Sample Test 1

Corporate Finance

(Prof. Arindam Banerjee)

Sample Quiz

1) If you deposit $2000 in a bank and earn 4% interest per year, how much will you have in five years?

a. FV(4%,5,0,-2000) = $2433.31

2) In which of these two cases would you end up with more money at age 50? How more money? Deposit $10,000 at age 40 and earn an annual rate of 7%, or deposit $5,000 at age 30 and earn an annual rate of 6%?

a. FV1=FV(7%,10,0,-10000)=$19,671.51; FV2=FV(6%,20,0,-5000)=$16035.68;

b. Difference=$3635.84

3) How much money would you have to deposit today in order to have $ 2,000 in four years if the discount rate is 8% per year?

a. FV(8%,4,0,2000)=-$1470.06

4) If a house valued at $ 150,000 grows to a value of $ 270,000 in seven years, what annual return did it earn?

a. Rate(7,0,-150000,270000)=$8.76%

5) Which cash flow has higher value in year 5? (A) $ 5,000 cash flow in year 4, (B) $ 6,000 cash flow in year 7 when interest rates are 6%? By how much?

a. PV₄ = -$5000, Time=1, Rate=6%, FV₅ = FV(6%,1,0,5000)=$5300

b. FV₇ = $6000, Time=2, Rate=6%, FV₅ = PV(6%,2,0,6000)=-$5339.98

c. Difference = $39.38

6) Today you are depositing $ 2,000 into a bank from a summer job. In one year you plan to deposit another $ 2,500. If the account earns 5.5% per year, how much will you have five years from now?

a. Given, PV=-$2000, FV₁=$2500, Interest=5.50%, Time=5

b. PV₀ of FV₁ = PV(5.5%,1,0,2500)=-$2369.67

c. Cumulative PV = PV + PV₀ of FV₁ =- $4369.67

d. FV₅ = FV(5.5%,1,0,4369.67) = $5710.98

7) You are going to receive $ 1,500 in two years and $ 3,000 in four years. What is the combined present value of these future payments if interest rates are 7%?

a. Given, FV2 = $1500, FV₄ = $3000, Interest = 7%

b. PV₁=PV(7%,2,0,1500)=-$1310.16

c. PV₂=PV(7%,4,0,3000)=-$2288.69

d. Total = -$3598.84

8) You can save $ 1,000 per year for the next six years in an account earning 10% per year. How much will you have at the end of the sixth year if you make the first deposit today?

a. PMT=-1000, Time=6, Interest=10%, Type=1

b. PV₀ =FV(10%,6,-1000,0,1)=$8487.17

9) What is the present value of annual $500 payments made for the next 15 years if interest rates are 11%?

a. PMT=-500, Time=15, Interest=11%

b. PV=PV(11%,15,0,-500)=$3595.43

10) At retirement you have saved $ 800,000 in your employer's savings plan. They have offered to convert this money to an annual payment of $ 70,000 for the next 30 years. What is the interest rate of this annuity?

a. FV₆₀=-$800,000

b. PMT=$70,000

c. Time=30 (Years)

d. Interest Rate = Rate(30,70000,-800000,0)=7.84%