Finance Chapter 3

1) Your aunt places $13,000 into an account earning an interest rate of 7% per year. After 5 years the account will be valued at $18,233.17. Which of the following statements is correct?A) The present value is $13,000, the time period is 7 years, the present value is $18,233.17, and the interest rate is 5%.B) The future value is $13,000, the time period is 5 years, the principal is $18,233.17, and the interest rate is 7%.C) The principal is $13,000, the time period is 5 years, the future value is $18,233.17, and the interest rate is 7%.D) The principal is $13,000, the time period is 7 years, the future value is $18,233.17, and the interest rate is 5%. C
2) The one-time payment of money at a future date is often called a ________.A) lump-sum paymentB) present valueC) principal amountD) perpetuity payment A
3) A $100 deposit today that earns an annual interest rate of 10% is worth how much at the end of two years? Assume all interest received at the end of the first year is reinvested the second year.A) $100B) $120C) $121D) $122 C
4) An investment of $100 today is worth $116.64 at the end of two years if it earns an annual interest rate of 8%. How much interest is earned in the first year and how much in the second year of this investment?A) The interest earned in year one is $8.32 and the interest earned in year two is $8.32.B) The interest earned in year one is $8.00 and the interest earned in year two is $8.64.C) The interest earned in year one is $8.64 and the interest earned in year two is $8.00.D) There is not enough information to solve this problem. B
5) ________ is simply the interest earned in subsequent periods on the interest earned in prior periods.A) Quoted interestB) Anticipated interestC) Simple interestD) Compound interest D
7) Which of the following will result in a future value greater than $100?A) PV = $50, r = an annual interest rate of 10%, and n = 8 years.B) PV = $75, r = an annual interest rate of 12%, and n = 3 years.C) PV = $90, r = an annual interest rate of 14%, and n = 1 year.D) All of the future values are greater than $100. D
8) A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?A) The PV is $178.00.B) The FV is $224.00.C) The FV is $224.72.D) This question is irrelevant because there are no two-year investments that earn an average of 6% per year. C
9) A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?A) The interest earned in year two is $12.00 and year one is $12.72.B) The interest earned in year one is $12.00 and year two is $12.72.C) The FV is $224.00.D) The future value would be greater if the interest rate were lower. B
10) A two-year investment of $200 is made today at an annual interest rate of 6%. Which of the following statements is true?A) The future value would be greater if the interest rate was higher.B) The present value would be greater if the interest rate was higher.C) The future value would be greater if the interest rate was lower.D) The future value does not change as the interest rate changes. A
11) In two years Rocky plans to enroll at Whatsamatta U., a prestigious university in Frostbite Falls, MN. If the current tuition is $23,500 per year and is expected to increase at a rate of 6% per year, how much will Rocky pay in tuition his first year of school? (His first tuition payment is exactly two years from today.) In his fourth year? (His last tuition payment is exactly 5 years from today) (Rounded to the nearest dollar.)A) $23,500 and $29,668B) $26,405 and $29,668C) $23,500 and $31,448D) $26,405 and $31,448 D
12) Steve would like to buy a new car but must complete a two-year commitment to the Peace Corp before he will drive the new car. The current price of the car Steve wants to buy is $22,000, and the dealer expects the price of a similar new car to be $24,000 in two years. If Steve can earn an annual interest rate of 3% on his money, should he buy the car now or wait for two years? Why? Note: Storage costs if Steve purchases the car are $0. Please limit your considerations to the factors offered in the answer choices.A) Buy now because if Steve invests the $22,000 today it will only increase in value to $23,340, and this is less than the cost of his desired new car in two years.B) Steve is indifferent because his $22,000 investment will be worth exactly $24,000 after two years.C) Buy in two years because at $24,000 the car will cost less than the $24,385 Steve will have after investing the money for two years.D) Buy in two years because $24,000 is a real deal for the car Steve wants. A
13) Jasmine and her spouse have saved $4,500 for a 12-day cruise vacation in Europe. The couple needs $5,000 for a “nice” cabin or $6,000 for a “luxury” cabin. If cabin prices are expected to remain constant for the next three years and Jasmine expects to earn 6% per year on her investments, will the couple’s savings be enough to afford the “nice” cabin in three years? Can they afford the luxury cabin? Why or why not?A) Yes, they can afford the “nice” cabin or the luxury cabin because their $4,500 investment will increase to $6,360 by the end of year three.B) Yes, they can afford the “nice” cabin or the luxury cabin because their $4,500 investment will increase to $5,360 by the end of year three.C) Yes, they can afford the “nice” cabin but NOT the luxury cabin because their $4,500 investment will only increase to $5,360 by the end of year three. D) No, they cannot afford the “nice” cabin or the luxury cabin because their $4,500 investment will only increase to $4,950 by the end of year three. C
14) A home improvement firm has quoted a price of $9,800 to fix up John’s backyard. Five years ago, John put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does John have enough money in his account to pay for the backyard fix-up?A) Yes; John now has exactly $9,800 in his home improvement account.B) No; John has only $9,687 in his home improvement account.C) Yes; John now has $10,519 in his home improvement account.D) There is not enough information to answer this question. B
15) Which of the following investments has a larger future value? A $100 investment earning 10% per year for 5 years or a $100 investment earning 5% per year for 10 years?A) An investment of $100 invested at 10% per year for 5 years because it has a future value of $161.05.B) An investment of $100 invested at 10% per year for 5 years because it has a future value of $162.89.C) An investment of $100 invested at 5% per year for 10 years because it has a future value of $161.05.D) An investment of $100 invested at 5% per year for 10 years because it has a future value of $162.89. D
16) Which of the following investments has a larger future value: Investment A–a $1,000 investment earning 5% per year for 6 years, or Investment B–a $500 investment earning 10% per year for 6 years, with a bonus of an extra $500 added at the end of the sixth year?A) Investment B, with a future value of $1,386.B) Investment A, with a future value of $1,386.C) Investment A, with a future value of $1,340.D) The investments have equal value. A
17) You wish to make a sizeable down payment on a house and you currently have $18,325 invested at an annual rate of 4.75%. How much money will be in the account in 2.5 years if it continues to earn at its present rate?A) $18,325B) $19,464C) $20,579D) $20,605 C
18) If you invest $1,800 today, how much money will you have in 5 years?A) $1,800B) This question cannot be answered because it is missing an annual rate of return.C) $2,287D) This question cannot be answered because it is missing the type of investment made. B
19) The current price on a 60-inch flat panel LCD HD television is $2,300. Big screen HD television prices have dropped at an average rate of 9% per year in recent years. If you expect this trend to continue, how much will this style of television cost in three years?A) $2,979B) $2,300C) $1,958D) $1,733 D
20) The financial aid office at your university has offered to pay your full annual tuition cost of $22,000 this year, as long as you maintain a grade point average of 3.00. If tuition costs rise at a rate of 6% per year while you are in college, but the financial aid office continues to pay exactly $22,000 per year for your tuition, how much out-of-pocket tuition costs will you have your senior year? NOTE: Think carefully about this problem when figuring the number of years from the start of your freshman year to the start of your senior year, assuming normal progress toward graduation in four years. Further, be aware that while tuition costs are rising your tuition is covered up to only $22,000. You must pay any excess tuition costs.A) $0B) $3,351C) $4,202D) $5,774 C
1) Which of the following actions will INCREASE the present value of an investment?A) Decrease the interest rate.B) Decrease the future value.C) Increase the amount of time.D) All of the above will increase the present value. A
2) Which of the following actions will DECREASE the present value of an investment?A) Decrease the interest rate.B) Decrease the future value.C) Decrease the amount of time.D) All of the above will decrease the present value. B
4) You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years. If this bond is discounted at a rate of 3.875% per year, what is today’s price (present value) for this bond?A) $8,417B) $8,500C) $5,654D) $10,000 C
5) A furniture store has a sofa on sale for $399.00, with the payment due one year from today. The store is willing to discount the price at an annual rate of 5% if you pay today. What is the amount if you pay today?A) $380.B) $399C) $419D) $394 A
6) Your university is running a special offer on tuition. This year’s tuition cost is $18,000. Next year’s tuition cost is scheduled to be $19,080. The university offers to discount next year’s tuition at a rate of 6% if you agree to pay both years’ tuition in full today. How much is the total tuition bill today if you take the offer?A) $18,000B) $34,981C) $37,080D) $36,000 D
7) An investment promises a payoff of $195 two and one-half years from today. At a discount rate of 7.5% per year, what is the present value of this investment?A) $162.03B) $162.75C) $169.47D) There is not enough information to answer this question. B
8) Your parents plan to spend $20,000 on a car for you upon graduation from college. If you will graduate in three years and your parents can earn 4.125% annually on their investment, how much money must they set aside today for your car?A) $20,000B) $17,704C) $17,716D) $16,387 C
9) You intend to buy a vacation home in seven years and plan to have saved $50,000 for a down payment. How much money would you have to place today into an investment that earns 8% per year to have enough for your desired down payment?A) $29,175B) $29,100C) $37,065D) $25,000 A
10) In five years your oldest child will be in 8th grade, at which point you and your family plan to vacation in Europe. You estimate that you will need $20,000 for the trip. How much do you need to set aside today if you can place your money in an investment vehicle earning an average of 4.50% per year?A) $14,961B) $15,073C) $16,049D) $16,058 C
11) You grandparents leave on their dream vacation to Antarctica in two years.The cruise vacation will cost them $25,000. If they have already saved $23,500 and are investing it at a rate of 2.75% per year, will they have saved enough money for their trip?A) No, because they forgot to factor in long underwear expenses.B) Yes, to have enough money they would have already needed to save $23,375.C) Yes, to have enough money they would have already needed to save $23,680.D) No, to have enough money they would have already needed to save $23,680. D
12) To determine the present value of a future amount, one should ________ the future cash flows.A) annuitizeB) compoundC) discountD) multiply C
13) The school district needs to pass a bond levy for funding to remodel existing schools and to build new schools. Expenditures for the new and remodeled buildings will begin 18 months after passage of the bond. If the school district receives all funding immediately after the passage of the bond and can invest the funds at a rate of 3.75% per year, how large must the bond be for the district to have $45,000,000 at the start of construction?A) $45,000,000B) $47,554,834C) $42,556,397D) $42,582,422 D
14) Your firm has sold a fleet of 100 cars to a local firm at a discounted price of $20,000 each (a total of $2,000,000) due in six months. You are willing to discount the purchase price at an annual rate of 4% if the firm pays cash today. What is the least amount of money you will accept if the firm pays your company today?A) $2,039,608B) $1,961,161C) $1,960,495D) This problem cannot be answered because we have an annual interest rate but only one-half year in time. B
15) Your manufacturing firm has just secured a sale to the federal government with payment of $450,000 due in nine months. You have asked your bank for cash today with the stipulation that you will give the proceeds from the government contract to the bank in nine months. The bank has agreed to your request if you allow them to discount the cash flows at an annual rate of 8%. How much will the bank pay you today under this agreement?A) $424,761B) $423,889C) $476,739D) $450,000 A
16) Your trust fund will pay you $100,000 in six years when you turn 25. A shady financial institution has encouraged you to sign away the rights to your trust fund in exchange for cash today. Would you prefer that the financial institution use a discount rate of 8% or 10% to determine the value of your lump sum payment? Why?A) Use 8% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.B) Use 10% because the lump sum payment of $62,741 is greater than the 10% discounted value of $55,839.C) Use 8% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447.D) Use 10% because the lump sum payment of $63,017 is greater than the 10% discounted value of $56,447. C
17) Your parts supplier gives you one-quarter of a year to pay for parts ordered today, or offers you a discount if you pay cash at purchase. You have just purchased $73,500 worth of parts from your supplier and the discount is at an annual rate of 8%. How much will you pay for the parts if you pay today?A) $73,500B) $72,099C) $68,056D) $72,046 B
1) In the equation r = (FV/PV)1/n – 1, the r is sometimes referred to as the ________.A) interest rateB) discount rateC) growth rateD) All of the above D
6) Dividend growth rate is important to many investors. You are considering investing in a firm after looking at the firm’s dividends over a seven-year period. At the end of the year 2002, the firm paid a dividend of $1.15. At year-end 2009, it paid a dividend of $1.84. What was the average annual growth rate of dividends for this firm?A) 7.25%B) 9.86%C) 6.94%D) There is not enough information to answer this question. C
7) Four years ago, Robert’s annual salary was $52,500. Today, he earns $73,800. What has been the average annual rate of growth of Robert’s salary?A) $5,325 per yearB) 10.38%C) 41.52%D) 8.89% D
8) You gave your little sister two rabbits for Easter three years ago and now she has 84 of the cute little bunnies. What is the average annual rate of increase in the number of rabbits your sister owns? Note: Your parents are not very pleased with you right now.A) 247.60%B) 14.00%C) 410.00%D) The TVM equations are designed for currency amounts and cannot be used for non-financial calculations such as this one. A
9) Simpson Construction had sales seven years ago of $2,150,000. This year their sales hit $4,600,000. What has been Simpson’s average annual rate of growth of sales?A) 30.56%B) 11.48%C) $350,000 per yearD) None of the above B
10) The Millville School District had 3,071 students enrolled five years ago. Today, the district enrollment is 2,418 students. What has been the annual rate of change of student enrollment in the Millville School District over this time period?A) -5.40%B) -4.25%C) -4.67%D) 4.25% C
11) You currently have $2,500 invested at an annual rate of 8%. How long will it take for this investment to grow to a value of $3,500?A) 4.37 yearsB) 5.00 yearsC) 5.60 yearsD) 8.03 years A
12) You have saved $1,200 for a used motorcycle that has a current price of $1,500. If your money is sitting in an account earning 2.50% per year, how long will it take for this account to grow to $1,500? Note: The motorcycle’s price may have changed by the time your account reaches a value of $1,500.A) 9.04 monthsB) 9.04 yearsC) 4.25 yearsD) 4.25 months B
13) Madison is taking over as Chief Marketing Officer at MidWest Graphics. She has pledged to increase sales from their current level of $12,000,000 at a rate of 10% per year until the firm hits sales of $20,000,000 per year. How long will it take Madison to hit the target goal at this rate of increase?A) 7.67 yearsB) 1.53 yearsC) 5.36 yearsD) At that rate, Madison will never reach the target sales level in her lifetime. C
14) Upon taking his first job out of college, your Dad earned an annual salary of $38,000 and set a goal to earn $100,000 per year. If his salary increased at an average annual rate of 12%, how long did it take to reach his goal?A) At that rate of growth, your Dad still has not earned $100,000 in a single year.B) 2.63 yearsC) 26.31 yearsD) 8.54 years D
15) Your grandfather likes to tell the story about how he started with 50 head of cattle on his ranch and grew the ranch to 1,000 head of cattle. He said “My plan was simple: grow the number of head of cattle at a rate of 10% per year.” Your grandfather reached his goal before he retired. How long did it take him?A) 18.63 yearsB) 31.43 yearsC) 25.22 yearsD) 47.65 years B
1) In 1930, the highest paid player in major league baseball was Babe Ruth of the New York Yankees, with an annual salary of $80,000. In 2005, the highest paid player in major league baseball player was Alex Rodriguez, also of the New York Yankees, with a salary of $25,000,000. What was the average annual rate of growth in the top baseball salary over this time period?A) 7.96%B) 18.70%C) 3.31%D) 4.17% A
2) In 1970, before the era of major league baseball free agency, the minimum player salary was $12,000. In 1975, the minimum salary was $16,000. What was the average annual growth in the minimum salary in major league baseball over those five years?A) 13.40%B) 2.67%C) 5.92%D) 15.00% C
3) In 1975, the era of major league baseball free agency began. The average player salary was $16,000. In 1980, the average salary was $30,000. What was the average annual growth in the minimum salary in major league baseball over those five years?A) 37.50%B) 13.40%C) 5.92%D) 10.67% B
4) Average U.S. wages in 1990 were $28,960, far larger than the average wage in 1930 of $1,970. What was the average annual increase in wages over this 60-year period?A) 3.31%B) 2.45%C) 24.50%D) 4.58% D
5) Gasoline cost $.10 per gallon in 1930. Over the next 60 years, the price rose at an average rate of 4.42% per year. Based on this information, what was the average price of a gallon of gas in 1990?A) $1.34 per gallonB) $1.53 per gallonC) $2.65 per gallonD) $2.75 per gallon A
6) For much of the 20th century, new car prices rose at an annual rate of 5.73%. Given a beginning new car price of $600, how long did it take for the average new car price to rise to $16,950? Please round to the nearest year.A) 40 yearsB) 60 yearsC) 70 yearsD) 100 years B
7) Buying your own home is often mentioned as “the best investment you can make.” In 1930, the average home sale price was $3,845. By 1990, that figure had risen to $123,000. What was the average annual rate of change in the price of houses over this time period?A) 3.42% per yearB) 5.95% per yearC) 10.12% per yearD) 12.36% per year B
8) Kirby Puckett became the first $3,000,000 man in major league baseball in 1990. By 2008, A-Rod was bringing in $27,500,000 per year. Did the annual change in the highest annual baseball salary rise more rapidly over this time period than from 1930 to 1990? Babe Ruth had the highest salary and made $80,000 in 1930.A) Yes, because the annual rate of change was 29.17% in the more recent period and only 36.67% in the earlier period.B) No, because the annual rate of change was 29.17% in the more recent period and 36.67% in the earlier period.C) Yes, because the annual rate of change was 13.10% in the more recent period and only 6.23% in the earlier period.D) There is not enough information provided to answer this question. C
9) In January of 1997, the U.S. Consumer Price Index (CPI) stood at 159.1. By January of 2011, the level had risen to 220.2. What was the average annual rate of inflation over this time period as measured by the CPI?A) 2.35%B) 3.31%C) 2.97%D) 2.60% A
10) The survey results from the National Association of Colleges and Employers (NACE) show the average annual increases in salaries for new accounting graduates to be 3.42% since the year 2000. If new starting salaries in accounting were $36,919 in 2000, what were they in 2011?A) $45,757B) $46,718C) $53,444D) $42,617 B
11) Your finance professor suggests that you should have $2,500,000 in your retirement portfolio before you even THINK about retiring. Recently, your uncle sold valuable California real estate and handed you a check for $300,000. (This is the amount you have after paying taxes. He is now your favorite uncle.) How much of the $300,000 must you set aside today if you invest a portion of the money at an annual rate of 8.0% and you wish to retire in 35 years with the amount suggested by your finance professor?A) $169,086B) $14,508C) $130,914D) At an annual rate of return of 8.0%, $300,000 is not a large enough investment to reach the goal amount of $2,500,000 in 35 years. A
12) You plan to place a $40,000 down payment on a lake cabin in Northern Minnesota in five years. If you invest in a long-term CD earning an annual rate of 5.50%, how much would you need to invest today to have enough for the down payment in five years?A) $33,326B) $30,605C) $24,379D) $18,264 B
13) Harry decided he was tired of being a poor college student when he visited a local electronics store and experienced its finest home theatre system. He determined that he would invest today a portion of the remaining money he earned last summer cleaning animal cages at the veterinary clinic. He plans to invest the money into an international mutual fund for 3.5 years and expects to earn an average annual rate of return of 15%. If Harry wants to have $4,000 in the account at the end of this time, how much must he invest today?A) $1,253B) $2,048C) $2,453D) $2,591 C
14) You need $32,000 at the end of 6 years. If you can earn 0.625% per month, how much would you need to invest today to meet your objective?A) $17,600B) $18,319C) $20,735D) $20,433 D
15) Your friend John started college at the age of 18 with $63,450 already saved, because 18 years ago when he was born his parents placed money into a special college savings account earning 7.25% per year. How much money did John’s parents place into his college account?A) $18,000B) $3,525C) $17,262D) $5,824 A
16) You know that regular tax-deferred investments are a popular investment choice for many people preparing for retirement. Did you know that if you invest $2,000 today and at the end of every year for 40 years at an annual rate of 10% that you will have grown your portfolio to a value of $975,704 at the end of that time? How much of that future value dollar amount comes from the $2,000 investment you made today?A) $975,704B) $885,185C) $23,798D) $90,519 D
17) If you invest $5,000 today at an annual interest rate of 6.35%, how much money will you have for your daughter’s college education in 18 years?A) $5,603B) $10,000C) $15,144D) There is not enough information to answer this question. C
18) You won the state lottery and took the payout as a $1,283,475 lump sum today. Your spouse has decided that you need to invest this money for the next 10 years and can expect it to earn an average annual rate of return of 7.18%. If this comes to pass, how much money will be in the account at the end of the period?A) $8,471,253B) $2,567.586C) $1,920,388D) $1,890,471 B

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