Question
A. 0 C. Infinity. 3) As the compounding rate becomes lower and lower, the future value of inflows approachers B. the present value of the inflows. D. More information is needed to answer the question. -4) If you invest $10,000 today at 10% interest, how much will you have in 10 years? A. $13,860 B. $25,940 C. $3,860 D. $80,712 5) As the interest rate increases, the present value A increases. B. decreases. C. remains the same. D. Not enough information is given to tell. -6) Sharon Smith will receive $1 million in 20 years. The discount rate is 10%. As an alternative she can receive $200,000 today. Which should she choose? A. The $200,000 today. B. The $1 million in 20 years. C. Both equal the same value. D. Neither option would be preferred. 7) Ambrin Corp. expects to receive S2.000 at the end of each year for 10 years. Then the per year for the following 10 years, at the end of each year. What corporation expects to receive $3,500 is the approximate present value of this 20-year cash flow? Use an 8% discount rate. A. $24,294 B $27,870 C. $32.389 D2.547 8) Mr. Fish wants to build a house in ten years. He estimates that the total cost will be $150,000 f he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed? A. Between 8% and 10% C. Above 10% B. Between 6% and 8% D. Between 4% and 6% 9) Babe Ruth Jr. has agreed to play for the Cleveland Indians for $3 million per year for the next 10 years. What table would you use to calculate the value of this contract in today's dollars? A. Present value of an annuity B. Present value of a single amount C. Future value of an annuity D. Future value of a dollar 10) Joe Nautilus has $210,000 and wants to retire. What approximate return must his money earn so he may receive annual benefits of $30,000 for the next 10 years? A. Greater than 10% C. Between 6% and 8% D. Lower than 6% B. Between 8% and 10% 11) You will deposit $200,000 today. It will grow for five years at 12% interest, but compounded semi-annually. What will your investment grow to? A $111,600 B. $1,120,000 C. $352,468 D. $358,200 12) John Doeber borrowed $150,000 to buy a house. His loan cost was 6% and he promised to repay the loan in 10 equal annual payments. What are John's annual payment amounts? A. $15,000 B. $20,380 C. $15,445 D. $11,453 3
Explanation / Answer
As there are multiple questions, I shall answer the first four questions, please repost the rest of the question separately.
3)
As the compounding rate becomes lower and lower, the future value of inflows approaches the present value of inflows. This can be shown by
FV= PV(1+r)^n as r tends to 0 FV = PV
4)
PV =10,000
Interest rate = 10%
Assuming interest being compounded annually
FV = 10,000*(1+10%)^10 = 25,937.42 = $ 25,940
5)
As the interest rate increases, the present value will decrease as the future values are now discounted at higher rates reducing the present value
6)
FV= $ 1 Million
Number of years = 20
Rate = 10%
PV = 1Million/(1.1)^20 = $ 148,643
Alternative = $ 200,000
So $ 200,000 today is better than $ 1 million 20 years hence.
