TOOLS & TECHNIQUES OF FINANCIAL PLANNING
8th Edition
College Course Materials
Chapter 20
Multiple Choice:
1. Rahul and Miranda want to make a lump-sum investment for their newborn's college education, and their goal is to accumulate $80,000 in 18 years. What is the amount they must invest today to reach their goal if the annual rate of return is 8%?
a. $20,020
b. $22,789
c. $14,782
d. $23,291
2. Troy wants to accumulate $40,000 in 10 years to purchase a vacation home. What is the annual investment rate of return that Troy must obtain if he deposits $250 at the end of every month for 10 years?
a. 6.75%
b. 5.56%
c. 9.25 %
d. 7.75 %
3. Samantha just won a settlement with an insurance company, which entitles her to receive payments of $20,000 at the beginning of each year for the next 20 years. Her financial advisor recommended to her that she consider accepting a lump-sum payment now, using a discount rate of 7%. What is the amount that she should accept in this scenario?
a. $205,234
b. $211,880
c. $226,712
d. $182,765
4. Omar wants to make a gift of $10,000 in today's dollars to his parents at the end of each of the next 10 years. If the annual rate of return is 8% and inflation is 3%, what is the value of the funds he must have in hand today to meet this need for the 10-year period?
a. $81,541
b. $77,766
c. $76,251
d. $82,713
An investment that Kevin is considering offers the following cash flows.
|
Year 1
|
Initial investment of $10,000
|
|
Year 2
|
Inflow of $2,000
|
|
Year 3
|
Inflow of $1,500
|
|
Year 4
|
Additional investment of $5,000
|
|
Year 5
|
Inflow of $1,200
|
|
Year 6
|
Inflow of $2,200
|
|
Year 7
|
Inflow of 1,500
|
|
Year 8
|
Inflow of $1,000
|
|
Year 9
|
Inflow of $1,200
|
|
Year 10
|
Sale proceeds of $17,000
|
5. What is the internal rate of return (IRR) that this investment offers if all cash flows occur at the end of each period?
a. 10.10%
b. 10.87%
c. 9.24%
d. 9.74%.
6. What is a reasonable purchase price for an investment that offers the following cash inflows at the end of each period? Assume an interest rate of 7%.
|
Year 1
|
$2,000
|
|
2
|
$2,200
|
|
3
|
$1,700
|
|
4
|
$2,000
|
|
5
|
$1,500
|
|
6
|
$2,000
|
|
7
|
$1,400
|
|
8
|
$14,000
|
a. $18,792
b. $19,224
c. $19,787
d. $18,126
7. Jim took out a 30 year, $200,000 mortgage on his home with an annual interest rate of 5.5%, compounded monthly. The following statements are true EXCEPT:
a. The monthly payments will be: $1,136
b. After the 12th payment, the total interest payments will be $10,933
c. After the 12th payment, the total principal payments will be $2,694
d. After the 12th payment, the mortgage balance will be $194,360
8. Ramon and Mia want to invest $2500 at the end of this year into an investment account. They plan to invest 10% more next year, and will continue to increase their contributions 10% from each year to the next. Assuming the annual investment rate of return is 8%, what will be the value of the investment at the end of 20 years?
a. $42,237
b. $258,318
c. $114,405
d. $366,570
9. What will be the future cash value of an account that has the following cash flow where the deposits are made at the end of the period and the annual investment rate of return is 7%?
|
Year 1
|
$2,000 deposit
|
|
2
|
$2,500
|
|
3
|
$1,200
|
|
4
|
$2,400
|
|
5
|
$1,500
|
|
6
|
$1,700
|
|
7
|
$1,400
|
|
8
|
$1,100
|
a. $18,174
b. $24,321
c. $10,578
d. $14,114
10. Donovan bought a painting 5 years ago for $10,000. Two years ago, he spent $1500 to have it restored. This year, he sold it for $18,000. What is the internal rate of return on his investment?
a. 12.21%
b. 10.10%
c. 11.23%
d. 9.65%
11. Sharda bought a $1000 corporate bond this year at a discount for $975. The bond pays $80 of interest at the end of each of the next 5 years, at which time it will mature at its face value. If her required rate of return is 8.25%, what is the net present value of the investment?
a. $15.08
b. $13.93
c. -$12.80
d. -$35.23
12. Tony's son, Mark is 12 years old and Tony expects him to start college in 6 years. Tuition costs $20,000 today, increasing at an annual rate of 7%. Tony wants to earn 10% annually on his investments. If he makes an initial investment one year from now, and annual additions at the end of each year until Mark starts college, what is the size of the annual (level) investments he must make to fund 4 years of Mark's college education?
a. $10,268.08
b. $12,192.77
c. $11,294.89
d. $14,935.39