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Exam 4: Time Value of Money - Streams and Valuations

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Question 41

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You are faced with two different investment options.The first investment provides cash flows of $1,500 per year for 10 years.The second investment provides cash flows of $3,000 for 5 years.For both investments,cash flows occur at the end of each year.Which of these has the higher present value with a discount rate of 5%?

A) The 5-year investment
B) They have the same PV.
C) The 10-year investment

D) All of the above
E) A) and B)

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Question 42

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You expect to receive $800 at the end of each of the next twenty years.What is the present value of the stream of payments if the interest rate is 12%?

A) $5,975.55
B) $5,892.62
C) $6,049.60
D) $6,054.63
E) $5,619.80

F) A) and B)
G) A) and C)

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Question 43

Multiple Choice

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An annuity with an infinite life is called:

Three years from now you will begin receiving annual payments of $7,200.This will continue for 14 years.At a discount rate of 5.8%,what is the present value of this stream of cash flows?

Actively managed mutual funds charge higher management fees than passive funds.Assume that the net return to an active fund (after fees) is 9.5% (0.79% per month) and the net return to a passive fund is 10.5% (0.875% per month) .Assume that an investor saves $600 per month (end-of-month) over thirty years.What is the difference in the future value of savings between investing in an active fund and a passive fund?

How much must be invested today to make four annual withdrawals of $20,000 each for tuition payments if you can earn 8% compounded annually on your investment and the first withdrawal will take place in one year? (Round to the nearest whole dollar)

Mary will receive $12,000 per year for the next ten years as royalty for her work on a finance book.What is the present value of her royalty income if the opportunity cost is 12 percent? (Round to the nearest whole dollar)

________ is an annuity with an infinite life making continual annual payments.

In comparing an ordinary annuity and an annuity due,which of the following is true?

You want to buy a Nissan 300Z on your 27th birthday.You have priced these cars and found that they currently sell for $25,000.You believe that the price will increase by 10 percent per year until you are ready to buy.You can presently invest to earn 14 percent.If you just turned 20 years old,how much must you invest at the end of each of the next 7 years to be able to purchase the Nissan in 7 years?

You have been offered a project paying $300 at the beginning of each year for the next 20 years.The first payment occurs at the beginning of the first year.What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment? (Round to the nearest whole dollar)

You would like to buy a Harley Davidson and you can afford to make a down payment of $2,000 and pay monthly (end-of-month) payments of $1,320.If the term is 36 months and the loan rate is 9% (APR) ,then what is the maximum that you can pay for the motorcycle?

Joe expects to start working immediately after graduation and he is already planning to retire.He wants to retire in twenty-five years and hopes that he will be able to do so comfortably by investing $2,000 at the end of each year throughout this period.If he earns 5% compounded annually,how much will be in his retirement fund in twenty-five years?

An investor is considering the purchase of 20 acres of land.An analysis indicates that if the land is used for cattle grazing,it will produce a cash flow of $1,000 per year indefinitely.If the investor requires a return of 10% on investments of this type,what is the most he or she should be willing to pay for the land?

The Bentley Azure can be leased for four years for $0 down and 48 monthly payments of $4,000 (due at the beginning of each month) .Today is the day that the first payment is due.If,instead,you save the payments in a bank account at the nominal annual rate of 7.5%,then how much money will you have at the end of the fourth year? (Round answer to the nearest whole dollar)

You are expecting to receive $70 per year at the end of each of the next five years.If you invest the money in account that pays 5%,then how much interest will you earn over the five years? (Round to the nearest whole dollar)

A perpetuity pays $550 at the end of every month.The PV of the perpetuity is $36,000.What is the nominal annual rate (APR) on the perpetuity?

The present value of a $25,000 perpetuity at a 14 percent discount rate is: (Round to the nearest whole dollar.)

What is the present value of an ordinary annuity that pays $1,000 per year over each of the next twenty years if the discount rate is 10%? Round to the nearest whole dollar.

The present value of an ordinary annuity of $2,350 each year for 8 years,assuming an opportunity cost of 11 percent,is: (Round to the nearest whole dollar.)