FIN 3013 Exam 2 || A+ Verified Already.
What is the present value (PV) of an investment that will pay $400 in one year's time, and $400
every year after that, when the interest rate is 5%?
A) $2400
B) $3600
C) $7200
D) $8000 correct answers D) $8000
𝑷𝑽 𝒐𝒇 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 = 𝑪/𝒓 = . 𝟎𝟓 = $𝟖,𝟎𝟎𝟎
A perpetuity has a PV of $32,000. If the interest rate is 10%, how much will the perpetuity pay
every year?
A) $2909
B) $3100
C) $3200
D) $3520 correct answers C) $3200
𝑷𝒂𝒚𝒎𝒆𝒏𝒕 = 𝑪 = 𝑷𝑽 × 𝒓 = 𝟑𝟐, 𝟎𝟎𝟎 𝒙 𝟎. 𝟏𝟎 = $𝟑,𝟐𝟎𝟎
A perpetuity will pay $1000 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 4%? correct answers The first step is to calculate the value of the perpetuity at year 4:
PV at year 4 = .04 = $25,000; Thus, this perpetuity is equivalent to a single
cash flow of $25,000 four years from now.
The next step is to calculate the PV of $25,000 received to be at year 4: PV =
$25,000/(1.04)^4 = $21,370.10
An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of
this annuity given that the discount rate is 6%? correct answers Calculate PV of a 10-year
annuity discounted at 6% interest rate; PV = $11,040.13.
PMT = 1,500 ; FV = 0; N = 10; I/YR = 6; PV = ?
,Which of the following statements regarding annuities is FALSE?
A) PV of an annuity = c x 1/r x [1-1/(1+r)^N]
B) The difference between an annuity and a perpetuity is that a perpetuity ends after
some fixed number of payments.
C) An annuity is a stream of N equal cash flows paid at regular intervals.
D) Most car loans, mortgages, and some bonds are annuities. correct answers B) The difference
between an annuity and a perpetuity is that a perpetuity ends after some fixed number of
payments.
An annuity pays $50 per year for 20 years. What is the future value (FV) of this annuity
at the end of those 20 years, given that the discount rate is 7%? correct answers PMT = 50; PV =
0; I/YR = 7; N = 20; FV =?
FV=2049.77
Clarissa wants to fund a growing perpetuity that will pay $5000 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 8%, how much does she need to fund this
growing perpetuity? correct answers 𝑷𝑽 𝒐𝒇 𝒈𝒓𝒐𝒘𝒊𝒏𝒈 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 =
𝑪/𝒓 − 𝒈 = 𝟓𝟎𝟎𝟎 / (𝟎. 𝟎𝟖 − 𝟎. 𝟎𝟓) = $𝟏𝟔𝟔, 𝟔𝟔𝟔. 𝟔𝟕
Martin wants to provide money in his will for an annual bequest to whichever of his living
relatives is oldest. That bequest will provide $1000 in the first year, and will grow by 7% per
year, forever. If the interest rate is 11%, how much must Martin provide to fund this bequest?
correct answers 𝑷𝑽 𝒐𝒇 𝒈𝒓𝒐𝒘𝒊𝒏𝒈 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 = 𝟏𝟎𝟎𝟎 / (𝟎. 𝟏𝟏 − 𝟎. 𝟎𝟕) = $𝟐𝟓, 𝟎𝟎�
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 8%
, per year forever. If the appropriate interest rate is 6%, then the value of this mining
operation is closest to:
A) $71,429
B) $500,000
C) $166,667
D) This problem cannot be solved. correct answers A) $71,429
𝑷𝑽 = 𝑪 / (𝒓 - 𝒈) = 𝟏𝟎, 𝟎𝟎𝟎 / (𝟎. 𝟎𝟔 − −𝟎. 𝟎𝟖) = 𝟏𝟎, . 𝟏𝟒 = $𝟕𝟏, 𝟒𝟐𝟗
What is the internal rate of return (IRR) of an investment that requires an initial investment of
$10,000 today and pays $14,000 in one year's time? correct answers Financial calculator
solution: PV = -10,000, N= 1, and FV = 14,000; Solve for I/YR and find 40%.
You are interested in purchasing a new automobile that costs $35,000. The dealership offers you
a special financing rate of 6% APR (0.5% per month) for 48 months. Assuming that you do not
make a down payment on the auto and you take the dealer's financing deal, then your monthly
car payments would be closest to: correct answers PV = 35,000; I = 0.5; N = 48; FV = 0;
Compute PMT = $821.98.
You are considering purchasing a new home. You will need to borrow $250,000 to purchase the
home. A mortgage company offers you a 15-year fixed rate mortgage (180 months) at 9% APR
(0.75% per month). If you borrow the money from this mortgage company, your monthly
mortgage payment will be closest to: correct answers PV = 250,000; I = 0.75; N = 180; FV = 0;
Compute payment = $2,535.67
You are considering an investment that will pay $150 after 1 year, $500 after 2 years and $600
after 3 years. What is the present value of the cash flows if the appropriate
discount rate is 10% per year?
A) $1000.38
B) $1150.12
C) $1260.35
D) $1270.91 correct answers A) $1000.38
What is the present value (PV) of an investment that will pay $400 in one year's time, and $400
every year after that, when the interest rate is 5%?
A) $2400
B) $3600
C) $7200
D) $8000 correct answers D) $8000
𝑷𝑽 𝒐𝒇 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 = 𝑪/𝒓 = . 𝟎𝟓 = $𝟖,𝟎𝟎𝟎
A perpetuity has a PV of $32,000. If the interest rate is 10%, how much will the perpetuity pay
every year?
A) $2909
B) $3100
C) $3200
D) $3520 correct answers C) $3200
𝑷𝒂𝒚𝒎𝒆𝒏𝒕 = 𝑪 = 𝑷𝑽 × 𝒓 = 𝟑𝟐, 𝟎𝟎𝟎 𝒙 𝟎. 𝟏𝟎 = $𝟑,𝟐𝟎𝟎
A perpetuity will pay $1000 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 4%? correct answers The first step is to calculate the value of the perpetuity at year 4:
PV at year 4 = .04 = $25,000; Thus, this perpetuity is equivalent to a single
cash flow of $25,000 four years from now.
The next step is to calculate the PV of $25,000 received to be at year 4: PV =
$25,000/(1.04)^4 = $21,370.10
An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of
this annuity given that the discount rate is 6%? correct answers Calculate PV of a 10-year
annuity discounted at 6% interest rate; PV = $11,040.13.
PMT = 1,500 ; FV = 0; N = 10; I/YR = 6; PV = ?
,Which of the following statements regarding annuities is FALSE?
A) PV of an annuity = c x 1/r x [1-1/(1+r)^N]
B) The difference between an annuity and a perpetuity is that a perpetuity ends after
some fixed number of payments.
C) An annuity is a stream of N equal cash flows paid at regular intervals.
D) Most car loans, mortgages, and some bonds are annuities. correct answers B) The difference
between an annuity and a perpetuity is that a perpetuity ends after some fixed number of
payments.
An annuity pays $50 per year for 20 years. What is the future value (FV) of this annuity
at the end of those 20 years, given that the discount rate is 7%? correct answers PMT = 50; PV =
0; I/YR = 7; N = 20; FV =?
FV=2049.77
Clarissa wants to fund a growing perpetuity that will pay $5000 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 8%, how much does she need to fund this
growing perpetuity? correct answers 𝑷𝑽 𝒐𝒇 𝒈𝒓𝒐𝒘𝒊𝒏𝒈 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 =
𝑪/𝒓 − 𝒈 = 𝟓𝟎𝟎𝟎 / (𝟎. 𝟎𝟖 − 𝟎. 𝟎𝟓) = $𝟏𝟔𝟔, 𝟔𝟔𝟔. 𝟔𝟕
Martin wants to provide money in his will for an annual bequest to whichever of his living
relatives is oldest. That bequest will provide $1000 in the first year, and will grow by 7% per
year, forever. If the interest rate is 11%, how much must Martin provide to fund this bequest?
correct answers 𝑷𝑽 𝒐𝒇 𝒈𝒓𝒐𝒘𝒊𝒏𝒈 𝒑𝒆𝒓𝒑𝒆𝒕𝒖𝒊𝒕𝒚 = 𝟏𝟎𝟎𝟎 / (𝟎. 𝟏𝟏 − 𝟎. 𝟎𝟕) = $𝟐𝟓, 𝟎𝟎�
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 8%
, per year forever. If the appropriate interest rate is 6%, then the value of this mining
operation is closest to:
A) $71,429
B) $500,000
C) $166,667
D) This problem cannot be solved. correct answers A) $71,429
𝑷𝑽 = 𝑪 / (𝒓 - 𝒈) = 𝟏𝟎, 𝟎𝟎𝟎 / (𝟎. 𝟎𝟔 − −𝟎. 𝟎𝟖) = 𝟏𝟎, . 𝟏𝟒 = $𝟕𝟏, 𝟒𝟐𝟗
What is the internal rate of return (IRR) of an investment that requires an initial investment of
$10,000 today and pays $14,000 in one year's time? correct answers Financial calculator
solution: PV = -10,000, N= 1, and FV = 14,000; Solve for I/YR and find 40%.
You are interested in purchasing a new automobile that costs $35,000. The dealership offers you
a special financing rate of 6% APR (0.5% per month) for 48 months. Assuming that you do not
make a down payment on the auto and you take the dealer's financing deal, then your monthly
car payments would be closest to: correct answers PV = 35,000; I = 0.5; N = 48; FV = 0;
Compute PMT = $821.98.
You are considering purchasing a new home. You will need to borrow $250,000 to purchase the
home. A mortgage company offers you a 15-year fixed rate mortgage (180 months) at 9% APR
(0.75% per month). If you borrow the money from this mortgage company, your monthly
mortgage payment will be closest to: correct answers PV = 250,000; I = 0.75; N = 180; FV = 0;
Compute payment = $2,535.67
You are considering an investment that will pay $150 after 1 year, $500 after 2 years and $600
after 3 years. What is the present value of the cash flows if the appropriate
discount rate is 10% per year?
A) $1000.38
B) $1150.12
C) $1260.35
D) $1270.91 correct answers A) $1000.38
