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Time Value of Money and Capital Budgeting Exam

Q1. How many years does it take to save $1,284 if you start with $625 and earn a 9% annual interest rate?

• 11.35 years
• 9.25 years
• 8.35 years
• 8.50 years

Q2. At the age of 18, Brad began saving cash so he could buy a used car on his 21st birthday. For any investment he made, he earned 4% in interest. Brad invested $800 at the end of the first year, $1,200 at the end of the second year, and $1,350 at the end of the third year. What is the total amount of money he had at the end of the third year?

• $3,350.00
• $3,430.00
• $3,463.28
• $3,517.28

Q3. When a scholarship offers a set amount per month, paid on the first of the month, and extends for a certain period of time (e.g., $325 a month for 36 months), which of the following is the best way to describe the payments for this type of scholarship?

• The payments for this type of scholarship are an example of ordinary annuity.
• The payments for this type of scholarship are an example of annuity due.
• The payments for this type of scholarship are an example of ordinary perpetuity.
• The payments for this type of scholarship are an example of perpetuity due.

Q4. The value created per dollar invested is known as the _____.

• net present value
• future value
• annuity
• profitability index

Q5. Jonathan is purchasing a car and plans to finance it. He decides to take out a 6-year loan, which will mean that his monthly payments are $345. Which of the following terms can be used to describe his car payments?

• Perpetuity
• Annuity
• Factor
• Lump sum

Q6. A/An _____ is an interest rate in which the monthly interest is expressed as only being compounded annually.

• annual percentage rate
• compounded rate
• quoted rate
• effective annual rate

Q7. When a trust fund is established to provide annual scholarships indefinitely, which of the following is the best way to describe the scholarships?

• The annual scholarships are an example of ordinary annuity.
• The annual scholarships are an example of annuity due.
• The annual scholarships are an example of an amortized payment.
• The annual scholarships are an example of perpetuity.

Q8. You deposit $3,325 in a bank account that pays 3% simple interest. How much interest will you earn over the next 7 years?

• $355.25
• $698.25
• $524.50
• $256

Q9. When the discount rate for a project reflects a net present value of zero, this is the definition of an internal rate of return. True

Q10. The net present value increases when there is also an increase in the required rate of return. False

Q11. If you were determining whether to proceed with a project, which of the following statements would cause you to reject it?

• The requirement of the average accounting return is exceeded
• The requirement period is longer than the payback period
• There is a Net Present Value that is positive
• There is a Profitability Index that is less than 1

Q12. Of the following expenses, which one can be considered an annuity?

• Monthly bill for electricity or gas
• Yearly homeowner association fees
• Recurring car maintenance
• A payment for a car loan

Q13. What would the net present value of an investment be if it produces a return that is equivalent to the required return?

• The net present value would be negative
• The net present value would reflect a larger number than what was initially invested
• The net present value of the investment would be zero
• The net present value would be the same as the net profit

Q14. If an inheritance is compounded annually at 6% and reaches a total of $100,000 after 12 years, what would the starting amount of the investment be?

• $51,386
• $49,697
• $49,852
• $48,976

Q15. Of the various methods of capital budgeting, which one is considered to be the superior method to analyze a project or investment?

• Payback
• Profitability Index
• Internal Rate of Return
• Net Present Value

Q16. If the payment for an annuity is lowered, this will also create a reduction in the annuity’s present value. True

Q17. You have a present value of $217, future value of $307, and 3 years as the number of periods. What is the interest rate?

• 13.05%
• 13.00%
• 12.26%
• 12.49%

Q18. What is the future value of $6,500 invested for 7 years at 10% compounded annually?

• $12,667
• $13,525
• $12,565
• $11,325

Q19. When the monthly interest rate of a credit card is multiplied by 12, this is referred to as the _____.

• annual percentage rate
• compounded rate
• effective annual rate
• fixed rate

Q20. If you were to analyze a project using the payback method, which of the following aspects would you purposely disregard?

• Time Value of Money
• Timing of each cash inflow
• Initial cost of the investment
• Ease of use