Chapter 02 - How To Calculate Present Values

Chapter 02 - How to Calculate Present Values
Chapter 02
How to Calculate Present Values

47. If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the
present value annuity factor for an equivalent annuity due?
A. 6.1446
B. 7.38
C. 6.759
D. None of the above
48. If the present annuity factor is 3.8896, what is the present value annuity factor for an
equivalent annuity due if the interest rate is 9%?
A. 3.5684
B. 4.2397
C. 3.8896
D. None of the above.
49. For $10,000 you can purchase a 5-year annuity that will pay $2358.65 per year for five
years. The payments are made at the beginning of each year. Calculate the effective annual
interest rate implied by this arrangement: (approximately)
A. 8%
B. 9%
C. 10%
D. none of the above
50. John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year.
If the mortgage calls for twenty equal annual payments, what is the amount of each payment?
A. $21,796.14
B. $10,500.00
C. $16,882.43
2-1
51. John House has taken a 20-year, $250,000 mortgage on his house at an interest rate of 6%
per year. What is the value of the mortgage after the payment of the fifth annual installment?
A. $128,958.41
B. $211,689.53
C. $141,019.50
52. If the present value of $1.00 received n years from today at an interest rate of r is 0.3855,
then what is the future value of $1.00 invested today at an interest rate of r% for n years?
A. $1.3855
B. $2.594
C. $1.70
D. Not enough information to solve the problem
A. $1.00
B. $1.61
C. $1.621
54. If the future value of $1 invested today at an interest rate of r% for n years is 9.6463, what
is the present value of $1 to be received in n years at r% interest rate?
A. $9.6463
B. $1.00
C. $0.1037
55. If the future value annuity factor at 10% and 5 years is 6.1051, calculate the equivalent
present value annuity factor
A. 6.1051
B. 3.7908
C. 6.7156
D. None of the given ones
2-2
56. If the present value annuity factor at 10% APR for 10 years is 6.1446, what is the
equivalent future value annuity factor?
A. 3.108
B. 15.9374
C. 2.5937
A. 2.0455
B. 6.3529
C. 1.7623
58. If the present value annuity factor at 8% APR for 10 years is 6.71, what is the equivalent
future value annuity factor?
A. 3.108
B. 14.487
C. 2.159
59. You are considering investing in a retirement fund that requires you to deposit $5,000 per
year, and you want to know how much the fund will be worth when you retire. What financial
technique should you use to calculate this value?
A. Future value of a single payment
B. Future value of an annuity
C. Present value of an annuity
60. Mr. Hopper is expected to retire in 25 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? [Assume that the
payments are made at the end of each year]
A. $4,559.44
B. $2,500
C. $7,626.05
2-3
61. Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000 in his
Hopper put into the retirement fund each year in order to achieve this goal?
A. $4,143.66
B. $8,287.32
C. $4,000

62. You would like to have enough money saved to receive a growing annuity for 20 years,
growing at a rate of 5% per year, the first payment being $50,000 after retirement. That way,
you hope that you and your family can lead a good life after retirement. How much would you
need to save in your retirement fund to achieve this goal.(assume that the growing annuity
payments start one year from the date of your retirement. The interest rate is 10%)?
A. $1,000,000
B. $425,678.19
C. $605,604.20
growing
at a rate of 4% per year, the first payment being $60,000 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 growing perpetuity payments start one year from the date
of
your retirement. The interest rate is 12%)?
A. $1,500,000
B. $632,390
C. $452,165
64. The discount rate is used for calculating the NPV is:

A. Determined by the financial markets
B. Found by the government
C. Found by the CEO

65. The managers of a firm can maximize stockholder wealth by:
A. Taking all projects with positive NPVs
B. Taking all projects with NPVs greater than the cost of investment
C. Taking all projects with NPVs greater than present value of cash flow
D. All of the above
2-4

66. If you invest $100 at 12% APR for three years, how much would you have at the end of 3
years using simple interest?
A. $136
B. $140.49
C. $240.18
years using compound interest?
A. $136
B. $140.49
C. $240.18
68. Which of the following statements is true?

A. The process of discounting is the inverse of the process of compounding.
B. Ending balances using simple interest is always greater than the ending balance using
compound interest at positive interest rates.
C. Present value of an annuity due is always less than the present value of an equivalent
annuity at positive interest rates.
D. All of the above are true.
69. The concept of compound interest is most appropriately described as:

A. Interest earned on an investment
B. The total amount of interest earned over the life of an investment
C. Interest earned on interest
2-5
70. Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year. If
the mortgage calls for equal monthly payments for twenty years, what is the amount of each
payment? (Assume monthly compounding or discounting.)
A. $1254.70
B. $1625.00
C. $1263.06
D. None of the above are true
71. An investment at 10.47% effective rate compounded monthly is equal to a nominal

(annual) rate of:
A. 10.99%
B. 9.57%
C. 10%
72. An investment at 12% nominal rate compounded monthly is equal to an annual rate of:
A. 12.68%
B. 12.36%
C. 12%
73. Mr. William expects to retire in 30 years and would like to accumulate $1 million in the
pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams put
into the pension fund each month in order to achieve his goal? Assume that Mr. Williams will
deposit the same amount each month into his pension fund and also use monthly
compounding.
A. $286.13
B. $771.60
C. $345.30
2-6
74. An investment at 10% nominal rate compounded continuously is equal to an equivalent

annual rate of:
A. 10.250%
B. 10.517%
C. 10.381%
75. The present value of a $100 per year perpetuity at 10% per year interest rate is $1000.
What would be the present value if the payments were compounded continuously?
A. $1000.00
B. $1049.21
C. $1024.40
2-7
years. The payments are made at the end of each year. Calculate the effective annual interest
rate implied by this arrangement: (approximately)
A. 8%
B. 9%
C. 10%
Using a financial calculator: N = 5; PV = -10,000; PMT = 2504.57; FV = 0

Compute: I = 8.0% [calculator setting: END]
Type: Medium

47. If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the
present value annuity factor for an equivalent annuity due?
A. 6.1446
B. 7.38
C. 6.759
Annuity due: 6.1446 * 1.1 = 6.759
Type: Difficult

48. If the present annuity factor is 3.8896, what is the present value annuity factor for an
equivalent annuity due if the interest rate is 9%?
A. 3.5684
B. 4.2397
C. 3.8896
D. None of the above.
annuity due factor = 3.8896 * 1.09 = 4.2397
Type: Medium

2-8
years. The payments are made at the beginning of each year. Calculate the effective annual
interest rate implied by this arrangement: (approximately)
A. 8%
B. 9%
C. 10%
D. none of the above
Using a financial calculator: N = 5; PV = -10,000; PMT = 2358.65; FV = 0

Compute: I = 9.0% [Calculator setting: BEGIN (BGN)
A. $1.3855
B. $2.594
C. $1.70
FV = 1/(0.3855) = 2.594
Type: Difficult

A. $1.00
B. $1.61
C. $1.621
FV = 1/(0.621) = 1.61
Type: Difficult

2-9
54. If the future value of $1 invested today at an interest rate of r% for n years is 9.6463, what
is the present value of $1 to be received in n years at r% interest rate?
A. $9.6463
B. $1.00
C. $0.1037
PV = 1/9.6463 = 0.1037
Type: Difficult

2-10
55. If the future value annuity factor at 10% and 5 years is 6.1051, calculate the equivalent
present value annuity factor
A. 6.1051
B. 3.7908
C. 6.7156
D. None of the given ones
PV = 6.1051/(1.1)^5 = 3.7908
Type: Difficult

A. 3.108
B. 15.9374
C. 2.5937
FV annuity factor = 6.1446 * (1.1^10) = 15.9374
Type: Difficult

A. 2.0455
B. 6.3529
C. 1.7623
Type: Difficult

2-11
58. If the present value annuity factor at 8% APR for 10 years is 6.71, what is the equivalent
future value annuity factor?
A. 3.108
B. 14.487
C. 2.159
Type: Difficult

59. You are considering investing in a retirement fund that requires you to deposit $5,000 per
year, and you want to know how much the fund will be worth when you retire. What financial
technique should you use to calculate this value?
A. Future value of a single payment
B. Future value of an annuity
C. Present value of an annuity
Type: Easy

60. Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in his
Hopper put into the retirement fund each year in order to achieve this goal? [Assume that the
payments are made at the end of each year]
A. $4,559.44
B. $2,500
C. $7,626.05
Future value annuity factor = [(1.1^25) - 1]/(0.1) = 98.347;

payment = 750,000/98.347 = 7626.05
Type: Difficult

2-12
61. Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000 in his
Hopper put into the retirement fund each year in order to achieve this goal?
A. $4,143.66
B. $8,287.32
C. $4,000
Future value annuity factor = [(1.12^30 - 1]/(0.12) = 241.3327;

payment = 1,000,000/241.3327 = 4143.66
Type: Difficult

growing at a rate of 5% per year, the first payment being $50,000 after retirement. That way,
you hope that you and your family can lead a good life after retirement. How much would you
need to save in your retirement fund to achieve this goal.(assume that the growing annuity
payments start one year from the date of your retirement. The interest rate is 10%)?
A. $1,000,000
B. $425,678.19
C. $605,604.20
PV = (50,000)[(1/(0.1 - 0.05)) - {(1/(0.1 - 0.05)}{(1.05^20)/(1.10^20)}] = 605,604.20
Type: Difficult

2-13
growing
at a rate of 4% per year, the first payment being $60,000 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 growing perpetuity payments start one year from the date
of
your retirement. The interest rate is 12%)?
A. $1,500,000
B. $632,390
C. $452,165
PV = (60,000) [(1/(0.12 - 0.04)) - {(1/(0.12 - 0.04)}{(1.04^25)/(1.12^25)}] = 632,390
Type: Difficult

64. The discount rate is used for calculating the NPV is:

A. Determined by the financial markets
B. Found by the government
C. Found by the CEO
Type: Easy

65. The managers of a firm can maximize stockholder wealth by:

A. Taking all projects with positive NPVs
B. Taking all projects with NPVs greater than the cost of investment
C. Taking all projects with NPVs greater than present value of cash flow
D. All of the above
Type: Medium

2-14
years using simple interest?
A. $136
B. $140.49
C. $240.18
FV = 100 + (100 * 0.12 * 3) = $136
Type: Medium

years using compound interest?
A. $136
B. $140.49
C. $240.18
FV = 100 * (1.12^3) = $140.49
Type: Medium

68. Which of the following statements is true?

A. The process of discounting is the inverse of the process of compounding.
B. Ending balances using simple interest is always greater than the ending balance using
compound interest at positive interest rates.
C. Present value of an annuity due is always less than the present value of an equivalent
annuity at positive interest rates.
D. All of the above are true.
Type: Difficult

2-15
69. The concept of compound interest is most appropriately described as:

A. Interest earned on an investment
B. The total amount of interest earned over the life of an investment
C. Interest earned on interest
Type: Medium

70. Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year. If
the mortgage calls for equal monthly payments for twenty years, what is the amount of each
payment? (Assume monthly compounding or discounting.)
A. $1254.70
B. $1625.00
C. $1263.06
D. None of the above are true
PMT = 150,000/[(1/0.005) - 1/((0.005 * ((1 + 0.005)^240)))] = $1254.70
Type: Difficult

71. An investment at 10.47% effective rate compounded monthly is equal to a nominal

(annual) rate of:
A. 10.99%
B. 9.57%
C. 10%
NOM = [(1.1047)^(1/12) - 1] * 12 = 0.1 = 10.00%
Type: Medium

2-16
72. An investment at 12% nominal rate compounded monthly is equal to an annual rate of:
A. 12.68%
B. 12.36%
C. 12%
EAR = ((1.01)^12) - 1 = 0.12681 = 12.68%
Type: Medium

73. Mr. William expects to retire in 30 years and would like to accumulate $1 million in the
pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams put
into the pension fund each month in order to achieve his goal? Assume that Mr. Williams will
deposit the same amount each month into his pension fund and also use monthly
compounding.
A. $286.13
B. $771.60
C. $345.30
PMT = 1,000,000/{[(1/0.01) - (1/(0.01 * (1.01^360)))] * (1.01^360)} = $286.13
Type: Difficult

74. An investment at 10% nominal rate compounded continuously is equal to an equivalent

annual rate of:
A. 10.250%
B. 10.517%
C. 10.381%
(e^(0.1)) - 1 = 0.10517 = 10.517%
Type: Difficult

2-17
75. The present value of a $100 per year perpetuity at 10% per year interest rate is $1000.
What would be the present value if the payments were compounded continuously?
A. $1000.00
B. $1049.21
C. $1024.40
(e^r) = 1.1 r = ln(1.1) = 0.09531; PV = 100/0.09531 = $1049.21
2-18

Chapter 02 - How To Calculate Present Values

Uploaded by

Copyright:

Available Formats

Chapter 02 - How To Calculate Present Values

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter 02 - How To Calculate Present Values

Uploaded by

Copyright:

Available Formats

Chapter 02 - How to Calculate Present Values

64. The discount rate is used for calculating the NPV is:

68. Which of the following statements is true?

69. The concept of compound interest is most appropriately described as:

71. An investment at 10.47% effective rate compounded monthly is equal to a nominal

74. An investment at 10% nominal rate compounded continuously is equal to an equivalent

Using a financial calculator: N = 5; PV = -10,000; PMT = 2504.57; FV = 0

Annuity due: 6.1446 * 1.1 = 6.759

annuity due factor = 3.8896 * 1.09 = 4.2397

Using a financial calculator: N = 5; PV = -10,000; PMT = 2358.65; FV = 0

FV annuity factor = 6.1446 * (1.1^10) = 15.9374

FV annuity factor = 3.6048 * (1.12^5) = 6.3529

FV annuity factor = 6.71 * (1.08^10) = 14.487

Future value annuity factor = [(1.1^25) - 1]/(0.1) = 98.347;

Future value annuity factor = [(1.12^30 - 1]/(0.12) = 241.3327;

PV = (50,000)[(1/(0.1 - 0.05)) - {(1/(0.1 - 0.05)}{(1.05^20)/(1.10^20)}] = 605,604.20

PV = (60,000) [(1/(0.12 - 0.04)) - {(1/(0.12 - 0.04)}{(1.04^25)/(1.12^25)}] = 632,390

64. The discount rate is used for calculating the NPV is:

65. The managers of a firm can maximize stockholder wealth by:

FV = 100 + (100 * 0.12 * 3) = $136

FV = 100 * (1.12^3) = $140.49

68. Which of the following statements is true?

69. The concept of compound interest is most appropriately described as:

PMT = 150,000/[(1/0.005) - 1/((0.005 * ((1 + 0.005)^240)))] = $1254.70

71. An investment at 10.47% effective rate compounded monthly is equal to a nominal

NOM = [(1.1047)^(1/12) - 1] * 12 = 0.1 = 10.00%

EAR = ((1.01)^12) - 1 = 0.12681 = 12.68%

PMT = 1,000,000/{[(1/0.01) - (1/(0.01 * (1.01^360)))] * (1.01^360)} = $286.13

74. An investment at 10% nominal rate compounded continuously is equal to an equivalent

(e^(0.1)) - 1 = 0.10517 = 10.517%

(e^r) = 1.1 r = ln(1.1) = 0.09531; PV = 100/0.09531 = $1049.21

You might also like