Tmv Questions

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The Time Value of Money – Practive test 1
You have 1 hour 20 minutes to complete the exam. You may use a calculator (not a financial or programmable calculator), cheat sheet with formulae, copies of Financial Tables and scratch paper. Please make sure to write your name on the scantron and on exam. You need to submit both the scantron and exam. Find the best option in the available multiple choice answers. Keep in mind that there may be some rounding errors. Good luck! ____ 1. You have just calculated the present value of the expected cash flows of a potential investment. Management thinks your figures are too low. Which of the following actions would improve the present value of your cash flows? a. extend the cash flows over a longer period of time b. increase the discount rate c. decrease the discount rate d. extend the cash flows over a longer period of time, and decrease the discount rate 2. The effective rate of interest will always be ____ the nominal rate. a. greater than b. equal to c. less than d. equal to or greater than 3. ____ is interest that is paid not only on the principal, but also on any interest earned but not withdrawn during earlier periods. a. basic interest b. simple interest c. future interest d. compound interest 4. More frequent compounding results in ____ future values and ____ present values than less frequent compounding at the same interest rate. a. higher, higher b. lower, higher c. higher, lower d. lower, lower 5. The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a nine year time period. Determine the compound annual growth rate. a. 11.1% b. 8% c. 22.2% d. 100% 6. Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment. a. 16.3% b. 62.7% c. 10% d. 20%

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7. Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60. He expects to live to the maximum age of 80 and wants to be able to withdraw $25,000 per year from the account on his 61st through 80th birthdays. The account is expected to earn 10 percent per annum for the entire period of time. Determine the size of the annual deposits that must be made by Mr. Moore. a. $212,850 b. $23,449 c. $2,164 d. $8,514 8. Many IRA funds argue that investors should invest at the beginning of the year rather than at the end. What is the difference to an investor who invests $2,000 per year at 11 percent over a 30 year period? a. $43,785 b. $36,189 c. $54,244 d. There is no difference 9. Columbia Bank & Trust has just given you a $20,000 term loan to pay for a new concrete mixer. The loan requires five equal annual end of the year payments. If the loan provides the bank with a 12 percent return, what will be your annual payments? a. $5,548 b. $3,148.12 c. $6,000 d. $1,666.67

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____ 10. Designs Now is opening a showcase office to display and sell it's computer designed poster art. Designs expects cash flows to be $120,000 in the first year, $180,000 in the second year, $240,000 in the third year. If Designs uses 11 percent as its discount rate, what is the present value of the cash flows? a. $429,720 b. $457,620 c. $456,000 d. $424,820 ____ 11. What is the future value of a $10,000 college tuition fund if the nominal rate of interest is 12 percent compounded monthly for five years? a. $17,623.42 b. $18,170 c. $16,105.10 d. $16,122.26 ____ 12. What is the most you should pay to receive the following cash flows if your required rate of return is 12 percent? Year 1 Year 2 Year 3 Year 4-10 a. b. c. d. $58,580 $104,135 $68,105 $40,000 $5,000 $8,000 $12,000 $15,000

____ 13. Seebee makes quarterly (end of period) payments of $30,000 into a pension fund...
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