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Financial Management Exam 2 Ch.5
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Terms in this set (24)
Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
annual percentage rate.
compounded rate.
perpetual rate.
simple rate.
effective annual rate.
annual percentage rate
Capstone Investments is considering a project that will produce cash inflows of $11,000 in year 1, $24,000 in year 2, and $36,000 in year 3. What is the present value of these cash inflows if the company assigns the project a discount rate of 12 percent?
$63,494.54
$41,997.60
$54,578.17
$46,564.28
$54,868.15
$54,578.17
FUTURE VALUE:MULTIPLE CASH FLOWS
You think you will be able to deposit $4,000 at the end of each of the next three years in a bank account paying 8 percent interest.
You currently have $7,000 in the account.
How much will you have in 3 years?
How much in 4 years?
Total value in 3 years = $21,803.58
Value at year 4 = $21,803.58(1.08) = $23,547.87
Cromwell Enterprises is acquiring Athens, Inc. for $899,000. Athens has agreed to accept annual payments of $210,000 at an interest rate of 8.5 percent. How many years will it take Cromwell Enterprises to pay for this purchase? *Use financial calculator
5.55 years
5.47 years
5.18 years
5.80 years
5.00 years
5.55 years
In calculator-
I/Y: 8.5
PV: 899,000
PMT: -210,000
FV: 0
Solve for N
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?
Annuity due
Consol
Perpetuity due
Ordinary annuity
Ordinary perpetuity
Annuity due
Julie is borrowing $12,800 to purchase a car. The loan terms are 36 months at 7.5 percent interest. How much interest will she pay on this loan if she pays the loan as agreed? Round your answer to the nearest whole dollar.
$1,414
$1,459
$1,506
$1,534
$1,338
$1,534
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?
Perpetuity
Continuation
Annuity due
Ordinary annuity
Amortized payment
Perpetuity
Katie's Dinor spent $84,000 to refurbish its current facility. The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for five years. What is the amount of each monthly payment?
$1,333.33
$1,401.49
$1,108.91
$1,282.16
$1,487.06
$1,401.49
Sticks and Stuff Furniture is offering a bedroom suite for $3,000. The credit terms are 60 months at $50 per month. What is the interest rate on this offer?
1.30 percent
1.15 percent
0.00 percent
1.50 percent
1.65 percent
0.00 percent
Steve is considering investing $3,600 a year for 40 years. How much will this investment be worth at the end of the 40 years if he earns an average annual rate of return of 11.6 percent? Assume Steve invests his first payment of the end of this year.
$2,471,685.70
$2,103,018.90
$2,311,416.67
$1,887,411.26
$1,919,200.08
$2,471,685.70
The Insolvent Insurance Co. will pay you $2,500 a year for 10 years in exchange for $30,000 today. What interest rate will you earn on this annuity? *use calculator
5.55 percent
-3.18 percent
5.60 percent
3.18 percent
5.50 percent
-3.18 percent
Which one of the following has the highest effective annual rate?
All the other answers have the same effective annual rate.
6 percent compounded semiannually
6 percent compounded quarterly
6 percent compounded annually
6 percent compounded monthly
6 percent compounded monthly
Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3?
End of year: Amount saved:
1, $500
2, $800
3, $900
$2,238.47
$2,200.00
$2,402.19
$2,309.80
$2,309.16
$2,309.80
You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?
$2,221.43
$1,736.25
$1,833.33
$2,406.11
$1,908.16
$1,736.25
Which one of the following statements is true concerning annuities?
All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.
All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
An annuity with payments at the beginning of each period is called an ordinary annuity.
All else equal, an ordinary annuity is more valuable than an annuity due.
All else equal, a decrease in the number of payments increases the future value of an annuity due.
All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?
12.00 percent
16.00 percent
16.28 percent
11.88 percent
12.16 percent
12.00 percent
Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from today. How much should she pay for this investment if she wishes to earn a 13 percent rate of return?
$20,186.75
$22,113.05
$23,749.24
$17,899.08
$18,023.88
$22,113.05
Compass Bank is offering 0.8 percent compounded daily on its savings accounts. If you deposit $2,500 today, how much will you have in the account in 15 years?
$2,890.62
$2,761.32
$2,818.74
$2,675.10
$2,567.15
$2,818.74
Which one of the following is an example of a perpetuity?
Trust income of $1,200 a year forever
Retirement pay of $2,200 a month for 20 years
Lottery winnings of $1,000 a month for life
Car payment of $260 a month for 60 months
Apartment rent payment of $800 a month for one year
Trust income of $1,200 a year forever
Webster Mining is considering the purchase of a new sorting machine. The quote consists of a quarterly payment of $29,600 for seven years at 8 percent interest. What is the purchase price of the equipment?
$774,311.28
$629,925.66
$687,418.22
$836,267.35
$621,380.92
$629,925.66
Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?
Lump sum
Perpetuity
Consol
Annuity
Factor
Annuity
You want to purchase a new condominium that costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?
$2,221.43
$1,736.25
$1,833.33
$2,406.11
$1,908.16
...
What is the difference between annuity and perpetuity?
Annuity-finite series of EQUAL payments that occur at REGULAR intervals
*When first payment occurs at the end of the period it is called an ordinary annuity
*If the first payment occurs at the beginning of the period it is called annuity due
Perpetuity-infinite series of equal payments
When is cash inflow positive or negative?
PMT will be positive when there is a cash inflow to you (you deposited $100 today and plan on withdrawing $20 a year for 5 years)
PMT will be negative when there is a cash outflow from you (deposited $100 today and plan to add $20 a year for 5 years)
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