FIN3400 CH. 5 SMARTBOOK REVIEW
QUESTIONS WITH 100% CORRECT ANSWERS
which one of these illustrates a perpetuity?
payments of $50 a quarter from now until forever
what is the effective annual rate of a 6 percent APR compounded daily?
6.18 percent
how is the annual percentage rate (APR) defined?
an APR is the interest rate per period times the number of periods per year.
you expect to receive $600 in years 1 through 5, $700 in years 6 through 8, and $400 in
years 9 and 10. What cash flow(s) will appear on a present value of multiple annuities time
line for year 10?
year 10 has one cash inflow in the amount of $400
true or false: a cash outflow three years from now will appear as a positive value at year 3
on a present value time line. Assume today is Time 0.
false
which one of these correctly summarizes the future value formula? assume the interest rate
is positive.
the greater the number of time period, the higher the future value, all else held constant.
what is the difference between annuity and a perpetuity?
an annuity has a fixed number of cash flows while perpetuity has unending cash flows.
how is an effective annual rate defined?
an effective annual rate is the rate per year which includes interest rate compunding
an investment pays an annual rate of 9 percent with interest payments occurring quarterly.
how many times per year is the interest compounded?
4 times
Tory invested $600 a year for three years, then $700 a year for an additional four years. In
year 9, she withdrew $1,500. She withdrew the entire investment in year 11. Which
statement correctly applies to the time line for this problem?
The cash flows for the first seven years are negative.
Rationale:
Withdrawals are cash inflows (positive values) and investments are cash outflows (negative
, values).
The cash flows are negative for the first seven years, but the amount in year 4 is $700, not $600.
While there are only nine cash flows, there are 12 time periods, including time 0. Time periods 0,
8, and 10 have no cash flows.
Stu deposited $400 in an account three years ago. Last year, he deposited $250 and plans to
deposit $300 next year. The rate is 3 percent. Which one of these correctly states a portion
of the formula needed to compute the future value five years from today?
$250 × 1.03^6
Rationale:
The deposit was made one year ago and the FV is 5 years from now, thus, the exponent is 6.
What is the future value in year 7 of these cash flows: Year 0 = $200; Year 1 = -$100; Year
3 = $200; and Year 4 = $200? The interest rate is 10%.
$771.61
Rationale:
FV7 = ($200 × 1.067) - ($100 × 1.066) + ($200 × 1.064) + ($200 × 1.063) = $771.31
Which one of these sets of cash flows fits the description of an ordinary annuity?
Car payments of $240 a month for four years with the first payment due one month after the loan
is obtained
You plan to invest $300 today and $500 three years from today. Two years from today, you
plan to withdraw $50. Which of these is a correct statement regarding a time line for
computing the future value of your cash flows four years from today?
The cash flow at year 3 is a negative $500.
True or false: Time has a greater impact on a future value than the interest rate.
True
Rationale:
Time is the exponential factor and thus time has a greater impact on the future value than the
interest rate.
Two years ago, Margo deposited $500 into a savings account. One year ago, she deposited
an additional $300, and today she deposited $800. Which one of these is these is the correct
formula for computing the value of these deposits today at a rate of 4 percent?
FV2 = ($500 × 1.042) + ($300 × 1.04) + $800
What is the future value in year 7 of these cash flows: Year 0 = $200; Year 1 = $240; Year 3
= $300; and Year 4 = $400? The interest rate is 6 percent.
$1,496.32
Rationale:
FV7 = ($200 × 1.067) + ($240 × 1.066) + ($300 × 1.064) + ($400 × 1.063) = $1,496.32
QUESTIONS WITH 100% CORRECT ANSWERS
which one of these illustrates a perpetuity?
payments of $50 a quarter from now until forever
what is the effective annual rate of a 6 percent APR compounded daily?
6.18 percent
how is the annual percentage rate (APR) defined?
an APR is the interest rate per period times the number of periods per year.
you expect to receive $600 in years 1 through 5, $700 in years 6 through 8, and $400 in
years 9 and 10. What cash flow(s) will appear on a present value of multiple annuities time
line for year 10?
year 10 has one cash inflow in the amount of $400
true or false: a cash outflow three years from now will appear as a positive value at year 3
on a present value time line. Assume today is Time 0.
false
which one of these correctly summarizes the future value formula? assume the interest rate
is positive.
the greater the number of time period, the higher the future value, all else held constant.
what is the difference between annuity and a perpetuity?
an annuity has a fixed number of cash flows while perpetuity has unending cash flows.
how is an effective annual rate defined?
an effective annual rate is the rate per year which includes interest rate compunding
an investment pays an annual rate of 9 percent with interest payments occurring quarterly.
how many times per year is the interest compounded?
4 times
Tory invested $600 a year for three years, then $700 a year for an additional four years. In
year 9, she withdrew $1,500. She withdrew the entire investment in year 11. Which
statement correctly applies to the time line for this problem?
The cash flows for the first seven years are negative.
Rationale:
Withdrawals are cash inflows (positive values) and investments are cash outflows (negative
, values).
The cash flows are negative for the first seven years, but the amount in year 4 is $700, not $600.
While there are only nine cash flows, there are 12 time periods, including time 0. Time periods 0,
8, and 10 have no cash flows.
Stu deposited $400 in an account three years ago. Last year, he deposited $250 and plans to
deposit $300 next year. The rate is 3 percent. Which one of these correctly states a portion
of the formula needed to compute the future value five years from today?
$250 × 1.03^6
Rationale:
The deposit was made one year ago and the FV is 5 years from now, thus, the exponent is 6.
What is the future value in year 7 of these cash flows: Year 0 = $200; Year 1 = -$100; Year
3 = $200; and Year 4 = $200? The interest rate is 10%.
$771.61
Rationale:
FV7 = ($200 × 1.067) - ($100 × 1.066) + ($200 × 1.064) + ($200 × 1.063) = $771.31
Which one of these sets of cash flows fits the description of an ordinary annuity?
Car payments of $240 a month for four years with the first payment due one month after the loan
is obtained
You plan to invest $300 today and $500 three years from today. Two years from today, you
plan to withdraw $50. Which of these is a correct statement regarding a time line for
computing the future value of your cash flows four years from today?
The cash flow at year 3 is a negative $500.
True or false: Time has a greater impact on a future value than the interest rate.
True
Rationale:
Time is the exponential factor and thus time has a greater impact on the future value than the
interest rate.
Two years ago, Margo deposited $500 into a savings account. One year ago, she deposited
an additional $300, and today she deposited $800. Which one of these is these is the correct
formula for computing the value of these deposits today at a rate of 4 percent?
FV2 = ($500 × 1.042) + ($300 × 1.04) + $800
What is the future value in year 7 of these cash flows: Year 0 = $200; Year 1 = $240; Year 3
= $300; and Year 4 = $400? The interest rate is 6 percent.
$1,496.32
Rationale:
FV7 = ($200 × 1.067) + ($240 × 1.066) + ($300 × 1.064) + ($400 × 1.063) = $1,496.32
