Ch 4 Practice Q's-Answers

.pdf

School

University of North Texas *

*We aren’t endorsed by this school

Course

3770

Subject

Finance

Date

Jan 9, 2024

Type

pdf

Pages

Uploaded by GeneralOkapi1625

Practice Questions for CHAPTER 4 1. A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900. After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.) A) $145 B) $160 C) $175 D) $190 2. Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%? A) $58,334 B) $93,334 C) $116,667 D) $70,000 3. An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%? A) $85.60 B) $171.20 C) $142.67 D) $199.74 4. Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $32,181 B) $53,635 C) $64,362 D) $75,089 5. An investment pays you $30,000 at the end of this year, and $15,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year? A) $39,614 B) $63,382 C) $79,228 D) $95,074

1 6. A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.6% per year? A) $94.40 million B) $118.00 million C) $165.20 million D) $188.80 million 7. Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following? A) $1420; $110,739 B) $2271; $166,109 C) $2839; $184,565 D) $3123; $221,478 8. What is the present value (PV) of an investment that will pay $500 in one year's time, and $500 every year after that, when the interest rate is 10%? A) $2500 B) $4000 C) $3000 D) $5000 9. A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%? A) $2695 B) $4312 C) $5390 D) $3234 10. An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity at the end of that 53 years given that the discount rate is 9%? A) $8258.91 B) $16,517.82 C) $19,270.79 D) $13,764.85

2 11. You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________. A) $100,000 B) $500,000 C) $250,000 D) This problem cannot be solved. 12. Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity? A) $125,000.00 B) $200,000.00 C) $300,000.00 D) $250,000.00 13. A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten years' time. What is the present value (PV) of this donation, given that the interest rate is 11%? A) $3,840,628.87 B) $5,376,880.42 C) $6,913,131.97 D) $7,681,257.74 14. How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000? A) 4.25 years B) 3.25 years C) 5.25 years D) 6.25 years 15. Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $37,086.78 B) $22,252.07 C) $44,504.14 D) $51,921.49

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version