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Exam 6: Discounted Cash Flow Valuation

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Question 31

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Which one of these statements related to growing annuities and perpetuities is correct? 

A) You can compute the present value of a growing annuity but not a growing perpetuity. 
B) In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate.
C) The future value of an annuity will decrease if the growth rate is increased.
D) An increase in the rate of growth will decrease the present value of an annuity.
E) The present value of a growing perpetuity will decrease if the discount rate is increased.

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Question 32

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You have been investing $300 a month for the last 8 years. Today, your investment account is worth $43,262. What is your average rate of return on your investments? 

A) 9.69 percent 
B) 7.23 percent 
C) 9.36 percent 
D) 8.41 percent 
E) 7.78 percent 

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Question 33

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Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease? 

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy? 

A one-time gift to your college will provide $25,000 in scholarship funds next year with that amount increasing by 2 percent annually thereafter. If the discount rate is 5.5 percent, what is the current value of this perpetual gift? 

You need some money today and the only friend you have that has any is a miser. He agrees to loan you the money you need, if you make payments of $30 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2 percent interest per month. How much total interest is he charging? 

Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 4.75 percent?

 An ordinary annuity is best defined as:

Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year? 

What is the future value of $1,575 a year for 25 years at 6.3 percent interest, compounded annually? 

First City Bank offers an APR of 7.65 percent on its loans. What is the maximum rate the bank can actually earn based on the quoted rate? 

You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account? 

Which one of the following statements related to loan interest rates is correct? 

You just obtained a loan of $16,700 with monthly payments for four years at 6.35 percent interest, compounded monthly. What is the amount of each payment? 

The Distribution Point plans to save $2,000 a month for the next 3 years for future emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit that would yield the same amount of savings as the monthly deposits after 3 years? 

You are considering two savings options. Both options offer a rate of return of 7.6 percent. The first option is to save $2,500, $2,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today? 

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)  

Your grandmother will be gifting you $150 at the end of each month for four years while you attend college. At a discount rate of 3.7 percent, what are these payments worth to you on the day you enter college? 

Island News purchased a piece of property for $1.79 million. The firm paid a down payment of 20 percent in cash and financed the balance. The loan terms require monthly payments for 20 years at an APR of 4.75 percent, compounded monthly. What is the amount of each mortgage payment? 

Chris has three options for settling an insurance claim. Option A will provide $1,500 a month for 6 years. Option B will pay $1,025 a month for 10 years. Option C offers $85,000 as a lump sum payment today. The applicable discount rate is 6.8 percent, compounded monthly. Which option should Chris select, and why, if he is only concerned with the financial aspects of the offers?