In-class quiz Practice Problems - Fall23(1) (3)

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Boston University *

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132

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Finance

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Jan 9, 2024

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In-class quiz practice problems #1 – Fall 2023 SM132 1. What is the value in year 7 of the following stream of payments on the date of the last payment? Assume an interest rate of 8%. Year 1 2 3 4 5 6 7 Payment $20 $25 $35 $15 2. Jeff has the opportunity to receive a lump-sum payment either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4%? A) one that pays $900 now B) one that pays $1080 in two years C) one that pays $1350 in five years D) one that pays $1620 in ten years 3. An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You don't care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac?

In-class quiz practice problems #1 – Fall 2023 SM132 4. Whose cash flow is best described by the timeline shown below? 0 1 2 3 4 -$3500 $1000 $1000 $1000 $1000 A) Harry, who borrows $3,500, and then receives an annual payment of $1,000 B) Leo, who borrows $3,500, and then pays back the loan in four annual payments of $1,000 C) Joe, who puts down $3,500 to buy a car, and then makes annual payments of $1,000 D) Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000 5. In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer?

In-class quiz practice problems #1 – Fall 2023 SM132 6. Consider the following timeline: 0 1 2 3 4 5 6 $50 $70 If the current market rate of interest is 3%, what is the combined value of the cash flows on the timeline at year 6 (round to the nearest dollar)? 7. You are given two choices of investments, Investment A and Investment B. Both investments have the same cash flows and all future cash flows are positve. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A) The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. B) The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. C) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. D) No comparison can be made -- we need to know the cash flows to calculate the present value. 8. You have a small business breeding Labradoodle puppies and have found a buyer for your last puppy. The puppy costs $2000 and the buyer has offered you three payment options. If the interest rate is 6%, which of the following would you prefer to receive? A) One payment of $2000 today B) Two payments of $1225 each. The first payment is 3 years from today and the second payment is 4 years from today C) Three annual payments of $710 beginning today

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In-class quiz practice problems #1 – Fall 2023 SM132 9. What is the value of the following stream of payments on the date of the 3rd payment (at Year 5)? Assume an interest rate of 8% Year 1 2 3 4 5 6 7 Payment $20 $25 $35 15

In-class quiz practice problems #1 – Fall 2023 SM132 10. You plan to buy a scroll saw to make wooden puzzles to sell at holiday time. The saw will cost $400. The materials for the puzzles cost $9 per puzzle and you expect to sell the puzzles for $12 each. Assuming that you buy the $400 saw today and that you sell 150 puzzles at the end of year 1 and 200 puzzles at the end of year 2, what is the net value today of your investment if interest rates are 4%? 11. Reiser Outfitters Inc (ROI) is an outdoor outfitter specializing in supporting New England camps. They have agreed to sell 600 kayaks to Charles River Adventures in exchange for a $100,000 payment today and an additional $450,000 payment one year from today. The kayaks cost ROI $300 each to manufacture. Assuming an interest rate of 4%, the net benefit today for ROI is closest to: 12. Two years ago, you put $340 in the bank. Today, you have $368. What annual interest rate did the bank pay? 13. You put $1000 in a bank account that pays 10%. How many years will it take before you have $5000 in the bank (round to the nearest year)?

In-class quiz practice problems #1 – Fall 2023 SM132 14. You have decided to donate a sailing dinghy to the BU Sailing Team 12 years from today. The boat builder has offered to allow you to pay for the shell in 3 annual payments of $2,450 and the payments will begin 12 years from today. If the interest rate is 2.5%, what is the value today of your planned dinghy donation? 15. Amanda has been tutoring Questrom students and decided that she loves teaching finance so much that she is taking a job tutoring Questrom students after she graduates. She negotiates a contract with Questrom to be paid $20,000 at the beginning of each year for the next 10 years. What is the value of this contract the day she receives the first payment? Assume an interest rate of 7%. 16. An investment will pay $900 per year, forever, starting five years after the investment is purchased. What is the value of this investment on the date that it is purchased, given that the interest rate is 11%? 17. Which of the following is true about perpetuities? A) If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. B) All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. C) All else equal, the present value of a perpetuity is higher when the interest rate is lower. D) All of the above are true statements.

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In-class quiz practice problems #1 – Fall 2023 SM132 18. You have decided to buy a schooner to sail the Maine coast when you retire. The boat builder has offered to allow you to pay for the schooner in 8 annual payments of $35,000 and the payments will begin 5 years from today. If the interest rate is 4%, what is the value today of your schooner? 19. You are planning to do a Sierra Club Machu Picchu Eco-Lodge Trek in 6 years with your college roommate. The trip costs $13,000. You currently have $7,000 in your bank account and deposit an additional $800 every year beginning one year from today. What interest rate would be required if you are to have $13,000 in your bank account in 6 years? ** BEGIN RETIRMENT SAVING QUESTIONS ** Use this information for the following two problems. You turned 25 years old today and have decided that it is time to make a retirement savings plan. You plan to deposit $3000 in your retirement account at the end of each year beginning 1 year from today and ending on your 65 th birthday. Assume that you will earn 7.3% on your savings. 20. How much will you have saved on your 65th birthday immediately after you make the last payment? Assume that you make the planned $3000 deposits and earn 7.3%. 21. You expect to live until age 95. How much can you withdraw every year in retirement (starting one year after your 65 th birthday) so that you will have no savings left after your final withdrawal at age 95? Assume that you continue to earn 7.3%.

In-class quiz practice problems #1 – Fall 2023 SM132 ** END RETIRMENT SAVING QUESTIONS ** 22. You plan to do an expedition to Patagonia during Spring Break in 3 years. The trip will cost $9,000. You already have $3,000 in the bank and you plan to make a deposit every year beginning one year from today for the next 3 years. If your bank pays 6%, how much does the yearly deposit need to be if you are to have $9,000 3 years from today? ** BEGIN BU HABITAT FOR HUMANITY QUESTIONS ** Use this information for the following 2 questions: The BU chapter of Habitat for Humanity wants to raise money to help families on the North Carolina coast to build homes in communities farther away from flood zones. They plan to fund the construction of one home per year during Spring Break forever and have made the following assumptions: • They plan to fund the first home in four years • They plan to invest $10 million today • They want the funding to increase by 3% per year after the first house is built in order to cover increases in material costs. • Assume an interest rate of 5% 23. Based on the above assumptions, how much will the funding be for the first home in four years? 24. If they decide that funding needs to increase at 2% instead of 3%, the amount that they need to invest today in order to fund the construction of one house per year forever will: A) Increase B) Decrease C) Remain unchanged

In-class quiz practice problems #1 – Fall 2023 SM132 25. You want to make a donation to BU at your 10 th reunion (13 years from today). You plan to make ten $5,000 deposits beginning one year after you graduate (4 years from today). Assuming that you deposit the money in a savings account that pays interest annually at an interest rate of 6%, how much will you donate at your 10 th reunion? 26. An investment will pay $600 per year, forever, starting four years after the investment is purchased. What is the value of this investment on the date that it is purchased, given that the interest rate is 3%?

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