FNAN 301
Test bank problems – time value of money part 2
1. Quality Real Estate owns a skyscraper that is expected to produce cash flows of $10 million in 1 year,
$15 million in 2 years, and $220 million in 3 years, when it is expected to be sold.
The cost of capital for
the building is 15.0%.
What is the value of the skyscraper?
2. You just bought a new car today.
What is the present value of your cash flows if the discount rate is
12.3 percent, you will receive a rebate of $2,000 from the dealer in 2 years, and you will pay $40,000 to
the dealer in 4 years?
Note: the correct answer is less than zero.
(http://www.youtube.com/watch?v=fS4_fkwv584
file:auto sale with rebate.wmv)
(Fall 2009, quiz 1, question 6)
(Fall 2009, final, question 2)
(Spring 2010, quiz 1, question 2)
(Spring 2010, final, question 1)
(Summer C 2010, quiz 1, question 5)
3. Arielle bought a new jet ski today from Wally’s Watersports Emporium.
She will pay $200 today to
Wally’s, she will receive a rebate of $200 from Wally’s in 1 year from today, and she will pay $1,700 to
Wally’s in 3 years from today.
If the discount rate is 9.5 percent, then what is the present value of the
cash flows associated with this transaction?
Note: the correct answer is less than zero.
(Fall 2010, quiz 1, question 8)
4. Milania has an investment that is worth $5,000 and has an expected return of 19.9 percent.
The
investment is expected to pay her $7,000 in 3 years from today and $X in 2 years from today.
What is X?
A. An amount less than $0
B. An amount equal to or greater than $0 but less than $900
C. An amount equal to or greater than $900 but less than $1,200
D. An amount equal to or greater than $1,200 but less than $1,400
E. An amount equal to or greater than $1,400
(Fall 2010, quiz 1, question 4)
5. You own a building that is worth $10,000.
The building is expected to make cash flows of $6,000 in 2
years and $X in 4 years.
What is X if the cost of capital is 7.5%?
6. You own an office building that is expected to produce cash flows forever.
The next cash flow is
expected to be $5,000,000 in 1 year.
Annual cash flows are expected to remain unchanged forever.
The
appropriate discount rate for the office building is 11 percent.
How much is the building worth?
7. You own an office building worth $50,000,000 that is expected to produce annual cash flows forever.
The next cash flow is expected to be $6,000,000 in 1 year.
Annual cash flows are expected to remain
unchanged forever.
What is the cost of capital for the office building?
8. Donegal Enterprises owns a factory that is worth $480,000 and has a cost of capital of 16.4 percent.
The factory is expected produce annual fixed cash flows forever with the next cash flow expected in one
year.
What is the annual cash flow produced by the factory expected to be?
(http://www.youtube.com/watch?v=l_QtU6auTXo