Chapter 3 Quiz, How to Calculate Present Values




1. Present Value is defined as:
A.Future cash flows discounted to the present at an appropriate discount rate
B.Inverse of future cash flows
C.Present cash flow compounded into the future
D.None of the above


2. If the interest rate is 15%, what is the 2 year discount factor?
A.0.7561
B.0.8697
C.1.3225
D.0.658


3. An annuity is defined as
A.Equal cash flows at equal intervals of time forever
B.Equal cash flows at equal intervals of time for a specific period
C.Unequal cash flows at equal intervals of time forever
D.None of the above


4. If the present value of the cash flow X is $200, and the present value cash flow Y $150, than the present value of the combined cash flow is:
A.$200
B.$150
C.$50
D.$350
E.None of the above


5.

What is the net present value of the following cash flow at a discount rate of 15%?



A.$19,887
B.$80,000
C.$26,300
D.None of the above


6. You would like to have enough money saved to receive a $100,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments start one year from the date of your retirement. The interest rate is 10%)?
A.$1,000,000
B.$10,000,000
C.$100,000
D.None of the above


7. What is the present value annuity due factor of $1at a discount rate of 15% for 15 years?
A.$5.8474
B.$8.514
C.$8.13
D.$7.002


8. If the present value of $1.00 received n years from today at an interest rate of r is 0.270, then what is the future value of $1.00 invested today at an interest rate of r% for n years?
A.$1.00
B.$3.71
C.$1.70
D.Not enough information to solve the problem


9. Which of the following statements is true?
A.Present value of an annuity is always greater than the present value of equivalent annuity for a given interest rate.
B.The future value of an annuity factor is always greater than the future value of an equivalent annuity at the same interest rate.
C.Both A and B are true
D.Both A and B are false


10. Mr. Hopper is expected to retire in 28 years and he wishes accumulate $750,000 in his retirement fund by that time. If the interest rate is 10% per year, how much should Mr. Hopper put into the retirement fund each year in order to achieve this goal?
A.$4,559.44
B.$5588.26
C.$9,118.88
D.None of the above


11. John House has taken a $150,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for thirty equal annual payments, what is the amount of each payment?
A.$14,158.94
B.$10,897.34
C.$16,882.43
D.None of the above


12. The concept of compound interest refers to:
A.Earning interest on the principal
B.Earning interest on previously earned interest
C.Investing for a number of years
D.None of the above


13. If you invest $100 at 13% APR for three years, how much would you have at the end of 3 years using simple interest?
A.$136
B.$144.28
C.$240.18
D.None of the above


14. An investment at 12% nominal rate compounded monthly is equal to an annual rate of:
A.12.68%
B.12.36%
C.12%
D.None of the above


15. A 5-year treasury bond with a compound rate of 8% has a face value of $1000. What is the annual interest payment?
A.$80
B.$40
C.$100
D.None of the above



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