## FIN370T Wk. 2 – Apply: Exercise Which of the following statements is incorrect with respect to time lines?

• Interest rates are not included on our time lines.
Correct
• Cash flows we receive are called inflows and denoted with a positive number.
• Cash flows we pay out are called outflows and designated with a negative number.
• A helpful tool for organizing our analysis is the time line.

If an average home in your town currently costs \$300,000, and house prices are expected to grow at an average rate of 5 percent per year, what will an average house cost in 10 years?

• \$450,000.00
• \$507,593.74
• \$483,153.01
• \$488,688.39

What is the present value of a \$600 payment in one year when the discount rate is 8 percent?

• \$525.87
• \$555.56
• \$498.61
• \$575.09

Which of the following is the equivalent of \$300 received today?

• Three hundred dollars compounded at 10 percent for one year.
• All of these choices are correct.
• Seven hundred ninety-five dollars ninety-nine cents to be received 20 years in the future assuming a 5 percent annual interest rate.
• Hundred dollars to be received two years from now and \$200 three years from now.

You double your money in five years. The reason your return is not 20 percent per year is because:

• it does not reflect the effect of discounting.
• it does not reflect the effect of the Rule of 72.
• it is probably a “fad” investment.
• it does not reflect the effect of compounding.

What is the future value of a \$1,000 annuity payment over 4 years if the interest rates are 8 percent?

• \$3,312.10
• \$4,320.00
• \$4,506.11
• \$9,214.20

A perpetuity, a special form of annuity, pays cash flows

• that do not have time value of money implications.
• continuously for one year.
• and is not effected by interest rate changes.
• periodically forever.

Which of the following will increase the present value of an annuity?

• The interest rate decreases.
• The amortization schedule decreases.
• The effective rate is calculated over fewer years.
• The number of periods decreases.

Compounding monthly versus annually causes the interest rate to be effectively higher, and thus the future value

• grows.
• is affected only if the calculation involves an annuity due.
• decreases.
• is independent of the monthly compounding.

A loan is offered with monthly payments and a 14.5 percent APR. What is the loan’s effective annual rate (EAR)?

• 14.97 percent
• 15.63 percent
• 15.13 percent
• 15.50 percent