1. Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a 14 percent rate of return is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?
A) $19,201.76
B) $21,435.74
C) $23,457.96
D) $27,808.17
E) $31,758.00
2. You are considering two insurance settlement offers. The first offer includes annual payments of $5,000, $7,500, and $10,000 over the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 5 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?
A) $19,877.67
B) $20,203.00
C) $21,213.15
D) $23,387.50
E) $24,556.88
3. You are considering a project with the following cash flows:
Year 1 Year 2 Year 3
$1,200 $1,800 $2,900
What is the present value of these cash flows, given a 9 percent discount rate?
A) $4,855.27
B) $4,713.62
C) $5,103.18
D) $5,292.25
E) $6,853.61
4. Mr. Miser loans money at an annual rate of 21 percent. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans?
A) 22.97 percent
B) 23.08 percent
C) 23.21 percent
D) 23.36 percent
E) 23.43 percent
5. You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 7.45 percent compounded daily. Loan B offers a rate of 7.5 percent compounded semi-annually. Loan _____ is the better offer because______:
A) A; you will pay less interest.
B) A; the annual percentage rate is 7.45 percent.
C) B; the annual percentage rate is 7.64 percent.
D) B; the interest is compounded less frequently.
E) B; the effective annual rate is 7.64 percent.
6. You have been investing $120 a month for the last 15 years. Today, your investment account is worth $47,341.19. What is your average rate of return on your investments?
A) 9.34 percent
B) 9.37 percent
C) 9.40 percent
D) 9.42 percent
E) 9.46 percent
7. Your firm wants to save $250,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each year starting today. The firm can earn a 4.7 percent rate of return. How much does the firm have to save each year to achieve their goal?
A) $75,966.14
B) $76,896.16
C) $78,004.67
D) $81.414.14
E) $83,333.33
8. Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35 percent?
A) $36,811.30
B) $37,557.52
C) $39,204.04
D) $39,942.42
E) $40,006.09
9. The Good Life Insurance Co. wants to sell you an annuity which will pay you $500 per quarter for 25 years. You want to earn a minimum rate of return of 5.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?
A) $26,988.16
B) $27,082.94
C) $27,455.33
D) $28,450.67
E) $28,806.30
10. Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day of each year. They both earn a 9 percent rate of return. What is the difference in their savings account balances at the end of thirty years?
A) $35,822.73
B) $36,803.03
C) $38,911.21
D) $39,803.04
E) $40,115.31