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Chapter 5 Sample Test Questions

# Chapter 5 Sample Test Questions - Chapter 5 Test Questions...

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Chapter 5 Test Questions Question 1 As the discount rate increases, the present value of \$500 to be received six years from now: a. remains constant. b. also increases. c. decreases. d. becomes negative. e. will vary but the direction of the change is unknown. Answer Question 1 As the discount rate increases the present value of any amount given in the future will decrease. Present Value = Future Value / (1+i) t where i is the discount rate and t is time. Answer : C Question 2 Today you earn a salary of \$28,500. What will be your annual salary fifteen years from now if you earn annual raises of 3.5 percent? a. \$47,035.35 b. \$47,522.89 c. \$47,747.44 d. \$48,091.91 e. None of the above Answer Question 2 For this we use our Financial Calculator. We know that PV = \$28,500, Int/Yr = 3.5% and N = 15. Solving for FV gives you \$47,747.44 . Answer : C Question 3 Your grandmother invested one lump sum 17 years ago at 4.25 percent interest. Today, she gave you the proceeds of that investment which totaled \$5,539.92. How much did your grandmother originally invest? a. \$2,700.00 b. \$2,730.30 c. \$2,750.00 d. \$2,768.40 e. None of the above

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Answer Question 3 For this we use our Financial Calculator. We know that FV = \$5,539.92, Int/Yr = 4.25% and N = 17. Solving for PV gives you \$2,730.30 . Answer : B Question 4 On your tenth birthday, you received \$100 which you invested at 4.5 percent interest, compounded annually. That investment is now worth \$3,000. How old are you today? (round to nearest year) a. age 77 b. age 82 c. age 84 d. age 85 e. None of the above Answer Question 4 For this we use our Financial Calculator. We know that FV = -\$3,000, Int/Yr = 4.5% and PV = \$100. Solving for N gives you 77.3. You are thus 77.3+10 = 87.3 years old. Answer : E Question 5 You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of \$50,000 today or receive payments of \$641 a month for ten years. You can earn 6.5 percent on your money. Which option should you take and why? Assume end-of-month payments a. You should accept the payments because they are worth \$56,451.91 today. b. You should accept the payments because they are worth \$56,523.74 today. c. You should accept the payments because they are worth \$56,737.08 today. d. You should accept the \$50,000 because the payments are only worth \$47,757.69 today. e. You should accept the \$50,000 because the payments are only worth \$9,856.38 today. Answer Question 5 For this we use our Financial Calculator. We know that PMT = \$641, Int/Month = 6.5%/12 = .5416667% and N = 12*10=120. Solving for PV gives you \$56,451.91.
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