Chapter 5 6 Practice Questions FIN 3403 1 How much money do you need to place into a bank account which pays a 6 annual rate in order to have 500 at the end of 7 years Answer CPT PV 332 53 2 How much money would you need to place into an account to have 1000 10 years from today Assume the account pays 8 5 and is compounded monthly Find PV Given n 7 I Y 6 FV 500 Find PV Given n 10 x 12 monthly I Y 8 5 12 monthly FV 1000 Answer CPT PV 429 3 Colombia Corporation deposited 2000 in an account that pays 12 interest annually If the interest is compounded continuously how much money will be in the account at the end of 20 years Find FV Equation FV PVe in Given n 20 i 12 PV 2000 Solve FV 2000e 0 12x20 Answer FV 22 046 4 Which of the following provides the greatest annual return a 16 compounded quarterly b 15 compounded continuously c 15 2 compounded daily d 16 compounded annually e all of the above are equal Answer A 5 If you borrow 25 000 from a local finance company and are required to pay 4424 50 per year for 10 years what is the annual interest rate on the loan Find I Y Given PV 25 000 PMT 4424 50 n 10 FV 0 Answer CPT I Y 12 6 How much do you have to deposit today so that you can withdraw 50 000 a year at the end of years 5 through 9 and 25 000 at the end of year 10 Assume you can earn an annual rate of 8 Find NPV Use the CF function CF0 0 CF1 0 CF2 0 CF3 0 CF4 0 CF10 25 000 CF5 50 000 CF6 50 000 CF7 50 000 CF8 50 000 CF9 50 000 I Y 8 Answer CPT NPV 158 318 Find PV Given FV 875 I Y 16 4 4 n 36 12 3 years x 4 12 Answer CPT PV 547 7 If you want to have 875 in 36 months how much money must you put into a savings account today Assume it pays 16 and is compounded quarterly 8 You just purchased a parcel of land for 10 000 If you expect a 12 annual rate of return on your investment how much will you sell the land for in 10 years Find FV 9 Amax Inc deposited 2 000 in a bank account that pays 12 interest annually How much money will be in the account after 4 years 10 Your grandmother deposited 100 in a savings account for your 25 years ago The money has been earning an annual rate of 12 interest compounded quarterly How much money is now in the account Given PV 10 000 I Y 12 n 10 Answer CPT FV 31 058 Find FV Given PV 2000 I Y 12 n 4 Answer CPT FV 3 147 Find FV Given PV 100 n 25 x 4 100 I Y 12 4 3 Answer CPT FV 1 922 11 Suppose you invest 500 in a stock mutual fund at the end of each month When you retire at the end of your 35 year old career your account is worth 4 000 000 What annual rate of return did you earn over the 35 years 12 Your bank has agreed to loan you 3 000 if you agree to pay a single lump sum of 5 055 in five years What annual rate of interest will you be paying Find I Y Set P Y to 12 Given n 35 x 12 420 PMT 500 FV 4 000 000 Answer CPT I Y 12 81 Find I Y Given PV 3000 FV 5055 n 5 PMT 0 Answer CPT I Y 11 13 If your opportunity cost is 10 how much are you willing to pay for an investment promising 750 at the end of years 1 through 4 and 450 at the end of years 5 through 10 Use CF Function CF0 0 CF1 750 CF6 450 CF2 750 CF7 450 CF3 750 CF8 450 CF4 750 CF9 450 CF5 450 CF10 450 I Y 10 Answer CPT NPV 3 716 Find I Y Given PV 41 625 PMT 5000 n 15 Answer CPT I Y 8 46 Use CF Function CF0 0 CF1 0 CF2 0 CF6 10 000 CF7 10 000 CF8 10 000 14 Suppose you pay 41 625 for an annuity that will pay you 5 000 per year at the end of each of the next 15 years What annual rate of return will you earn 15 Your firm is investing in a project Because of the project the firm will receive cash flows of 10 000 at the end of years 5 6 7 8 9 and 10 Using a 12 discount rate what is the present value of this cash flow stream CF3 0 CF4 0 CF5 10 000 CF9 10 000 CF10 10 000 I Y 12 Answer CPT NPV 26 129 16 Suppose you decided to place 2 500 in a savings account at First Foremost Savings and Loan If the account pays 7 compounded continuously how much money will you have in the account after 15 years Answer Solve for FV 7 144 17 Calculate the present value of 1 200 received at the end of each year for 21 years Use a discount rate of 10 Find FV FV PVe in Given PV 2500 i 7 n 15 Find PV Given PMT 1200 n 21 I Y 10 Answer CPT PV 10 378 18 If you have 1 000 to deposit in a savings account for 1 year which of the following should you choose 8 75 compounded continuously 9 compounded quarterly or 9 5 compounded annually Answer 9 5 compounded annually 19 Your firm has an unusual investment opportunity that is expected to provide 45 000 two years 25 000 four years from now and 60 000 six years from now If your firm s opportunity cost is 14 what is the present value of these cash flows Use CF Function CF0 0 CF1 0 CF2 45 000 CF3 0 CF4 25 000 CF5 0 CF6 60 000 I Y 14 Answer CPT NPV 76 763 20 You have an investment that will provide 1000 at the end of each of the next 24 months and 1500 at the end of each of the following 24 months periods 25 through 48 If your opportunity cost of funds is 10 how much would you pay for this investment what is the present value Step 1 Months 25 48 P Y 12 n 24 I Y 10 PMT 1500 CPT PV 32 506 28 Step 2 Months 1 24 P Y 12 n 24 I Y 10 PMT 1000 PV 32 506 28 CPT FV 48 307 Answer 48 307 Find n Given PV 2000 I Y 12 2 6 FV 6298 Answer CPT n 21 21 Artek Corporation deposited 2 000 in a bank account that pays 12 interest annually …