Finance Fundamentals – MBA

Subject: Time Value of Money – Practice Questions

1. Mickey wishes to accumulate $100,000 by the end of 10 years by making annual end of year deposits over the next
10 years. If Mickey can earn 10% on his investments, how much must he deposit at the end of each year?
a. $16,275
b. $6,903
c. $6,275
d. $5,698

2. In 1958 the average tuition for one year at an Ivy League school was $1,800. Thirty years later, in 1988, the average
cost was $13,700. What was the growth rate in tuition over the 30-year period?
a. 12%
b. 9%
c. 6%
d. 7%
e. 8%

3. You are considering buying a new car. The sticker price is $15,000 and you have $2,000 to put toward a down
payment. If you can negotiate a nominal annual interest rate of 10 percent and you wish to pay for the car over a 5-
year period, what are your monthly car payments?
a. $330.11
b. $252.34
c. $276.21
d. $285.78
e. $309.27

4. Which of the following statements is most correct?

a. The present value of an annuity due will exceed the present value of an ordinary annuity (assuming all else
equal).
b. The future value of an annuity due will exceed the future value of an ordinary annuity (assuming all else equal).
c. The nominal interest rate will always be greater than or equal to the effective annual interest rate.
d. Statements a and b are correct.
e. All of the statements above are correct.

5. If you put $10,000 in a fixed deposit for 10 years, how much will you have in the account at the end of 10 years?
Assume that the bank annual interest rate is 12%, but it is compounded quarterly.
a. $33,004
b. $32,071
c. $32,620
d. $11,046

6. A bank recently loaned you $15,000 to buy a car. The loan is for five years (60 months) and is fully amortized. The
nominal rate on the loan is 12 percent, and payments are made at the end of each month. What will be the remaining
balance on the loan after you make the 30th payment?
a. $ 8,611.17
b. $ 8,363.62
c. $14,515.50
d. $ 3,160.26
e. $ 6,021.20

7. What is the present value of $500 received each quarter for 5 years, if the annual interest rate is 12% compounded
quarterly? Assume that the payments are received at the beginning of each period?
a. $2975
b. $8339
c. $7662
d. $7439
8. Consider an investment project with the following sequence of cash flows:

End of Year Net Cash Flow

0 -$50,000
1 20,000
2 30,000
3 20,000
The firm’s cost of capital (K) is 10%. The NPV and IRR of the project are closest to:
NPV IRR
a. $961 17.5%
b. $8,002 18.8%
c. $6,009 18.8%
d. $20,000 10.0%

9. You have just taken out a 10-year, $12,000 loan to purchase a new car. This loan is to be repaid in 120 equal end-of-
month installments. If each of the monthly installments is $150, what is the effective annual interest rate on this car
loan? (Hint: Find monthly interest rate and then convert it to effective annual rate – EAR)
a. 6.5431%
b. 7.8942%
c. 8.6892%
d. 8.8869%
e. 9.0438%

10. You borrow $149,000 to buy a house. The mortgage rate is 7.5% and the loan period is 30 years. Payments are
made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay?
a. $138,086
b. $218,161
c. $226,059
d. $287,086
e. $375,059

11. Winston Enterprises would like to buy some additional land and build a new factory. The anticipated total cost is
$136 million. The owner of the firm is quite conservative and will only do this when the company has sufficient
funds to pay cash for the entire expansion project. Management has decided to save $450,000 a month for this
purpose. The firm earns 6% compounded monthly on the funds it saves. How long does the company have to wait
before expanding its operations?
a. 184.61 months
b. 199.97 months
c. 234.34 months
d. 284.61 months
e. 299.97 months

12. Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day of
each year. They both earn a 9% rate of return. What is the difference in their savings account balances at the end of
thirty years?
a. $35,822.73
b. $36,803.03
c. $38,911.21
d. $39,803.04
e. $40,115.31

13. You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of
$50,000 for the next five years. At a discount rate of 12%, what is this job worth to you today?
a. $180,238.81
b. $201,867.47
c. $210,618.19
d. $223,162.58
e. $224,267.10
14. You retire at age 60 and expect to live another 27 years. On the day you retire, you have $464,900 in your
retirement savings account. You are conservative and expect to earn 4.5% on your money during your retirement.
How much can you withdraw from your retirement savings each month if you plan to die on the day you spend
your last penny?
a. $2,001.96
b. $2,092.05
c. $2,398.17
d. $2,472.00
e. $2,481.27

15. You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The
second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable
discount rate is 8.75%, which offer should you accept and why?
a. You should accept the $189,000 today because it has the higher net present value.
b. You should accept the $189,000 today because it has the lower future value.
c. You should accept the second offer because you will receive $200,000 total.
d. You should accept the second offer because you will receive an extra $11,000.
e. You should accept the second offer because it has a present value of $194,555.42.

16. The McDonald Group purchased a piece of property for $1.2 million. It paid a down payment of 20% in cash and
financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75%
compounded monthly. What is the amount of each mortgage payment?
a. $7,440.01
b. $8,978.26
c. $9,036.25
d. $9,399.18
e. $9,413.67

17. The Robertson Firm is considering a project which costs $123,900 to undertake. The project will yield cash flows
of $4,894.35 monthly for 30 months. What is the rate of return on this project?
a. 12.53%
b. 13.44%
c. 13.59%
d. 14.02%
e. 14.59%

18. Which of the following statements concerning the effective annual rate are correct?
I. When making financial decisions, you should compare effective annual rates rather than annual percentage
rates.
II. The more frequently interest is compounded, the higher the effective annual rate.
III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were
compounded daily.
IV. When borrowing and choosing which loan to accept, you should select the offer with the highest effective
annual rate.
a. I and II only
b. I and IV only
c. I, II, and III only
d. II, III, and IV only
e. I, II, III,and IV

19. You are considering a project with the following cash flows:
Year 1 Year 2 Year 3
$4,200 $5,000 $5,400
What is the present value of these cash flows, given a 3% discount rate?
a. $13,732.41
b. $13,812.03
c. $14,308.08
d. $14,941.76
e. $14,987.69
20. You have $2,500 that you want to use to open a savings account. You have found five different accounts that are
acceptable to you. All you have to do now is determine which account you want to use such that you can earn the
highest rate of interest possible. Which account should you use based upon the annual percentage rates quoted by
each bank?
Account A: 3.75%, compounded annually
Account B: 3.70%, compounded monthly
Account C: 3.70%, compounded semi-annually
Account D: 3.65%, compounded continuously
Account E: 3.66%, compounded quarterly
a. Account A
b. Account B
c. Account C
d. Account D
e. Account E

Use the following information to answer the next 2 questions:

You are buying a home for $120,000. If you make a down payment of 20,000 and take out a mortgage loan on the
balance (loan = 100,000) at an interest rate of 15%, compounded monthly. The loan is to be repaid in 15 years.

21. What will be your monthly payment to payoff of the loan in 15 years?
a. $1,399.59
b. $1,400
c. $1,357
d. $1,933

22. You have made 80 payments on the above loan. For the 80th month of the amortization schedule, what are the
interest, principal repayment, and the remaining balance?
Principal Remaining
Period Payment Interest Repayment Balance
80