In a growing midwestern town, the number of eating establishments at the end of each of the last five years are as follows:

Transcription

1 Name: Date: In a growing midwestern town, the number of eating establishments at the end of each of the last five years are as follows: Year 1 = 273; Year 2 = 279; Year 3 = 302; Year 4 = 320; Year 5 = From the end of year 1 to the end of year 5, the number of eating establishments grew at a rate of compounded annually. A) 3.45% B) 4.15% C) 5.95% D) 6.75% E) 8.25% 2. Between the end of year 2 and the end of year 3, the number of eating establishments grew at a rate of compounded annually. A) 5.2% B) 6.7% C) 7.6% D) 8.2% E) 9.3% 3. If the town's population was 90,000 at the end of year 5, and the population grew at the same annual rate as the number of eating establishments between the end of year 1 and the end of year 5, what was the town's population at the end of year 1? A) 71,423 B) 61,433 C) 51,223 D) 41,333 E) 31, If, over the next five years, eating establishments are expected to grow at the same rate as they did during year 5, forecast the number of eating establishments at the end of year 10. A) 494 B) 510 C) 534 D) 555 E) 629 Page 1

2 5. Interest earned only on the original principal amount invested is called. A) free interest B) annual interest C) simple interest D) interest on interest E) compound interest 6. The current value of future cash flows discounted at the appropriate discount rate is called the: A) Principal value. B) Future value. C) Present value. D) Simple interest rate. E) Compound interest rate. 7. Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations? A) The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now. B) Both discount factors are greater than one. C) Regardless of the interest rate, the discount factors are such that the present value of the $1,000 will always be greater than the present value of the $800. D) Since the payments are different, no statement can be made regarding the discount factors. E) You should factor in the time differential and choose the payment that arrives the soonest. 8. Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $1,000,000 today or a lump sum payment of $1,250,000 three years from now. If you can earn 7% on your invested funds, which of the following is true? A) Take the signing bonus because it has the lower present value. B) Take the signing bonus because it has the higher future value. C) Take the lump sum because it has the higher present value. D) Take the lump sum because it has the lower future value. E) Based on these numbers, you are indifferent between the two. Page 2

3 9. What is the future value of $15,000 received today if it is invested at 7.5% compounded annually for five years? A) $15, B) $17, C) $21, D) $24, E) $28, You will receive a $250,000 inheritance in 25 years. You can invest that money today at 8% compounded annually. What is the present value of your inheritance? A) $ 17, B) $ 29, C) $ 36, D) $ 65, E) $100, You are supposed to receive $3,000 four years from now. At an interest rate of 8%, what is that $3,000 worth today? A) $1, B) $1, C) $2, D) $2, E) $2, Granny puts $25,000 into a bank account earning 6%. You can't withdraw the money until the balance has doubled. How long will you have to leave the money in the account? A) 6 years B) 9 years C) 12 years D) 14 years E) 20 years 13. An insurance company promises to pay Jane $1 million on her 65th birthday in return for a one-time payment of $125,000 today. (Jane just turned 30.) At what rate of interest would Jane be indifferent between accepting the company's offer and investing the premium on her own? A) 3.4% B) 4.5% C) 5.1% D) 6.1% E) 7.2% Page 3

4 14. You have $200 in an account which pays 5% compound interest. How much additional dollars of interest would you earn over 6 years if you moved the money to an account earning 6%? A) $11.89 B) $15.68 C) $18.93 D) $22.88 E) $ An account paying annual compound interest was opened with $2, years ago. Today, the account balance is $3,500. If the same interest rate is offered on an account paying simple interest, how much income would be earned over the same time period? A) $ 576 B) $ 862 C) $1,152 D) $1,500 E) $1, An account paying annual compound interest was opened with $2, years ago. Today, the account balance is $3,500. If the same interest rate is offered on an account paying simple interest, how much income would be earned each year over the same time period? A) $ B) $ C) $ D) $ E) $ The future value interest factor is calculated as: A) (1 + r) t B) (1 + rt) C) (1 + r)(t) D) 1 + r t E) None of the above are correct Page 4

5 18. The present value interest factor is calculated as: A) 1/(1 + r t) B) 1/(1 + rt) C) 1/(1 + r)(t) D) 1/(1 + r) t E) 1 + r + t 19. Given r and t greater than zero and assuming a lump sum payment: I. Present value interest factors are less than one. II. Future value interest factors are greater than one. III. Present value interest factors are greater than future value interest factors. IV. Present value interest factors grow as t grows, provided r is held constant. A) I only B) I and II only C) I and IV only D) II and III only E) II and IV only 20. How much would you have to invest today at 9% compounded annually to have $35,000 available for the purchase of a car five years from now? A) $20, B) $22, C) $24, D) $26, E) $28, Page 5