINTERESTRATE

Type:PROBLEMS

61.Youhavebeeninvesting$120amonthforthelast15years.Today,yourinvestment

accountisworth$47,.Whatisyouraveragerateofreturnonyourinvestments?

A.%

B.%

C.%

D.%

E.%

Thiscannotbesolveddirectly,soit'seasiesttojustusethecalculatormethodtogetan

answer.Youcanthenusethecalculatoranswerastherateintheformulajusttoverifythat

youansweriscorrect.

Difficultylevel:Medium

Topic:ORDINARYANNUITYINTERESTRATE

Type:PROBLEMS

62.Brinker,Inc.hasbeeninvesting$136,000ayearforthepast4yearsintoabusiness

venture.Today,Brinkersoldthatventurefor$685,000.Whatisitsrateofreturnonthis

venture?

A.%

B.%

C.%

D.%

E.%

Thiscannotbesolveddirectly,soit'seasiesttojustusethecalculatormethodtogetan

answer.Youcanthenusethecalculatoranswerastherateintheformulajusttoverifythat

youansweriscorrect.

Difficultylevel:Easy

Topic:ORDINARYANNUITYINTERESTRATE

Type:PROBLEMS

63.Yourmotherhelpedyoustartsaving$25amonthbeginningonyour10thbirthday.She

alwaysmadeyoumakeyourdepositonthefirstdayofeachmonthjustto"startthemonthout

right."Today,youturn21andhave$4,inyoura