FIN 3400 Chapter 04 Assignment Questions and Answers- Florida International University
Susette invested $10,000 twenty years ago. Ten years ago, she
... [Show More] invested an
additional $5,000. Last year, she withdrew $8,000 to pay for a vacation. If
you were to draw a time line of these events, which value(s) would be
treated as a cash inflow(s) to Susette?
Multiple choice question.
$8,000 cash withdrawal
$10,000 original investment plus $5,000 additional investment
$10,000 original investment
$5,000 additional investment
Louisa invested $12,000 in a business venture which returned $4,000,
$6,000, and $8,000 over the past three years. Which of these amounts is
(are) cash outflows to Louisa?
Multiple choice question.
$4,000, $6,000, and $8,000 returns
$12,000 investment
$4,000 return
$8,000 return
Four years ago, AB Tools had an extra $500 it did not currently need so the
firm deposited the $500 in a new savings account. Three years ago, the firm
withdrew $200. Last year, the firm deposited $800 into the account. Today,
the account is worth $1,180 and the firm is withdrawing the entire balance.
Which statement correctly defines a portion of the time line for the account if
the $500 deposit is shown at time zero?
Multiple choice question.
At year 2, there is a cash outflow of $800.
At year 1, there is a cash inflow of $200.
At time zero, there is a cash inflow of $500.
At year 4, there is a cash outflow of $1,180.
Which one of these correctly defines the future value of a $1,000
investment?
Multiple choice question.
The future value is the value that is obtained by discounting the $1,000
for a stated period of time.
Future value is the value of the investment at any date after the initial
investment date.
Future value is the value of the $1,000 investment at any point in time
prior to the date of investment.
The initial $1,000 investment is the future value.
Five years ago, Alicia invested $10,000 at 5% interest. How much less money
would she have today if she had invested the money at 4% instead of 5%?
Interest is compounded annually.
Multiple choice question.
$12,167
$596
$12,763
$1,000
Reason:
FV = $10,000 × (1 + 0.05)5 = $14,660.05
FV = $10,000 × (1 + 0.04)5 = $12,763
Difference = $12,167 - $12,763 = -$596
Five years ago, Lewis Equipment purchased equipment costing $212,000.
Two years ago, the firm paid $32,000 for updates to that equipment. This
year, the firm sold the equipment for $189,000. Which of these cash flows is
(are) cash inflows to Lewis Equipment?
Multiple choice question.
$32,000 updates
$189,000 sale price
$212,000 original cost plus $32,000 in updates
$212,000 original cost
How is the future value of $500 invested for one year at 6 percent annual
interest computed?
Multiple choice question.
FV = $500/(1 + 0.06)1
FV = $500 + $500 × (1 + 0.06)
FV = $500 × (1 + 0.06)1
FV = $500 × (1.06)12
Which one of these cash flows best illustrates a cash outflow?
Multiple choice question.
Ernst withdrew $900 from his savings account.
Carlton Mills collected $1,200 from the sale of a product.
Better Bakery purchased a new oven for $28,600.
Paulette received a $100 dividend payment on her stock investment.
Which one of these formulas illustrates the compounding of interest?
Multiple choice question.
$100 × (1 + 0.06) × (1 + 0.06)
$100 + $6 + $6 + $6 + $6
$100/(1 + 0.06)
$100 × (1 + 0.06)
Four years ago, AB Tools had an extra $1100 it did not currently need so the
firm deposited the $1100 in a new savings account. Three years ago, the
firm withdrew $300. Last year, the firm deposited $800 into the account.
Today, the account is worth $1,600 and the firm is withdrawing the entire
balance. Which statement correctly defines a portion of the time line for the
account if the $500 deposit is shown at time zero?
Multiple choice question.
At year 4, there is a cash outflow of $1,6600.
At year 2, there is a cash outflow of $800.
At time zero, there is a cash outflow of $1100.
At year 1, there is a cash outflow of $300.
How is future value best defined?
Multiple choice question.
Future value is the amount that a future cash flow is worth today.
Future value is the value that an investment made today will be worth
sometime in the future.
Future value is the value of an investment after one or more periods.
Future value is a value that will be reached sometime after today.
In the case of simple interest, interest is applied each period to
Multiple choice question.
interest and principal
the principal only
the interest only
with a compound effect
Ten years ago, Alicia invested $9,000 at 5 percent interest. How much more
money would she have today if she had invested the money at 6 percent
instead of 5 percent? Interest is compounded annually.
Multiple choice question.
$1,503.13
$1,642.97
$1,457.58
$1,309.18
Reason:
FV = $9,000 × (1 + 0.05)10 = $14,660.05
FV = $9,000 × (1 + 0.06)10 = $16,117.63
Difference = $16,117.63 - $14,660.05 = $1,457.58
Today, both Marti and Neil invested $5,000. Marti's investment will return 4
percent while Neil's will return 8 percent. Both rates will be compounded.
Which one of these statements is correct?
Multiple choice question.
Both Marti's and Neil's investment will be worth the same amount after
one year.
Neil's investment will increase in value faster than Marti's.
Marti's investment will increase faster in value than Neil's.
Neil's investment will be worth exactly twice as much as Marti's in ten
years.
Which formula illustrates the value of $100 invested for one year at 5
percent interest?
Multiple choice question.
FV = $100 × (1 + 0.05)
FV = $100/(1 + 0.05)
FV = $100 × 10.05
FV = $100 × (0.05)1
This morning, Mal Reynolds invested $1,000 for 40 years. He will earn 15%
interest for the first twenty five years and 10% interest for the last fifteen
years. How much will his investment be worth 5 years from now?
Multiple choice question.
$1,000,000
$47,365
$137,511
Unable to be determined
Alicia invested $1,000 three years ago at a fixed rate of 5 percent interest.
Which one of these illustrates the compounding of interest on this
investment?
Multiple choice question.
Alicia spends her $50 of interest each year as soon as she receives it.
Alicia received $50 in interest in years 1, 2, and 3.
Alicia's investment was worth $1,050 after one year and $1,102.50 after
two years.
Alicia withdrew $1,050 two years ago.
Select all that apply
Solving which of the following problems illustrates discounting? Select all
that apply.
Multiple select question.
If you invest $6,000 today at 5 percent interest, how much will you have
6 years from now?
Three years ago, you deposited $1,200 in a savings account that pays 1.5
percent interest. How much is the account worth today?
What is a $1,000 gift to be received next year worth today if the interest
rate is 5 percent?
How much do you need to invest today at 7 percent interest to have
$40,000 available for college expenses in 17 years?
Four years ago, AB Tools had an extra $500 it did not currently need so the
firm deposited the $500 in a new savings account. Three years ago, the firm
withdrew $200. Last year, the firm deposited $800 into the account. Today,
the account is worth $1,180 and the firm is withdrawing the entire balance.
Which statement correctly defines a portion of the time line for the account if
the $500 deposit is shown at time zero?
Multiple choice question.
At time zero, there is a cash inflow of $500.
At year 4, there is a cash outflow of $1,180.
At year 1, there is a cash inflow of $200.
At year 2, there is a cash outflow of $800.
Select all that apply
$100 represents the present value, as it is used in the present value formula,
for which of these problems? Select all that apply.
Multiple select question.
Janice invested $100 today at 9 percent interest for ten years.
Marcus received $100 today from a bond purchased for $50 several years
ago.
Shawn invested $40 which has increased in value to $100 today.
Russ' savings account increased in value from $100 five years ago to
$111 today.
Which one of the following best illustrates simple interest?
Multiple choice question.
Ann has a $1,000 savings account that will pay her $40 of interest each
year for five years.
Alex invested $1,000 and has received $35, $42, $46, and $49 in annual
earnings over the past four years.
Rita has a savings account that paid her $40, $41, $42, and $43 in
interest over the past four years on a $1,000 investment.
Ivan invested $1,000 and receives an increasing amount of interest each
year even though the interest rate is constant.
What is the value today of $2,500 to be received in 7 years if the discount
rate is 3.5 percent?
Multiple choice question.
$2,172.86
$1,964.98
$2,415.46
$3,180.70
Which one of these statements is correct concerning the relationship
of i to PV, FV, and N?
Multiple choice question.
If you increase the interest rate, all else held constant, the time period
will increase.
If you increase the interest rate, all else held constant, the future value
will increase.
If you increase the interest rate, all else held constant, the time period
will remain constant.
If you increase the interest rate, all else held constant, the present value
will increase.
Which one of these statements is correct concerning the relationship
of PV, FV, i, and N? Assume the interest rate is constant and positive.
Multiple choice question.
All else held constant, the longer the time period, the lower the present
value.
All else held constant, the longer the time period, the lower the future
value.
All else held constant, the longer the time period, the higher the interest
rate.
All else held constant, the shorter the time period, the lower the present
value.
This morning, Kurt invested $500 for five years. He will earn 3 percent
interest for the first two years and 5 percent interest for the last three years.
How much will his investment be worth 5 years from now?
Multiple choice question.
$622.19
$614.06
$598.14
$584.82
You expect to receive a gift of $1,000 three years from today. What is the
value of this gift today if the discount rates are 6 percent, 6.5 percent, and 7
percent for the next three years, respectively?
Multiple choice question.
$827.87
$831.14
$798.19
$808.11
Which term is defined as the process of finding a present value by reducing a
future value using the applicable rates of interest?
Multiple choice question.
Compounding
Investing
Analyzing
Discounting
You expect to receive a gift of $5,000 six years from today. Which formula
provides the value of this gift two years from today if the discount rate is 9
percent?
Multiple choice question.
PV = $5,000 × (1 + 0.09)6
PV = $5,000/(1 + 0.09)4
PV = $5,000/(1 + 0.09)6
PV = $5,000 × (1 + 0.09)4
Which one of the following is the correct application of the present value
formula for this problem: Maria expects to receive $5,000 from her
grandmother upon her graduation in three years. What is the current value
of this gift if the interest rate is 4 percent?
Multiple choice question.
PV = $5,000/(1 + 0.04)3
$5,000 = FV/(1 + 0.04)3
PV = $5,000/(1 + 0.03)4
$5,000 = FV/(1 + 0.03)4
Which formula moves a cash flow of $800 ahead six years in time at an
interest rate of 5 percent?
Multiple choice question.
PV = $800/(1 + 0.05)6
FV = $800 × (1 + 0.06)5
PV = $800/(1 + 0.06)5
FV = $800 × (1 + 0.05)6
A bank loaned money at 7 percent interest for five years to Stu. The loan will
be repaid in one lump sum payment of $3,366.12. How much did Stu borrow?
Multiple choice question.
$2,400
$2,200
$2,100
$2,300
A project has these cash flows: -$2,000 two years ago, $800 one year ago,
and $1,200 one year from now. Which is the correct formula for computing
today's value of these cash flows given a 6 percent rate of interest?
Multiple choice question.
Today's value = -$2,000/(1 + 0.06)2 + $800/(1 + 0.06) + $1,200 × (1 +
0.06)
Today's value = -$2,000 × (1 + 0.06)2 + $800 × (1 + 0.06) + $1,200/(1 +
0.06)
Today's value = -$2,000 + $800/(1 + 0.06) + $1,200/(1 + 0.06)3
Today's value = -$2,000 × (1 + 0.06) + $800 + $1,200/(1 + 0.06)2
Which of these statements is (are) correct? Assume a constant, positive,
annual rate of interest. Select all that apply.
Multiple select question.
The longer the time period, the higher the present value given a stated
future value.
The shorter the time period, the lower the present value of a stated future
value.
The shorter the time period, the higher the present value of a stated
future value.
The longer the time period, the greater the future value of a stated sum.
Which of these statements correctly defines the Rule of 72?
Multiple choice question.
The Rule of 72 provides an approximation of the number of years needed
to double your money given a particular rate of interest.
The Rule of 72 states that you can double your money in one year if you
can earn a rate of return of 72 percent for the year.
The Rule of 72 provides an exact number of years needed to double your
money if the interest rate is 7.2 percent.
The Rule of 72 is the theory that money has a 72 percent probability of
doubling in value within a ten-year period.
You expect to receive a gift of $1,000 five years from today. What is the value
of this gift today if the discount rates are 8% for the next three years and
10% for the next two years?
Multiple choice question.
$808.11
$656.06
$831.14
$1000.00
Reason:
PV = $1,000/[(1 + 0.08)3 × (1 + 0.10)2] = $656.06
Approximately how long will it take a $2,500 investment to grow to $5,000 at
an interest rate of 6 percent?
Multiple choice question.
8 years
0.08 years
12 years
1.20 years
Charity House has been promised a $25,000 donation five years from today.
How much would that gift be worth next year? Assume an interest rate of 8
percent.
Multiple choice question.
PV = $25,000/(1 + 0.08)4
PV = $25,000/(1 + 0.08)5
PV = $25,000 × (1 + 0.08)4
PV = $25,000 × (1 + 0.08)5
Twelve years ago, you invested $4,800. Today, your investment is worth
$8,750. What is your rate of return?
Multiple choice question.
4.87 percent
13.45 percent
5.13 percent
5.42 percent
Which formula computes the value in year 9 of a $10,000 investment in year
2 if the interest rate is 6 percent?
Multiple choice question.
FV = $10,000 × (1 + 0.06)9
FV = $10,000 × (1 + 0.06)7
PV = $10,000/(1 + 0.06)7
PV = $10,000/(1 + 0.06)9
Sara invested $3,400 six years ago. Today, her investment is worth $4,200.
Which formula will correctly compute her rate of return?
Multiple choice question.
i = ($4,200/$3,400)1/6 - 1
i = ($4,200/$3,400)6
-1
i = [($4,200/$3,400) - 1]1/6
i= ($3,400/$4,200)1/6
A project has these cash flows: $2,000 3 years ago, $1,000 now and -$2,000
three years from now. Which is the correct formula for computing today's
value of these cash flows given a 6% rate of interest?
Multiple choice question.
Today's value = $2,000 × (1 + 0.06)3 + $1,000 × (1 + 0.06)0
- $2,000/(1
+ 0.06)3
Today's value = -$2,000 × (1 + 0.06)3
- $1,000 × (1 + 0.06)0 +v $2,000/(1
+ 0.06)3
Today's value = $2,000/(1 + 0.06)3 + $1,000 × (1 + 0.06)0
- $2,000 × (1
+ 0.06)3
Today's value = $2,000 + $1,000 - $2,000
Two years ago, your investments were worth $11,000. Today, those same
investments are only worth $9,800, for an annual loss of 5.61 percent. How
do you compute the return needed to increase your investments to $11,000
in the next two years?
Multiple choice question.
i= ($11,000/$9,800)1/2 - 1
i = ($11,000 - $9,800)/2
i = ($9,800/$11,000)2 + 1
i = ($11,000 - $9,800)1/2 -1
Which one of these formulas correctly defines the Rule of 72?
Multiple choice question.
Approximate number of years to double money × Interest rate = 72
Interest rate × 72 = Approximate number of years to double money
Approximate number of years to double money/72 = Interest rate
Interest rate × Exact number of years to double money = 72
How long will it take to double a $2,000 investment at 10% interest
Multiple choice question.
14.54 years
7.00 years
7.27 years
10 years
How long will it take to increase a $2,200 investment to $10,000 if the
interest rate is 6.5 percent?
Multiple choice question.
19.67 years
24.04 years
27.22 years
15.59 years
Reason:
Using a financial calculator: I = 6.5; PV = -2,200; PMT = 0; FV = 10,000
If you want to double your money in five years, what is the approximate
annual rate of return you must earn using the Rule of 72?
Multiple choice question.
14.4 percent
3.6 percent
6.9 percent
12.0 percent
Ten years ago, you put $5,000 in a savings account. Today, your investment
has the purchasing power of $4,800 What is your real rate of return? (just
calculate like a normal interest rate)
Multiple choice question.
4.000%
-0.41%
-4.00%
-4.17%
Which of these is the correct formula for computing the interest rate on an
investment?
Multiple choice question.
i = (FVN/PV)1/N
i = (FVN/PV)N
- 1
i = (FVN/PV)1/N - 1
i = (FVN/PV)N
You invested $1,000 and lost 21 percent of that value during the first year.
Which formula computes the rate needed to increase your investment back
to $1,000 by the end of the second year?
Multiple choice question.
i = $1,000/[$1,000 × (1 - 0.021)]
i ={[$1,000 × (1 - 0.21)]/$1,000}1/1 - 1
i = $1,000/[$1,000 × (1 - 0.21)]1/1 - 1
i = $1,000/[$1,000 × (1 - 0.21)1/2 -1 [Show Less]