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Sample_Practice_Examples - A CCOUNT I NG AND F INANCE...

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ACCOUNTING AND FINANCE University of Auckland Executive Programmes ___________________________________________ Accounting and Finance for Graduate Diploma in Business MODULE 1 – Practice examples The Arithmetic of Finance Optional reference: Chapter 14 of the Text “Financial Management and Decision Making”
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Practice problems 1. You have just inherited a trust. You and your heirs will receive $25,000 per year forever, beginning one year from now. What is the present value of the trust given an 8% discount rate? a. $182,500 b. $200,000 c. $287,500 d. $312,500 e. $337,500 2. How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment 1 year from today, at an interest rate of 10%? A. Which of the following will increase the present value of an annuity, other things equal? a. Increasing the interest rate. b. Decreasing the interest rate. c. Decreasing the number of payments. d. Decreasing the amount of the payment. 4. What is the present value of a five period annuity of $1,000 if the interest rate is 10% and the first payment is made today?
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