FNAN 301, Spring 2014, test 1, solutions

1. Three years ago, Lovie invested $14,500. He has earned and will earn compound interest of
9.80 percent per year. In 2 years from today, Valentina can make an investment and earn simple
interest of 2.30 percent per year. If Valentina wants to have just as much in 5 years from today
as Lovie will have in 5 years from today, then how much should Valentina invest in 2 years
from today?
A. An amount less than $20,000 or an amount equal to or greater than $31,000
B. An amount equal to or greater than $20,000 but less than $22,800
C. An amount equal to or greater than $22,800 but less than $25,500
D. An amount equal to or greater than $25,500 but less than $27,800
E. An amount equal to or greater than $27,800 but less than $31,000
1. Three years ago, Lovie invested $14,500. He has earned and will earn compound interest of
9.80 percent per year. In 2 years from today, Valentina can make an investment and earn simple
interest of 3.20 percent per year. If Valentina wants to have just as much in 5 years from today
as Lovie will have in 5 years from today, then how much should Valentina invest in 2 years
from today?
A. An amount equal to or greater than $21,000 but less than $23,800
B. An amount equal to or greater than $23,800 but less than $26,500
C. An amount equal to or greater than $26,500 but less than $29,300
D. An amount equal to or greater than $29,300 but less than $32,000
E. An amount less than $21,000 or an amount equal to or greater than $32,000
1. Three years ago, Lovie invested $14,500. He has earned and will earn compound interest of
8.90 percent per year. In 2 years from today, Valentina can make an investment and earn simple
interest of 2.30 percent per year. If Valentina wants to have just as much in 5 years from today
as Lovie will have in 5 years from today, then how much should Valentina invest in 2 years
from today?
A. An amount less than $19,000 or an amount equal to or greater than $31,000
B. An amount equal to or greater than $19,000 but less than $22,800
C. An amount equal to or greater than $22,800 but less than $26,000
D. An amount equal to or greater than $26,000 but less than $28,300
E. An amount equal to or greater than $28,300 but less than $31,000
1. Three years ago, Lovie invested $14,500. He has earned and will earn compound interest of
8.90 percent per year. In 2 years from today, Valentina can make an investment and earn simple
interest of 3.20 percent per year. If Valentina wants to have just as much in 5 years from today
as Lovie will have in 5 years from today, then how much should Valentina invest in 2 years
from today?
A. An amount equal to or greater than $21,000 but less than $24,900
B. An amount equal to or greater than $24,900 but less than $27,100
C. An amount equal to or greater than $27,100 but less than $29,300
D. An amount equal to or greater than $29,300 but less than $32,000
E. An amount less than $21,000 or an amount equal to or greater than $32,000

FNAN 301, Spring 2014, test 1, solutions

2. Amore Flowers just won a lawsuit and can choose 1 of 5 possible alternatives. Valentina is the
manager with Amore Flowers who has been asked to make that choice. Each alternative would
involve an expected cash flow (CF) to the firm (Amore Flowers) and an expected cash flow to
the manager (Valentina). These expected cash flows, when they are expected, and their present
values, as well as the relevant cost of capital for each alternative, are presented in the table.
Which alternative should Valentina choose if she wants to make the most ethical decision as a
manager?
Alternative
A
B
C
D
E
Cost of capital associated
9.4%
10.8%
9.0%
11.1%
7.4%
with all CFs for alternative
Expected CF to firm
Number of years until
expected CF to firm is
received
Present value of expected
CF to firm
Expected CF to manager
Number of years until
expected CF to manager is
received
Present value of expected
CF to manager
Sum of expected CFs to
firm and manager
Sum of present values of
expected CFs to firm and
manager

$75,200

$103,700

$83,100

$91,800

$94,400

14

$43,865

$41,202

$45,459

$39,549

$34,747

$10,300

$11,600

$9,300

$4,500

$22,700

11

22

$7,191

$4,609

$3,604

$2,393

$4,720

$85,500

$115,300

$92,400

$96,300

$117,100

$51,055

$45,811

$49,063

$41,941

$39,466

FNAN 301, Spring 2014, test 1, solutions

2. Amore Flowers just won a lawsuit and can choose 1 of 5 possible alternatives. Valentina is the
manager with Amore Flowers who has been asked to make that choice. Each alternative would
involve an expected cash flow (CF) to the firm (Amore Flowers) and an expected cash flow to
the manager (Valentina). These expected cash flows, when they are expected, and their present
values, as well as the relevant cost of capital for each alternative, are presented in the table.
Which alternative should Valentina choose if she wants to make the most ethical decision as a
manager?
Alternative
A
B
C
D
E
Cost of capital associated
10.8%
11.1%
7.4%
9.4%
9.0%
with all CFs for alternative
Expected CF to firm
Number of years until
expected CF to firm is
received
Present value of expected
CF to firm
Expected CF to manager
Number of years until
expected CF to manager is
received
Present value of expected
CF to manager
Sum of expected CFs to
firm and manager
Sum of present values of
expected CFs to firm and
manager

$103,700

$91,800

$94,400

$75,200

$83,100

14

$41,202

$39,549

$34,747

$43,865

$45,459

$11,600

$4,500

$22,700

$10,300

$9,300

22

11

$4,609

$2,393

$4,720

$7,191

$3,604

$115,300

$96,300

$117,100

$85,500

$92,400

$45,811

$41,941

$39,466

$51,055

$49,063

FNAN 301, Spring 2014, test 1, solutions

2. Amore Flowers just won a lawsuit and can choose 1 of 5 possible alternatives. Valentina is the
manager with Amore Flowers who has been asked to make that choice. Each alternative would
involve an expected cash flow (CF) to the firm (Amore Flowers) and an expected cash flow to
the manager (Valentina). These expected cash flows, when they are expected, and their present
values, as well as the relevant cost of capital for each alternative, are presented in the table.
Which alternative should Valentina choose if she wants to make the most ethical decision as a
manager?
Alternative
A
B
C
D
E
Cost of capital associated
9.0%
10.8%
9.4%
11.1%
7.4%
with all CFs for alternative
Expected CF to firm
Number of years until
expected CF to firm is
received
Present value of expected
CF to firm
Expected CF to manager
Number of years until
expected CF to manager is
received
Present value of expected
CF to manager
Sum of expected CFs to
firm and manager
Sum of present values of
expected CFs to firm and
manager

$83,100

$103,700

$75,200

$91,800

$94,400

14

$45,459

$41,202

$43,865

$39,549

$34,747

$9,300

$11,600

$10,300

$4,500

$22,700

11

22

$3,604

$4,609

$7,191

$2,393

$4,720

$92,400

$115,300

$85,500

$96,300

$117,100

$49,063

$45,811

$51,055

$41,941

$39,466

FNAN 301, Spring 2014, test 1, solutions

2. Amore Flowers just won a lawsuit and can choose 1 of 5 possible alternatives. Valentina is the
manager with Amore Flowers who has been asked to make that choice. Each alternative would
involve an expected cash flow (CF) to the firm (Amore Flowers) and an expected cash flow to
the manager (Valentina). These expected cash flows, when they are expected, and their present
values, as well as the relevant cost of capital for each alternative, are presented in the table.
Which alternative should Valentina choose if she wants to make the most ethical decision as a
manager?
Alternative
A
B
C
D
E
Cost of capital associated
11.1%
9.0%
7.4%
9.4%
10.8%
with all CFs for alternative
Expected CF to firm
Number of years until
expected CF to firm is
received
Present value of expected
CF to firm
Expected CF to manager
Number of years until
expected CF to manager is
received
Present value of expected
CF to manager
Sum of expected CFs to
firm and manager
Sum of present values of
expected CFs to firm and
manager

$91,800

$83,100

$94,400

$75,200

$103,700

14

$39,549

$45,459

$34,747

$43,865

$41,202

$4,500

$9,300

$22,700

$10,300

$11,600

11

22

$2,393

$3,604

$4,720

$7,191

$4,609

$96,300

$92,400

$117,100

$85,500

$115,300

$41,941

$49,063

$39,466

$51,055

$45,811

FNAN 301, Spring 2014, test 1, solutions

3. Based on the information in the table, which one of the assertions is true?
Present value of
When expected cash
Expected
Investment
expected cash flow
Expected cash flow
flow is expected
annual return
A
?
$12,900
in 3 years
7.60%
B
?
$16,200
in 5 years
9.20%
C
$7,900
$13,300
in 9 years
?
D
$8,200
$10,300
in 4 years
?
A. Investment A is more valuable than investment B and investment C is riskier than investment D
B. Investment A is more valuable than investment B and investment D is riskier than investment C
C. Investment B is more valuable than investment A and investment C is riskier than investment D
D. Investment B is more valuable than investment A and investment D is riskier than investment C
3. Based on the information in the table, which one of the assertions is true?
Present value of
When expected cash
Expected
Investment
expected cash flow
Expected cash flow
flow is expected
annual return
A
?
$12,900
in 3 years
7.60%
B
?
$16,400
in 5 years
9.80%
C
$7,900
$13,300
in 9 years
?
D
$8,200
$10,300
in 4 years
?
A. Investment A is more valuable than investment B and investment C is riskier than investment D
B. Investment A is more valuable than investment B and investment D is riskier than investment C
C. Investment B is more valuable than investment A and investment C is riskier than investment D
D. Investment B is more valuable than investment A and investment D is riskier than investment C
3. Based on the information in the table, which one of the assertions is true?
Present value of
When expected cash
Expected
Investment
expected cash flow
Expected cash flow
flow is expected
annual return
A
?
$12,900
in 3 years
7.60%
B
?
$16,200
in 5 years
9.20%
C
$7,900
$13,100
in 9 years
?
D
$8,200
$10,300
in 4 years
?
A. Investment A is more valuable than investment B and investment C is riskier than investment D
B. Investment A is more valuable than investment B and investment D is riskier than investment C
C. Investment B is more valuable than investment A and investment C is riskier than investment D
D. Investment B is more valuable than investment A and investment D is riskier than investment C
3. Based on the information in the table, which one of the assertions is true?
Present value of
When expected cash
Expected
Investment
expected cash flow
Expected cash flow
flow is expected
annual return
A
?
$12,900
in 3 years
7.60%
B
?
$16,400
in 5 years
9.80%
C
$7,900
$13,100
in 9 years
?
D
$8,200
$10,300
in 4 years
?
A. Investment A is more valuable than investment B and investment C is riskier than investment D
B. Investment A is more valuable than investment B and investment D is riskier than investment C
C. Investment B is more valuable than investment A and investment C is riskier than investment D
D. Investment B is more valuable than investment A and investment D is riskier than investment C

FNAN 301, Spring 2014, test 1, solutions

4. Four years ago, Lovie invested $24,600. In 3 years from today, he expects to have $27,300. If
Lovie expects to earn the same annual rate of return after 3 years from today as the annual rate
implied from the past and expected values given in the problem, then in how many years from
today does he expect to have exactly $29,500?
A. A number less than 4.30 or an amount equal to or greater than 9.30
B. A number equal to or greater than 4.30 but less than 5.60
C. A number equal to or greater than 5.60 but less than 6.80
D. A number equal to or greater than 6.80 but less than 8.10
E. A number equal to or greater than 8.10 but less than 9.30
4. Four years ago, Lovie invested $24,600. In 3 years from today, he expects to have $28,200. If
Lovie expects to earn the same annual rate of return after 3 years from today as the annual rate
implied from the past and expected values given in the problem, then in how many years from
today does he expect to have exactly $29,500?
A. A number equal to or greater than 2.10 but less than 3.70
B. A number equal to or greater than 3.70 but less than 5.20
C. A number equal to or greater than 5.20 but less than 6.30
D. A number equal to or greater than 6.30 but less than 7.80
E. A number less than 2.10 or an amount equal to or greater than 7.80
4. Four years ago, Lovie invested $25,200. In 3 years from today, he expects to have $28,200. If
Lovie expects to earn the same annual rate of return after 3 years from today as the annual rate
implied from the past and expected values given in the problem, then in how many years from
today does he expect to have exactly $29,500?
A. A number equal to or greater than 2.40 but less than 3.50
B. A number equal to or greater than 3.50 but less than 4.60
C. A number equal to or greater than 4.60 but less than 5.70
D. A number equal to or greater than 5.70 but less than 6.80
E. A number less than 2.40 or an amount equal to or greater than 6.80
4. Four years ago, Lovie invested $25,200. In 3 years from today, he expects to have $27,300. If
Lovie expects to earn the same annual rate of return after 3 years from today as the annual rate
implied from the past and expected values given in the problem, then in how many years from
today does he expect to have exactly $29,500?
A. A number less than 6.40 or an amount equal to or greater than 12.20
B. A number equal to or greater than 6.40 but less than 8.00
C. A number equal to or greater than 8.00 but less than 9.60
D. A number equal to or greater than 9.60 but less than 11.00
E. A number equal to or greater than 11.00 but less than 12.20

FNAN 301, Spring 2014, test 1, solutions

5. Valentina has an investment that is worth $12,300 and has an expected return of 8.7 percent.
The investment is expected to pay her $9,800 in 4 years from today and $X in 5 years from
today. What is X?
A. An amount less than $2,600 or an amount equal to or greater than $9,200
B. An amount equal to or greater than $2,600 but less than $4,200
C. An amount equal to or greater than $4,200 but less than $5,800
D. An amount equal to or greater than $5,800 but less than $7,500
E. An amount equal to or greater than $7,500 but less than $9,200
5. Valentina has an investment that is worth $12,300 and has an expected return of 7.8 percent.
The investment is expected to pay her $9,800 in 4 years from today and $X in 5 years from
today. What is X?
A. An amount equal to or greater than $2,600 but less than $4,200
B. An amount equal to or greater than $4,200 but less than $5,800
C. An amount equal to or greater than $5,800 but less than $7,500
D. An amount equal to or greater than $7,500 but less than $9,200
E. An amount less than $2,600 or an amount equal to or greater than $9,200
5. Valentina has an investment that is worth $13,200 and has an expected return of 8.7 percent.
The investment is expected to pay her $9,800 in 4 years from today and $X in 5 years from
today. What is X?
A. An amount less than $4,600 or an amount equal to or greater than 11,200
B. An amount equal to or greater than $4,600 but less than $6,200
C. An amount equal to or greater than $6,200 but less than $7,800
D. An amount equal to or greater than $7,800 but less than $9,600
E. An amount equal to or greater than $9,600 but less than $11,200
5. Valentina has an investment that is worth $13,200 and has an expected return of 7.8 percent.
The investment is expected to pay her $9,800 in 4 years from today and $X in 5 years from
today. What is X?
A. An amount equal to or greater than $4,600 but less than $6,200
B. An amount equal to or greater than $6,200 but less than $7,800
C. An amount equal to or greater than $7,800 but less than $9,600
D. An amount equal to or greater than $9,600 but less than $11,200
E. An amount less than $4,600 or an amount equal to or greater than 11,200

FNAN 301, Spring 2014, test 1, solutions

6. An investment, which is worth $7,500 and has an expected return of 4.50 percent, is expected to
pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the
present value of the annual cash flow that is expected in 4 years from today?
A. An amount equal to or greater than $250.00 but less than $290.00
B. An amount equal to or greater than $290.00 but less than $330.00
C. An amount equal to or greater than $330.00 but less than $370.00
D. An amount equal to or greater than $370.00 but less than $535.00
E. An amount less than $250.00 or an amount equal to or greater than $535.00
6. An investment, which is worth $7,500 and has an expected return of 5.40 percent, is expected to
pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the
present value of the annual cash flow that is expected in 4 years from today?
A. An amount equal to or greater than $255.00 but less than $295.00
B. An amount equal to or greater than $295.00 but less than $335.00
C. An amount equal to or greater than $335.00 but less than $375.00
D. An amount equal to or greater than $375.00 but less than $535.00
E. An amount less than $255.00 or an amount equal to or greater than $535.00
6. An investment, which is worth $7,900 and has an expected return of 4.50 percent, is expected to
pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the
present value of the annual cash flow that is expected in 4 years from today?
A. An amount less than $260.00 or an amount equal to or greater than $535.00
B. An amount equal to or greater than $260.00 but less than $300.00
C. An amount equal to or greater than $300.00 but less than $340.00
D. An amount equal to or greater than $340.00 but less than $380.00
E. An amount equal to or greater than $380.00 but less than $535.00
6. An investment, which is worth $7,900 and has an expected return of 5.40 percent, is expected to
pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the
present value of the annual cash flow that is expected in 4 years from today?
A. An amount equal to or greater than $235.00 but less than $275.00
B. An amount equal to or greater than $275.00 but less than $315.00
C. An amount equal to or greater than $315.00 but less than $355.00
D. An amount equal to or greater than $355.00 but less than $530.00
E. An amount less than $235.00 or an amount equal to or greater than $530.00

FNAN 301, Spring 2014, test 1, solutions

7. An investment is expected to generate annual cash flows forever. The first annual cash flow is
expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate
annually. We know that the cash flow expected in 5 years from today is expected to be $1,950
and the cash flow expected in 8 years from today is expected to be $2,370. What is the cash flow
expected to be in 3 years from today?
7. An investment is expected to generate annual cash flows forever. The first annual cash flow is
expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate
annually. We know that the cash flow expected in 5 years from today is expected to be $1,950
and the cash flow expected in 8 years from today is expected to be $2,260. What is the cash flow
expected to be in 3 years from today?
7. An investment is expected to generate annual cash flows forever. The first annual cash flow is
expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate
annually. We know that the cash flow expected in 5 years from today is expected to be $1,950
and the cash flow expected in 8 years from today is expected to be $2,160. What is the cash flow
expected to be in 3 years from today?
7. An investment is expected to generate annual cash flows forever. The first annual cash flow is
expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate
annually. We know that the cash flow expected in 5 years from today is expected to be $1,950
and the cash flow expected in 8 years from today is expected to be $2,430. What is the cash flow
expected to be in 3 years from today?

10

FNAN 301, Spring 2014, test 1, solutions

8. Lovie owns a romantic gazebo worth $56,800 that is expected to produce cash flows that grow
at a constant rate forever. The next cash flow is expected in 1 year and is expected to be $4,700.
The cost of capital for the romantic gazebo is 15.60 percent. By how much are cash flows
expected to grow each year?
A. A rate equal to or greater than 7.00 percent but less than 7.40 percent
B. A rate equal to or greater than 7.40 percent but less than 7.80 percent
C. A rate equal to or greater than 7.80 percent but less than 8.20 percent
D. A rate equal to or greater than 8.20 percent but less than 8.60 percent
E. A rate less than 7.00 percent or an amount equal to or greater than 8.60 percent
8. Lovie owns a romantic gazebo worth $56,800 that is expected to produce cash flows that grow
at a constant rate forever. The next cash flow is expected in 1 year and is expected to be $4,700.
The cost of capital for the romantic gazebo is 16.40 percent. By how much are cash flows
expected to grow each year?
A. A rate less than 7.80 percent or an amount equal to or greater than 9.40 percent
B. A rate equal to or greater than 7.80 percent but less than 8.20 percent
C. A rate equal to or greater than 8.20 percent but less than 8.60 percent
D. A rate equal to or greater than 8.60 percent but less than 9.00 percent
E. A rate equal to or greater than 9.00 percent but less than 9.40 percent
8. Lovie owns a romantic gazebo worth $56,800 that is expected to produce cash flows that grow
at a constant rate forever. The next cash flow is expected in 1 year and is expected to be $4,500.
The cost of capital for the romantic gazebo is 15.60 percent. By how much are cash flows
expected to grow each year?
A. A rate less than 7.00 percent or an amount equal to or greater than 8.80 percent
B. A rate equal to or greater than 7.00 percent but less than 7.40 percent
C. A rate equal to or greater than 7.40 percent but less than 7.80 percent
D. A rate equal to or greater than 7.80 percent but less than 8.30 percent
E. A rate equal to or greater than 8.30 percent but less than 8.80 percent
8. Lovie owns a romantic gazebo worth $56,800 that is expected to produce cash flows that grow
at a constant rate forever. The next cash flow is expected in 1 year and is expected to be $4,500.
The cost of capital for the romantic gazebo is 16.40 percent. By how much are cash flows
expected to grow each year?
A. A rate equal to or greater than 7.80 percent but less than 8.20 percent
B. A rate equal to or greater than 8.20 percent but less than 8.70 percent
C. A rate equal to or greater than 8.70 percent but less than 9.20 percent
D. A rate equal to or greater than 9.20 percent but less than 9.70 percent
E. A rate less than 7.80 percent or an amount equal to or greater than 9.70 percent

11

FNAN 301, Spring 2014, test 1, solutions

9. Valentina took out a loan from the bank today for X. She plans to repay this loan by making
payments of $4,800 per year for a certain amount of time. If the interest rate on the loan is 12.67
percent per year, she makes her first $4,800 payment later today, and she makes her final annual
payment of $4,800 in 4 years, then what is X, the amount of the loan?
9. Valentina took out a loan from the bank today for X. She plans to repay this loan by making
payments of $4,800 per year for a certain amount of time. If the interest rate on the loan is 12.67
percent per year, she makes her first $4,800 payment later today, and she makes her final annual
payment of $4,800 in 3 years, then what is X, the amount of the loan?
9. Valentina took out a loan from the bank today for X. She plans to repay this loan by making
payments of $4,800 per year for a certain amount of time. If the interest rate on the loan is 17.62
percent per year, she makes her first $4,800 payment later today, and she makes her final annual
payment of $4,800 in 4 years, then what is X, the amount of the loan?
9. Valentina took out a loan from the bank today for X. She plans to repay this loan by making
payments of $4,800 per year for a certain amount of time. If the interest rate on the loan is 17.62
percent per year, she makes her first $4,800 payment later today, and she makes her final annual
payment of $4,800 in 3 years, then what is X, the amount of the loan?

12

FNAN 301, Spring 2014, test 1, solutions

10. Lovie just took out a loan from the bank for $26,000. He plans to repay this loan by making
a special payment to the bank of $9,000 in 4 years and by also making equal, regular annual
payments of X for 7 years. If the interest rate on the loan is 6.5 percent per year and he makes
his first regular annual payment in 1 year, then what is X, Lovies regular annual payment?
A. An amount less than $3,000.00 or an amount equal to or greater than $3,890.00
B. An amount equal to or greater than $3,000.00 but less than $3,220.00
C. An amount equal to or greater than $3,220.00 but less than $3,430.00
D. An amount equal to or greater than $3,430.00 but less than $3,650.00
E. An amount equal to or greater than $3,650.00 but less than $3,890.00
10. Lovie just took out a loan from the bank for $26,000. He plans to repay this loan by making a
special payment to the bank of $9,000 in 3 years and by also making equal, regular annual
payments of X for 7 years. If the interest rate on the loan is 6.5 percent per year and he makes his
first regular annual payment in 1 year, then what is X, Lovies regular annual payment?
A. An amount less than $3,000.00 or an amount equal to or greater than $3,890.00
B. An amount equal to or greater than $3,000.00 but less than $3,220.00
C. An amount equal to or greater than $3,220.00 but less than $3,430.00
D. An amount equal to or greater than $3,430.00 but less than $3,650.00
E. An amount equal to or greater than $3,650.00 but less than $3,890.00
10. Lovie just took out a loan from the bank for $26,000. He plans to repay this loan by making
a special payment to the bank of $9,000 in 4 years and by also making equal, regular annual
payments of X for 7 years. If the interest rate on the loan is 5.6 percent per year and he makes
his first regular annual payment in 1 year, then what is X, Lovies regular annual payment?
A. An amount equal to or greater than $3,000.00 but less than $3,280.00
B. An amount equal to or greater than $3,280.00 but less than $3,490.00
C. An amount equal to or greater than $3,490.00 but less than $3,670.00
D. An amount equal to or greater than $3,670.00 but less than $3,890.00
E. An amount less than $3,000.00 or an amount equal to or greater than $3,890.00
10. Lovie just took out a loan from the bank for $26,000. He plans to repay this loan by making a
special payment to the bank of $9,000 in 3 years and by also making equal, regular annual
payments of X for 7 years. If the interest rate on the loan is 5.6 percent per year and he makes his
first regular annual payment in 1 year, then what is X, Lovies regular annual payment?
A. An amount equal to or greater than $3,000.00 but less than $3,110.00
B. An amount equal to or greater than $3,110.00 but less than $3,220.00
C. An amount equal to or greater than $3,220.00 but less than $3,440.00
D. An amount equal to or greater than $3,440.00 but less than $3,690.00
E. An amount less than $3,000.00 or an amount equal to or greater than $3,690.00

13

FNAN 301, Spring 2014, test 1, solutions

Find investment with simple to match future value of an investment with compound
1. Three years ago, Lovie invested $14,500. He has earned and will earn compound interest of
9.80 percent per year. In 2 years from today, Valentina can make an investment and earn simple
interest of 2.30 percent per year. If Valentina wants to have just as much in 5 years from today as
Lovie will have in 5 years from today, then how much should Valentina invest in 2 years from
today?
A. An amount less than $20,000 or an amount equal to or greater than $31,000
B. An amount equal to or greater than $20,000 but less than $22,800
C. An amount equal to or greater than $22,800 but less than $25,500
D. An amount equal to or greater than $25,500 but less than $27,800
E. An amount equal to or greater than $27,800 but less than $31,000
Solve in 2 steps:
1. Compute how much Lovie will have in 5 years
2. Compute how much Valentina needs to invest to have the same amount in 5 years
1. Compute how much Lovie will have in 5 years
Time
-3
-2
-1
0
Re-time Lovie
0
1
2
3
Invest
14,500
Future value

1
4

2
5

3
6

4
7

5
8
?

With Lovie, C0 = 14,500; r = .0980, and t = 8

Note: if he invested 3 years ago, then the money will have 8 years to compound until 5 years from today
So in 5 years from today (8 years after being invested), Lovie will have
C0 (1+r)t = 14,500 (1.0980)8 = $30,633
2. Compute how much Valentina needs to invest to have the same amount in 5 years
Time
0
1
2
3
4
5
Re-time Valentina
0
1
2
3
Invest
?
Value in future
30,633
With simple interest, an investment of C0 grows to C0 + (C0 simple interest rate per period t) in t
periods
With Valentina, C0 = ?, simple rate = .0230, t = 3, and the amount it will grow to = 30,633
Note that if she invests in 2 years, then the money will have 3 years to grow until 5 years from today
So in 5 years from today, Valentina will have 30,633 = [C0 + (C0 .0230 3)]
= [C0 + (C0 .0230) + (C0 .0230) + (C0 .0230)
= [C0 + (C0 .0690)]
= 1.0690 C0
= 30,633
So, C0 = 30,633 / 1.0690 = $28,656
Answers may differ slightly due to rounding
Answer: E

$28,656 is an amount equal to or greater than $27,800 but less than $31,000
14

FNAN 301, Spring 2014, test 1, solutions

1. Three years ago, Lovie invested $14,500. He has earned and will earn compound interest of
9.80 percent per year. In 2 years from today, Valentina can make an investment and earn simple
interest of 3.20 percent per year. If Valentina wants to have just as much in 5 years from today as
Lovie will have in 5 years from today, then how much should Valentina invest in 2 years from
today?
A. An amount equal to or greater than $21,000 but less than $23,800
B. An amount equal to or greater than $23,800 but less than $26,500
C. An amount equal to or greater than $26,500 but less than $29,300
D. An amount equal to or greater than $29,300 but less than $32,000
E. An amount less than $21,000 or an amount equal to or greater than $32,000
Solve in 2 steps:
1. Compute how much Lovie will have in 5 years
2. Compute how much Valentina needs to invest to have the same amount in 5 years
1. Compute how much Lovie will have in 5 years
Time
-3
-2
-1
0
Re-time Lovie
0
1
2
3
Invest
14,500
Future value

1
4

2
5

3
6

4
7

5
8
?

With Lovie, C0 = 14,500; r = .0980, and t = 8

Note: if he invested 3 years ago, then the money will have 8 years to compound until 5 years from today
So in 5 years from today (8 years after being invested), Lovie will have
C0 (1+r)t = 14,500 (1.0980)8 = $30,633
2. Compute how much Valentina needs to invest to have the same amount in 5 years
Time
0
1
2
3
4
5
Re-time Valentina
0
1
2
3
Invest
?
Value in future
30,633
With simple interest, an investment of C0 grows to C0 + (C0 simple interest rate per period t) in t
periods
With Valentina, C0 = ?, simple rate = .0320, t = 3, and the amount it will grow to = 30,633
Note that if she invests in 2 years, then the money will have 3 years to grow until 5 years from today
So in 5 years from today, Valentina will have 30,633 = [C0 + (C0 .0320 3)]
= [C0 + (C0 .0320) + (C0 .0320) + (C0 .0320)
= [C0 + (C0 .0960)]
= 1.0960 C0
= 30,633
So, C0 = 30,633 / 1.0960 = $27,950
Answers may differ slightly due to rounding
Answer: C

$27,950 is an amount equal to or greater than $26,500 but less than $29,300
15

FNAN 301, Spring 2014, test 1, solutions

1. Three years ago, Lovie invested $14,500. He has earned and will earn compound interest of
8.90 percent per year. In 2 years from today, Valentina can make an investment and earn simple
interest of 2.30 percent per year. If Valentina wants to have just as much in 5 years from today as
Lovie will have in 5 years from today, then how much should Valentina invest in 2 years from
today?
A. An amount less than $19,000 or an amount equal to or greater than $31,000
B. An amount equal to or greater than $19,000 but less than $22,800
C. An amount equal to or greater than $22,800 but less than $26,000
D. An amount equal to or greater than $26,000 but less than $28,300
E. An amount equal to or greater than $28,300 but less than $31,000
Solve in 2 steps:
1. Compute how much Lovie will have in 5 years
2. Compute how much Valentina needs to invest to have the same amount in 5 years
1. Compute how much Lovie will have in 5 years
Time
-3
-2
-1
0
Re-time Lovie
0
1
2
3
Invest
14,500
Future value

1
4

2
5

3
6

4
7

5
8
?

With Lovie, C0 = 14,500; r = .0890, and t = 8

Note: if he invested 3 years ago, then the money will have 8 years to compound until 5 years from today
So in 5 years from today (8 years after being invested), Lovie will have
C0 (1+r)t = 14,500 (1.0890)8 = $28,681
2. Compute how much Valentina needs to invest to have the same amount in 5 years
Time
0
1
2
3
4
5
Re-time Valentina
0
1
2
3
Invest
?
Value in future
28,681
With simple interest, an investment of C0 grows to C0 + (C0 simple interest rate per period t) in t
periods
With Valentina, C0 = ?, simple rate = .0230, t = 3, and the amount it will grow to = 28,681
Note that if she invests in 2 years, then the money will have 3 years to grow until 5 years from today
So in 5 years from today, Valentina will have 28,681 = [C0 + (C0 .0230 3)]
= [C0 + (C0 .0230) + (C0 .0230) + (C0 .0230)
= [C0 + (C0 .0690)]
= 1.0690 C0
= 28,681
So, C0 = 28,681 / 1.0690 = $26,830
Answers may differ slightly due to rounding
Answer: D

$26,830 is an amount equal to or greater than $26,000 but less than $28,300
16

FNAN 301, Spring 2014, test 1, solutions

1. Three years ago, Lovie invested $14,500. He has earned and will earn compound interest of
8.90 percent per year. In 2 years from today, Valentina can make an investment and earn simple
interest of 3.20 percent per year. If Valentina wants to have just as much in 5 years from today as
Lovie will have in 5 years from today, then how much should Valentina invest in 2 years from
today?
A. An amount equal to or greater than $21,000 but less than $24,900
B. An amount equal to or greater than $24,900 but less than $27,100
C. An amount equal to or greater than $27,100 but less than $29,300
D. An amount equal to or greater than $29,300 but less than $32,000
E. An amount less than $21,000 or an amount equal to or greater than $32,000
Solve in 2 steps:
1. Compute how much Lovie will have in 5 years
2. Compute how much Valentina needs to invest to have the same amount in 5 years
1. Compute how much Lovie will have in 5 years
Time
-3
-2
-1
0
Re-time Lovie
0
1
2
3
Invest
14,500
Future value

1
4

2
5

3
6

4
7

5
8
?

With Lovie, C0 = 14,500; r = .0890, and t = 8

Note: if he invested 3 years ago, then the money will have 8 years to compound until 5 years from today
So in 5 years from today (8 years after being invested), Lovie will have
C0 (1+r)t = 14,500 (1.0890)8 = $28,681
2. Compute how much Valentina needs to invest to have the same amount in 5 years
Time
0
1
2
3
4
5
Re-time Valentina
0
1
2
3
Invest
?
Value in future
28,681
With simple interest, an investment of C0 grows to C0 + (C0 simple interest rate per period t) in t
periods
With Valentina, C0 = ?, simple rate = .0320, t = 3, and the amount it will grow to = 28,681
Note that if she invests in 2 years, then the money will have 3 years to grow until 5 years from today
So in 5 years from today, Valentina will have 28,681 = [C0 + (C0 .0320 3)]
= [C0 + (C0 .0320) + (C0 .0320) + (C0 .0320)
= [C0 + (C0 .0960)]
= 1.0960 C0
= 28,681
So, C0 = 28,681 / 1.0960 = $26,169
Answers may differ slightly due to rounding
Answer: B

$26,169 is an amount equal to or greater than $24,900 but less than $27,100
17

FNAN 301, Spring 2014, test 1, solutions

Conceptual: manager chooses option with highest PV to firm
2. Amore Flowers just won a lawsuit and can choose 1 of 5 possible alternatives. Valentina is the
manager with Amore Flowers who has been asked to make that choice. Each alternative would
involve an expected cash flow (CF) to the firm (Amore Flowers) and an expected cash flow to
the manager (Valentina). These expected cash flows, when they are expected, and their present
values, as well as the relevant cost of capital for each alternative, are presented in the table.
Which alternative should Valentina choose if she wants to make the most ethical decision as a
manager?
Alternative
A
B
C
D
E
Cost of capital associated
9.4%
10.8%
9.0%
11.1%
7.4%
with all CFs for alternative
Expected CF to firm
Number of years until
expected CF to firm is
received
Present value of expected
CF to firm
Expected CF to manager
Number of years until
expected CF to manager is
received
Present value of expected
CF to manager
Sum of expected CFs to
firm and manager
Sum of present values of
expected CFs to firm and
manager
A. Alternative A
B. Alternative B
C. Alternative C
D. Alternative D
E. Alternative E

$75,200

$103,700

$83,100

$91,800

$94,400

14

$43,865

$41,202

$45,459

$39,549

$34,747

$10,300

$11,600

$9,300

$4,500

$22,700

11

22

$7,191

$4,609

$3,604

$2,393

$4,720

$85,500

$115,300

$92,400

$96,300

$117,100

$51,055

$45,811

$49,063

$41,941

$39,466

Answer: Alternative C
Recall that value maximization of the firm is what shareholders typically want and
therefore what ethical managers should pursue. Therefore, if Valentina wants to make the
most ethical decision, she should choose the alternative that creates the most value for the
firm, which would be the one with the highest value for Present value of expected CF to
firm. That alternative is C.

18

FNAN 301, Spring 2014, test 1, solutions

2. Amore Flowers just won a lawsuit and can choose 1 of 5 possible alternatives. Valentina is the
manager with Amore Flowers who has been asked to make that choice. Each alternative would
involve an expected cash flow (CF) to the firm (Amore Flowers) and an expected cash flow to
the manager (Valentina). These expected cash flows, when they are expected, and their present
values, as well as the relevant cost of capital for each alternative, are presented in the table.
Which alternative should Valentina choose if she wants to make the most ethical decision as a
manager?
Alternative
A
B
C
D
E
Cost of capital associated
10.8%
11.1%
7.4%
9.4%
9.0%
with all CFs for alternative
Expected CF to firm
Number of years until
expected CF to firm is
received
Present value of expected
CF to firm
Expected CF to manager
Number of years until
expected CF to manager is
received
Present value of expected
CF to manager
Sum of expected CFs to
firm and manager
Sum of present values of
expected CFs to firm and
manager
A. Alternative A
B. Alternative B
C. Alternative C
D. Alternative D
E. Alternative E

$103,700

$91,800

$94,400

$75,200

$83,100

14

$41,202

$39,549

$34,747

$43,865

$45,459

$11,600

$4,500

$22,700

$10,300

$9,300

22

11

$4,609

$2,393

$4,720

$7,191

$3,604

$115,300

$96,300

$117,100

$85,500

$92,400

$45,811

$41,941

$39,466

$51,055

$49,063

Answer: Alternative E
Recall that value maximization of the firm is what shareholders typically want and
therefore what ethical managers should pursue. Therefore, if Valentina wants to make the
most ethical decision, she should choose the alternative that creates the most value for the
firm, which would be the one with the highest value for Present value of expected CF to
firm. That alternative is E.

19

FNAN 301, Spring 2014, test 1, solutions

2. Amore Flowers just won a lawsuit and can choose 1 of 5 possible alternatives. Valentina is the
manager with Amore Flowers who has been asked to make that choice. Each alternative would
involve an expected cash flow (CF) to the firm (Amore Flowers) and an expected cash flow to
the manager (Valentina). These expected cash flows, when they are expected, and their present
values, as well as the relevant cost of capital for each alternative, are presented in the table.
Which alternative should Valentina choose if she wants to make the most ethical decision as a
manager?
Alternative
A
B
C
D
E
Cost of capital associated
9.0%
10.8%
9.4%
11.1%
7.4%
with all CFs for alternative
Expected CF to firm
Number of years until
expected CF to firm is
received
Present value of expected
CF to firm
Expected CF to manager
Number of years until
expected CF to manager is
received
Present value of expected
CF to manager
Sum of expected CFs to
firm and manager
Sum of present values of
expected CFs to firm and
manager
A. Alternative A
B. Alternative B
C. Alternative C
D. Alternative D
E. Alternative E

$83,100

$103,700

$75,200

$91,800

$94,400

14

$45,459

$41,202

$43,865

$39,549

$34,747

$9,300

$11,600

$10,300

$4,500

$22,700

11

22

$3,604

$4,609

$7,191

$2,393

$4,720

$92,400

$115,300

$85,500

$96,300

$117,100

$49,063

$45,811

$51,055

$41,941

$39,466

Answer: Alternative A
Recall that value maximization of the firm is what shareholders typically want and
therefore what ethical managers should pursue. Therefore, if Valentina wants to make the
most ethical decision, she should choose the alternative that creates the most value for the
firm, which would be the one with the highest value for Present value of expected CF to
firm. That alternative is A.

20

FNAN 301, Spring 2014, test 1, solutions

2. Amore Flowers just won a lawsuit and can choose 1 of 5 possible alternatives. Valentina is the
manager with Amore Flowers who has been asked to make that choice. Each alternative would
involve an expected cash flow (CF) to the firm (Amore Flowers) and an expected cash flow to
the manager (Valentina). These expected cash flows, when they are expected, and their present
values, as well as the relevant cost of capital for each alternative, are presented in the table.
Which alternative should Valentina choose if she wants to make the most ethical decision as a
manager?
Alternative
A
B
C
D
E
Cost of capital associated
11.1%
9.0%
7.4%
9.4%
10.8%
with all CFs for alternative
Expected CF to firm
Number of years until
expected CF to firm is
received
Present value of expected
CF to firm
Expected CF to manager
Number of years until
expected CF to manager is
received
Present value of expected
CF to manager
Sum of expected CFs to
firm and manager
Sum of present values of
expected CFs to firm and
manager
A. Alternative A
B. Alternative B
C. Alternative C
D. Alternative D
E. Alternative E

$91,800

$83,100

$94,400

$75,200

$103,700

14

$39,549

$45,459

$34,747

$43,865

$41,202

$4,500

$9,300

$22,700

$10,300

$11,600

11

22

$2,393

$3,604

$4,720

$7,191

$4,609

$96,300

$92,400

$117,100

$85,500

$115,300

$41,941

$49,063

$39,466

$51,055

$45,811

Answer: Alternative B
Recall that value maximization of the firm is what shareholders typically want and
therefore what ethical managers should pursue. Therefore, if Valentina wants to make the
most ethical decision, she should choose the alternative that creates the most value for the
firm, which would be the one with the highest value for Present value of expected CF to
firm. That alternative is B.

21

FNAN 301, Spring 2014, test 1, solutions

Compare PV of 2 and risk (return) of 2 single CF investments
3. Based on the information in the table, which one of the assertions is true?
Investmen
Present value of
When expected cash
Expected
t
expected cash flow Expected cash flow
flow is expected
annual return
A
?
$12,900
in 3 years
7.60%
B
?
$16,200
in 5 years
9.20%
C
$7,900
$13,300
in 9 years
?
D
$8,200
$10,300
in 4 years
?
A. Investment A is more valuable than investment B and investment C is riskier than investment D
B. Investment A is more valuable than investment B and investment D is riskier than investment C
C. Investment B is more valuable than investment A and investment C is riskier than
investment D
D. Investment B is more valuable than investment A and investment D is riskier than investment C
Compare A and B
A: PV0 = Ct (1+r)t = 12,900 / (1.0760)3 = $10,355
Mode is not relevant, since PMT = 0
Enter
3
7.60
N
I%
PV
Solve for
-10,355
B: PV0 = Ct (1+r)t = 16,200 / (1.0920)5 = $10,433
Mode is not relevant, since PMT = 0
Enter
5
9.20
N
I%
PV
Solve for
-10,433

0
PMT

12,900
FV

0
PMT

16,200
FV

B is more valuable than A, because B has a higher present value than A

Compare C and D
C: Mode is not relevant, since PMT = 0
Enter
9
N
I%
Solve for
5.96
D: Mode is not relevant, since PMT = 0
Enter
4
N
I%
Solve for
5.87

-7,900
PV

0
PMT

13,300
FV

-8,200
PV

0
PMT

10,300
FV

C is riskier than D, because C has a higher expected return than D

Put it together
Answer: C. Investment B is more valuable than investment A and investment C is riskier
than investment D
22

FNAN 301, Spring 2014, test 1, solutions

3. Based on the information in the table, which one of the assertions is true?
Investmen
Present value of
When expected cash
Expected
t
expected cash flow Expected cash flow
flow is expected
annual return
A
?
$12,900
in 3 years
7.60%
B
?
$16,400
in 5 years
9.80%
C
$7,900
$13,300
in 9 years
?
D
$8,200
$10,300
in 4 years
?
A. Investment A is more valuable than investment B and investment C is riskier than
investment D
B. Investment A is more valuable than investment B and investment D is riskier than investment C
C. Investment B is more valuable than investment A and investment C is riskier than investment D
D. Investment B is more valuable than investment A and investment D is riskier than investment C
Compare A and B
A: PV0 = Ct (1+r)t = 12,900 / (1.0760)3 = $10,355
Mode is not relevant, since PMT = 0
Enter
3
7.60
N
I%
PV
Solve for
-10,355
B: PV0 = Ct (1+r)t = 16,400 / (1.0980)5 = $10,276
Mode is not relevant, since PMT = 0
Enter
5
9.80
N
I%
PV
Solve for
-10,276

0
PMT

12,900
FV

0
PMT

16,400
FV

A is more valuable than B, because A has a higher present value than B

Compare C and D
C: Mode is not relevant, since PMT = 0
Enter
9
N
I%
Solve for
5.96
D: Mode is not relevant, since PMT = 0
Enter
4
N
I%
Solve for
5.87

-7,900
PV

0
PMT

13,300
FV

-8,200
PV

0
PMT

10,300
FV

C is riskier than D, because C has a higher expected return than D

Put it together
Answer: A. Investment A is more valuable than investment B and investment C is riskier
than investment D

23

FNAN 301, Spring 2014, test 1, solutions

3. Based on the information in the table, which one of the assertions is true?
Investmen
Present value of
When expected cash
Expected
t
expected cash flow Expected cash flow
flow is expected
annual return
A
?
$12,900
in 3 years
7.60%
B
?
$16,200
in 5 years
9.20%
C
$7,900
$13,100
in 9 years
?
D
$8,200
$10,300
in 4 years
?
A. Investment A is more valuable than investment B and investment C is riskier than investment D
B. Investment A is more valuable than investment B and investment D is riskier than investment C
C. Investment B is more valuable than investment A and investment C is riskier than investment D
D. Investment B is more valuable than investment A and investment D is riskier than
investment C
Compare A and B
A: PV0 = Ct (1+r)t = 12,900 / (1.0760)3 = $10,355
Mode is not relevant, since PMT = 0
Enter
3
7.60
N
I%
PV
Solve for
-10,355
B: PV0 = Ct (1+r)t = 16,200 / (1.0920)5 = $10,433
Mode is not relevant, since PMT = 0
Enter
5
9.20
N
I%
PV
Solve for
-10,433

0
PMT

12,900
FV

0
PMT

16,200
FV

B is more valuable than A, because B has a higher present value than A

Compare C and D
C: Mode is not relevant, since PMT = 0
Enter
9
N
I%
Solve for
5.78
D: Mode is not relevant, since PMT = 0
Enter
4
N
I%
Solve for
5.87

-7,900
PV

0
PMT

13,100
FV

-8,200
PV

0
PMT

10,300
FV

D is riskier than C, because D has a higher expected return than C

Put it together
Answer: D. Investment B is more valuable than investment A and investment D is riskier than
investment C

24

FNAN 301, Spring 2014, test 1, solutions

3. Based on the information in the table, which one of the assertions is true?
Investmen
Present value of
When expected cash
Expected
t
expected cash flow Expected cash flow
flow is expected
annual return
A
?
$12,900
in 3 years
7.60%
B
?
$16,400
in 5 years
9.80%
C
$7,900
$13,100
in 9 years
?
D
$8,200
$10,300
in 4 years
?
A. Investment A is more valuable than investment B and investment C is riskier than investment D
B. Investment A is more valuable than investment B and investment D is riskier than
investment C
C. Investment B is more valuable than investment A and investment C is riskier than investment D
D. Investment B is more valuable than investment A and investment D is riskier than investment C
Compare A and B
A: PV0 = Ct (1+r)t = 12,900 / (1.0760)3 = $10,355
Mode is not relevant, since PMT = 0
Enter
3
7.60
N
I%
PV
Solve for
-10,355
B: PV0 = Ct (1+r)t = 16,400 / (1.0980)5 = $10,276
Mode is not relevant, since PMT = 0
Enter
5
9.80
N
I%
PV
Solve for
-10,276

0
PMT

12,900
FV

0
PMT

16,400
FV

A is more valuable than B, because A has a higher present value than B

Compare C and D
C: Mode is not relevant, since PMT = 0
Enter
9
N
I%
Solve for
5.78
D: Mode is not relevant, since PMT = 0
Enter
4
N
I%
Solve for
5.87

-7,900
PV

0
PMT

13,100
FV

-8,200
PV

0
PMT

10,300
FV

D is riskier than C, because D has a higher expected return than C

Put it together
Answer: B. Investment A is more valuable than investment B and investment D is riskier than
investment C

25

FNAN 301, Spring 2014, test 1, solutions

Find t after finding r from 2 earlier CFs
4. Four years ago, Lovie invested $24,600. In 3 years from today, he expects to have $27,300. If
Lovie expects to earn the same annual rate of return after 3 years from today as the annual rate
implied from the past and expected values given in the problem, then in how many years from
today does he expect to have exactly $29,500?
A. A number less than 4.30 or an amount equal to or greater than 9.30
B. A number equal to or greater than 4.30 but less than 5.60
C. A number equal to or greater than 5.60 but less than 6.80
D. A number equal to or greater than 6.80 but less than 8.10
E. A number equal to or greater than 8.10 but less than 9.30
To solve:
1) Find the implied return over the 7 year period from 4 years ago to 3 years from today
2) Use the implied return to determine when goal will be reached relative to one of the given values and then
relative to today
1) Find the implied return over the 7 year period from 4 years ago to 3 years from today
Time
-4
-3
-2
-1
0
1
Re-time
0
1
2
3
4
5
Invest
24,600
Future value
Mode is not relevant, since PMT = 0
Enter
7
-24,600
0
27,300
N
I%
PV
PMT
FV
Solve for
1.50

2
6

3
7
27,300

2) Use the implied return to determine when goal will be reached relative to one of the given values and then
relative to today
Time
0
1
2
3
4

?
Re-time
0
1

?3
Invest
27,300
Future value
29,500
Mode is not relevant, since PMT = 0
Enter
1.50
-27,300
0
29,500
N
I%
PV
PMT
FV
Solve for
5.21
Lovie would have $29,500 in 5.21 years from 3 years from today
Therefore, Lovie would have $29,500 in 8.21 years from today
(Solutions may differ somewhat due to rounding annual rate of return)
Alternatively
Time
-4
-3
Re-time
0
1
Invest
24,600
Future value
Mode is not relevant, since PMT = 0
Enter
1.50
N
I%
Solve for
12.20

-2
2

-1
3

0
4

?
?+4
29,500

-24,600
PV

0
PMT

29,500
FV

Lovie would have $29,500 in 12.20 years from 4 years ago

Therefore, Lovie would have $29,500 in 8.20 years from today
(Solutions may differ somewhat due to rounding annual rate of return)

Answer: E, 8.21 is a number equal to or greater than 8.10 but less than 9.30
26

FNAN 301, Spring 2014, test 1, solutions

4. Four years ago, Lovie invested $24,600. In 3 years from today, he expects to have $28,200. If
Lovie expects to earn the same annual rate of return after 3 years from today as the annual rate
implied from the past and expected values given in the problem, then in how many years from
today does he expect to have exactly $29,500?
A. A number equal to or greater than 2.10 but less than 3.70
B. A number equal to or greater than 3.70 but less than 5.20
C. A number equal to or greater than 5.20 but less than 6.30
D. A number equal to or greater than 6.30 but less than 7.80
E. A number less than 2.10 or an amount equal to or greater than 7.80
To solve:
1) Find the implied return over the 7 year period from 4 years ago to 3 years from today
2) Use the implied return to determine when goal will be reached relative to one of the given values and then
relative to today
1) Find the implied return over the 7 year period from 4 years ago to 3 years from today
Time
-4
-3
-2
-1
0
1
Re-time
0
1
2
3
4
5
Invest
24,600
Future value
Mode is not relevant, since PMT = 0
Enter
7
-24,600
0
28,200
N
I%
PV
PMT
FV
Solve for
1.97

2
6

3
7
28,200

2) Use the implied return to determine when goal will be reached relative to one of the given values and then
relative to today
Time
0
1
2
3
4

?
Re-time
0
1

?3
Invest
28,200
Future value
29,500
Mode is not relevant, since PMT = 0
Enter
1.97
-28,200
0
29,500
N
I%
PV
PMT
FV
Solve for
2.31
Lovie would have $29,500 in 2.31 years from 3 years from today
Therefore, Lovie would have $29,500 in 5.31 years from today
(Solutions may differ somewhat due to rounding annual rate of return)
Alternatively
Time
-4
-3
Re-time
0
1
Invest
24,600
Future value
Mode is not relevant, since PMT = 0
Enter
1.97
N
I%
Solve for
9.31

-2
2

-1
3

0
4

?
?+4
29,500

-24,600
PV

0
PMT

29,500
FV

Lovie would have $29,500 in 9.31 years from 4 years ago

Therefore, Lovie would have $29,500 in 5.31 years from today
(Solutions may differ somewhat due to rounding annual rate of return)

Answer: C, 5.31 is a number equal to or greater than 5.20 but less than 6.30

27

FNAN 301, Spring 2014, test 1, solutions

4. Four years ago, Lovie invested $25,200. In 3 years from today, he expects to have $28,200. If
Lovie expects to earn the same annual rate of return after 3 years from today as the annual rate
implied from the past and expected values given in the problem, then in how many years from
today does he expect to have exactly $29,500?
A. A number equal to or greater than 2.40 but less than 3.50
B. A number equal to or greater than 3.50 but less than 4.60
C. A number equal to or greater than 4.60 but less than 5.70
D. A number equal to or greater than 5.70 but less than 6.80
E. A number less than 2.40 or an amount equal to or greater than 6.80
To solve:
1) Find the implied return over the 7 year period from 4 years ago to 3 years from today
2) Use the implied return to determine when goal will be reached relative to one of the given values and then
relative to today
1) Find the implied return over the 7 year period from 4 years ago to 3 years from today
Time
-4
-3
-2
-1
0
1
Re-time
0
1
2
3
4
5
Invest
25,200
Future value
Mode is not relevant, since PMT = 0
Enter
7
-25,200
0
28,200
N
I%
PV
PMT
FV
Solve for
1.62

2
6

3
7
28,200

2) Use the implied return to determine when goal will be reached relative to one of the given values and then
relative to today
Time
0
1
2
3
4

?
Re-time
0
1

?3
Invest
28,200
Future value
29,500
Mode is not relevant, since PMT = 0
Enter
1.62
-28,200
0
29,500
N
I%
PV
PMT
FV
Solve for
2.80
Lovie would have $29,500 in 2.80 years from 3 years from today
Therefore, Lovie would have $29,500 in 5.80 years from today
(Solutions may differ somewhat due to rounding annual rate of return)
Alternatively
Time
-4
-3
Re-time
0
1
Invest
25,200
Future value
Mode is not relevant, since PMT = 0
Enter
1.62
N
I%
Solve for
9.80

-2
2

-1
3

0
4

?
?+4
29,500

-25,200
PV

0
PMT

29,500
FV

Lovie would have $29,500 in 9.80 years from 4 years ago

Therefore, Lovie would have $29,500 in 5.80 years from today
(Solutions may differ somewhat due to rounding annual rate of return)

Answer: D, 5.80 is a number equal to or greater than 5.70 but less than 6.80

28

FNAN 301, Spring 2014, test 1, solutions

4. Four years ago, Lovie invested $25,200. In 3 years from today, he expects to have $27,300. If
Lovie expects to earn the same annual rate of return after 3 years from today as the annual rate
implied from the past and expected values given in the problem, then in how many years from
today does he expect to have exactly $29,500?
A. A number less than 6.40 or an amount equal to or greater than 12.20
B. A number equal to or greater than 6.40 but less than 8.00
C. A number equal to or greater than 8.00 but less than 9.60
D. A number equal to or greater than 9.60 but less than 11.00
E. A number equal to or greater than 11.00 but less than 12.20
To solve:
1) Find the implied return over the 7 year period from 4 years ago to 3 years from today
2) Use the implied return to determine when goal will be reached relative to one of the given values and then
relative to today
1) Find the implied return over the 7 year period from 4 years ago to 3 years from today
Time
-4
-3
-2
-1
0
1
Re-time
0
1
2
3
4
5
Invest
25,200
Future value
Mode is not relevant, since PMT = 0
Enter
7
-25,200
0
27,300
N
I%
PV
PMT
FV
Solve for
1.15

2
6

3
7
27,300

2) Use the implied return to determine when goal will be reached relative to one of the given values and then
relative to today
Time
0
1
2
3
4

?
Re-time
0
1

?3
Invest
27,300
Future value
29,500
Mode is not relevant, since PMT = 0
Enter
1.15
-27,300
0
29,500
N
I%
PV
PMT
FV
Solve for
6.78
Lovie would have $29,500 in 6.78 years from 3 years from today
Therefore, Lovie would have $29,500 in 9.78 years from today
(Solutions may differ somewhat due to rounding annual rate of return)
Alternatively
Time
-4
-3
Re-time
0
1
Invest
25,200
Future value
Mode is not relevant, since PMT = 0
Enter
1.15
N
I%
Solve for
13.78

-2
2

-1
3

0
4

?
?+4
29,500

-25,200
PV

0
PMT

29,500
FV

Lovie would have $29,500 in 13.78 years from 4 years ago

Therefore, Lovie would have $29,500 in 9.78 years from today
(Solutions may differ somewhat due to rounding annual rate of return)

Answer: D, 9.78 is a number equal to or greater than 9.60 but less than 11.00

29

FNAN 301, Spring 2014, test 1, solutions

Find missing cash flow to get PV of multiple CFs
5. Valentina has an investment that is worth $12,300 and has an expected return of 8.7 percent.
The investment is expected to pay her $9,800 in 4 years from today and $X in 5 years from
today. What is X?
A. An amount less than $2,600 or an amount equal to or greater than $9,200
B. An amount equal to or greater than $2,600 but less than $4,200
C. An amount equal to or greater than $4,200 but less than $5,800
D. An amount equal to or greater than $5,800 but less than $7,500
E. An amount equal to or greater than $7,500 but less than $9,200
Time
Expected cash flow
Present value

0
0
12,300

1
0

2
0

3
0

4
9,800

PV = C0 + [C1/(1+r)1] + [C2/(1+r)2] + [C3/(1+r)3] + [C4/(1+r)4] + [C5/(1+r)5]

PV = 12,300
C0 = C1 = C2 = C3 = 0
C4 = 9,800
C5 = X
r = .087
12,300 = 0 + [0/(1.087)1] + [0/(1.087)2] + [0/(1.087)3] + [9,800/(1.087)4]+ [X/(1.087)5]
So 12,300 = 0 + 0 + 0 + 0 + 7,019.53 + [X/(1.087)5]
So 12,300 7,019.53 = [X/(1.087)5]
= 5,280.47
So [X/(1.087)5] = 5,280.47
So X = [5,280.47 (1.087)5] = $8,013.46
Answers may differ slightly due to rounding
Answer: E
$8,013.46 is an amount equal to or greater than $7,500 but less than $9,200

30

5
X

FNAN 301, Spring 2014, test 1, solutions

5. Valentina has an investment that is worth $12,300 and has an expected return of 7.8 percent.
The investment is expected to pay her $9,800 in 4 years from today and $X in 5 years from
today. What is X?
A. An amount equal to or greater than $2,600 but less than $4,200
B. An amount equal to or greater than $4,200 but less than $5,800
C. An amount equal to or greater than $5,800 but less than $7,500
D. An amount equal to or greater than $7,500 but less than $9,200
E. An amount less than $2,600 or an amount equal to or greater than $9,200
Time
Expected cash flow
Present value

0
0
12,300

1
0

2
0

3
0

4
9,800

PV = C0 + [C1/(1+r)1] + [C2/(1+r)2] + [C3/(1+r)3] + [C4/(1+r)4] + [C5/(1+r)5]

PV = 12,300
C0 = C1 = C2 = C3 = 0
C4 = 9,800
C5 = X
r = .078
12,300 = 0 + [0/(1.078)1] + [0/(1.078)2] + [0/(1.078)3] + [9,800/(1.078)4]+ [X/(1.078)5]
So 12,300 = 0 + 0 + 0 + 0 + 7,256.90 + [X/(1.078)5]
So 12,300 7,256.90 = [X/(1.078)5]
= 5,043.10
So [X/(1.078)5] = 5,043.10
So X = [5,043.10 (1.078)5] = $7,341.61
Answers may differ slightly due to rounding
Answer: C
$7,341.61 is an amount equal to or greater than $5,800 but less than $7,500

31

5
X

FNAN 301, Spring 2014, test 1, solutions

5. Valentina has an investment that is worth $13,200 and has an expected return of 8.7 percent.
The investment is expected to pay her $9,800 in 4 years from today and $X in 5 years from
today. What is X?
A. An amount less than $4,600 or an amount equal to or greater than 11,200
B. An amount equal to or greater than $4,600 but less than $6,200
C. An amount equal to or greater than $6,200 but less than $7,800
D. An amount equal to or greater than $7,800 but less than $9,600
E. An amount equal to or greater than $9,600 but less than $11,200
Time
Expected cash flow
Present value

0
0
13,200

1
0

2
0

3
0

4
9,800

PV = C0 + [C1/(1+r)1] + [C2/(1+r)2] + [C3/(1+r)3] + [C4/(1+r)4] + [C5/(1+r)5]

PV = 13,200
C0 = C1 = C2 = C3 = 0
C4 = 9,800
C5 = X
r = .087
13,200 = 0 + [0/(1.087)1] + [0/(1.087)2] + [0/(1.087)3] + [9,800/(1.087)4]+ [X/(1.087)5]
So 13,200 = 0 + 0 + 0 + 0 + 7,019.53 + [X/(1.087)5]
So 13,200 7,019.53 = [X/(1.087)5]
= 6,180.47
So [X/(1.087)5] = 6,180.47
So X = [6,180.47 (1.087)5] = $9,379.27
Answers may differ slightly due to rounding
Answer: D
$9,379.27 is an amount equal to or greater than $7,800 but less than $9,600

32

5
X

FNAN 301, Spring 2014, test 1, solutions

5. Valentina has an investment that is worth $13,200 and has an expected return of 7.8 percent.
The investment is expected to pay her $9,800 in 4 years from today and $X in 5 years from
today. What is X?
A. An amount equal to or greater than $4,600 but less than $6,200
B. An amount equal to or greater than $6,200 but less than $7,800
C. An amount equal to or greater than $7,800 but less than $9,600
D. An amount equal to or greater than $9,600 but less than $11,200
E. An amount less than $4,600 or an amount equal to or greater than 11,200
Time
Expected cash flow
Present value

0
0
13,200

1
0

2
0

3
0

4
9,800

PV = C0 + [C1/(1+r)1] + [C2/(1+r)2] + [C3/(1+r)3] + [C4/(1+r)4] + [C5/(1+r)5]

PV = 13,200
C0 = C1 = C2 = C3 = 0
C4 = 9,800
C5 = X
r = .078
13,200 = 0 + [0/(1.078)1] + [0/(1.078)2] + [0/(1.078)3] + [9,800/(1.078)4]+ [X/(1.078)5]
So 13,200 = 0 + 0 + 0 + 0 + 7,256.90 + [X/(1.078)5]
So 13,200 7,256.90 = [X/(1.078)5]
= 5,943.10
So [X/(1.078)5] = 5,943.10
So X = [5,943.10 (1.078)5] = $8,651.81
Answers may differ slightly due to rounding
Answer: C
$8,651.81 is an amount equal to or greater than $7,800 but less than $9,600

33

5
X

FNAN 301, Spring 2014, test 1, solutions

PV of a given cash flow with a fixed perpetuity
6. An investment, which is worth $7,500 and has an expected return of 4.50 percent, is expected to
pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the
present value of the annual cash flow that is expected in 4 years from today?
A. An amount equal to or greater than $250.00 but less than $290.00
B. An amount equal to or greater than $290.00 but less than $330.00
C. An amount equal to or greater than $330.00 but less than $370.00
D. An amount equal to or greater than $370.00 but less than $535.00
E. An amount less than $250.00 or an amount equal to or greater than $535.00
Timeline tip for FNAN 301: the cash flows occur annually so the timeline period is a year
Time
Cash flow
Present value of perpetuity

0
$0
$7,500

1
C

2
C

3
C

4
C

5
C

Approach
1) Find the amount of the cash flow expected in 4 years from today
2) Find the present value of the cash flow expected in 4 years from today
1) Find the amount of the cash flow expected in 4 years from today
The cash flows reflect a fixed perpetuity, so the cash flow expected in 4 years is the same as
the cash flow expected every year forever
PV = C / r and C = PV r
PV = $7,500
r = .0450
C = $7,500 .0450 = $337.50
2) Find the present value of the cash flow expected in 4 years from today
PV0 = C4 / (1 + r)4
The cash flow expected in 4 years = C4 = $337.50
r = .0450
PV0 = $337.50 / 1.04504
= $283.01
Answer: A
$283.01 is an amount equal to or greater than $250.00 but less than $290.00

34

FNAN 301, Spring 2014, test 1, solutions

6. An investment, which is worth $7,500 and has an expected return of 5.40 percent, is expected to
pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the
present value of the annual cash flow that is expected in 4 years from today?
A. An amount equal to or greater than $255.00 but less than $295.00
B. An amount equal to or greater than $295.00 but less than $335.00
C. An amount equal to or greater than $335.00 but less than $375.00
D. An amount equal to or greater than $375.00 but less than $535.00
E. An amount less than $255.00 or an amount equal to or greater than $535.00
Timeline tip for FNAN 301: the cash flows occur annually so the timeline period is a year
Time
Cash flow
Present value of perpetuity

0
$0
$7,500

1
C

2
C

3
C

4
C

5
C

Approach
1) Find the amount of the cash flow expected in 4 years from today
2) Find the present value of the cash flow expected in 4 years from today
1) Find the amount of the cash flow expected in 4 years from today
The cash flows reflect a fixed perpetuity, so the cash flow expected in 4 years is the same as
the cash flow expected every year forever
PV = C / r and C = PV r
PV = $7,500
r = .0540
C = $7,500 .0540 = $405.00
2) Find the present value of the cash flow expected in 4 years from today
PV0 = C4 / (1 + r)4
The cash flow expected in 4 years = C4 = $405.00
r = .0540
PV0 = $405.00 / 1.05404
= $328.17
Answer: B
$328.17 is an amount equal to or greater than $295.00 but less than $335.00

35

FNAN 301, Spring 2014, test 1, solutions

6. An investment, which is worth $7,900 and has an expected return of 4.50 percent, is expected to
pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the
present value of the annual cash flow that is expected in 4 years from today?
A. An amount less than $260.00 or an amount equal to or greater than $535.00
B. An amount equal to or greater than $260.00 but less than $300.00
C. An amount equal to or greater than $300.00 but less than $340.00
D. An amount equal to or greater than $340.00 but less than $380.00
E. An amount equal to or greater than $380.00 but less than $535.00
Timeline tip for FNAN 301: the cash flows occur annually so the timeline period is a year
Time
Cash flow
Present value of perpetuity

0
$0
$7,900

1
C

2
C

3
C

4
C

5
C

Approach
1) Find the amount of the cash flow expected in 4 years from today
2) Find the present value of the cash flow expected in 4 years from today
1) Find the amount of the cash flow expected in 4 years from today
The cash flows reflect a fixed perpetuity, so the cash flow expected in 4 years is the same as
the cash flow expected every year forever
PV = C / r and C = PV r
PV = $7,900
r = .0450
C = $7,900 .0450 = $355.50
2) Find the present value of the cash flow expected in 4 years from today
PV0 = C4 / (1 + r)4
The cash flow expected in 4 years = C4 = $355.50
r = .0450
PV0 = $355.50 / 1.04504
= $298.11
Answer: B
$298.11 is an amount equal to or greater than $260.00 but less than $300.00

36

FNAN 301, Spring 2014, test 1, solutions

6. An investment, which is worth $7,900 and has an expected return of 5.40 percent, is expected to
pay fixed annual cash flows forever with the next annual cash flow expected in 1 year. What is the
present value of the annual cash flow that is expected in 4 years from today?
A. An amount equal to or greater than $235.00 but less than $275.00
B. An amount equal to or greater than $275.00 but less than $315.00
C. An amount equal to or greater than $315.00 but less than $355.00
D. An amount equal to or greater than $355.00 but less than $530.00
E. An amount less than $235.00 or an amount equal to or greater than $530.00
Timeline tip for FNAN 301: the cash flows occur annually so the timeline period is a year
Time
Cash flow
Present value of perpetuity

0
$0
$7,900

1
C

2
C

3
C

4
C

5
C

Approach
1) Find the amount of the cash flow expected in 4 years from today
2) Find the present value of the cash flow expected in 4 years from today
1) Find the amount of the cash flow expected in 4 years from today
The cash flows reflect a fixed perpetuity, so the cash flow expected in 4 years is the same as
the cash flow expected every year forever
PV = C / r and C = PV r
PV = $7,900
r = .0540
C = $7,900 .0540 = $426.60
2) Find the present value of the cash flow expected in 4 years from today
PV0 = C4 / (1 + r)4
The cash flow expected in 4 years = C4 = $426.60
r = .0540
PV0 = $426.60 / 1.05404
= $345.67
Answer: C
$345.67 is an amount equal to or greater than $315.00 but less than $355.00

37

FNAN 301, Spring 2014, test 1, solutions

Find a CF in a growing perpetuity from 2 other CFs
7. An investment is expected to generate annual cash flows forever. The first annual cash flow is
expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate
annually. We know that the cash flow expected in 5 years from today is expected to be $1,950
and the cash flow expected in 8 years from today is expected to be $2,370. What is the cash flow
expected to be in 3 years from today?
A. $1,712.22 (plus or minus $5.00)
B. $1,455.34 (plus or minus $5.00)
C. $2,108.24 (plus or minus $5.00)
D. $1,604.43 (plus or minus $5.00)
E. None of the above is within $5.00 of the correct answer
Approach:
1) Find the annual growth rate
2) Find the cash flow expected in 3 years
Time
CF
CF

0
0
0

1
C1
C1

2
C2
C2

3
C3
C3

4
C4
C4

5
C5
1,950

CF

C1

C2

C3

C4

C5

CF

C1

C2

C3

C3
(1+g)

C3
(1+g)2

6
C6
C6
C5
(1+g)
C3
(1+g)3

7
C7
C7
C5
(1+g)2
C3
(1+g)4

1) Find the annual growth rate

We know that Cb = Ca (1+g)b-a so C8 = C5 (1+g)8-5 = C5 (1+g)3
C5 = 1,950
C8 = 2,370
So 2,370 = 1,950 (1+g)3
(2,370/1,950) = (1+g)3
(2,370/1,950)1/3 = [(1+g)3]1/3 = 1 + g
= 1.0672
So g = 1.0672 1 = .0672
2) Find the cash flow expected in 3 years
We know that Cb = Ca (1+g)b-a so C5 = C3 (1+g)5-3 = C3 (1+g)2
C5 = 1,950 and g = .0672
So 1,950 = C3 (1.0672)2
So C3 = 1,950 (1.0672)2
= 1,712.15
We also know that Cb = Ca (1+g)b-a so C8 = C3 (1+g)8-3 = C3 (1+g)5
C8 = 2,370 and g = .0672
So 2,370 = C3 (1.0672)5
So C3 = 2,370 (1.0672)5
= 1,712.06
Answers may differ somewhat due to rounding

38

8
C8
2,370
C5
(1+g)3
C3
(1+g)5

9
C9
C9
C5
(1+g)4
C3
(1+g)6

10
C10
C10
C5
(1+g)5
C3
(1+g)7

FNAN 301, Spring 2014, test 1, solutions

7. An investment is expected to generate annual cash flows forever. The first annual cash flow is
expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate
annually. We know that the cash flow expected in 5 years from today is expected to be $1,950
and the cash flow expected in 8 years from today is expected to be $2,260. What is the cash flow
expected to be in 3 years from today?
A. $1,767.33 (plus or minus $5.00)
B. $1,562.87 (plus or minus $5.00)
C. $2,068.54 (plus or minus $5.00)
D. $1,682.52 (plus or minus $5.00)
E. None of the above is within $5.00 of the correct answer
Approach:
1) Find the annual growth rate
2) Find the cash flow expected in 3 years
Time
CF
CF

0
0
0

1
C1
C1

2
C2
C2

3
C3
C3

4
C4
C4

5
C5
1,950

CF

C1

C2

C3

C4

C5

CF

C1

C2

C3

C3
(1+g)

C3
(1+g)2

6
C6
C6
C5
(1+g)
C3
(1+g)3

7
C7
C7
C5
(1+g)2
C3
(1+g)4

1) Find the annual growth rate

We know that Cb = Ca (1+g)b-a so C8 = C5 (1+g)8-5 = C5 (1+g)3
C5 = 1,950
C8 = 2,260
So 2,260 = 1,950 (1+g)3
(2,260/1,950) = (1+g)3
(2,260/1,950)1/3 = [(1+g)3]1/3 = 1 + g
= 1.0504
So g = 1.0504 1 = .0504
2) Find the cash flow expected in 3 years
We know that Cb = Ca (1+g)b-a so C5 = C3 (1+g)5-3 = C3 (1+g)2
C5 = 1,950 and g = .0504
So 1,950 = C3 (1.0504)2
So C3 = 1,950 (1.0504)2
= 1,767.36
We also know that Cb = Ca (1+g)b-a so C8 = C3 (1+g)8-3 = C3 (1+g)5
C8 = 2,260 and g = .0504
So 2,260 = C3 (1.0504)5
So C3 = 2,260 (1.0504)5
= 1,767.40
Answers may differ somewhat due to rounding

39

8
C8
2,260
C5
(1+g)3
C3
(1+g)5

9
C9
C9
C5
(1+g)4
C3
(1+g)6

10
C10
C10
C5
(1+g)5
C3
(1+g)7

FNAN 301, Spring 2014, test 1, solutions

7. An investment is expected to generate annual cash flows forever. The first annual cash flow is
expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate
annually. We know that the cash flow expected in 5 years from today is expected to be $1,950
and the cash flow expected in 8 years from today is expected to be $2,160. What is the cash flow
expected to be in 3 years from today?
A. $1,821.47 (plus or minus $5.00)
B. $1,672.65 (plus or minus $5.00)
C. $2,031.43 (plus or minus $5.00)
D. $1,760.42 (plus or minus $5.00)
E. None of the above is within $5.00 of the correct answer
Approach:
1) Find the annual growth rate
2) Find the cash flow expected in 3 years
Time
CF
CF

0
0
0

1
C1
C1

2
C2
C2

3
C3
C3

4
C4
C4

5
C5
1,950

CF

C1

C2

C3

C4

C5

CF

C1

C2

C3

C3
(1+g)

C3
(1+g)2

6
C6
C6
C5
(1+g)
C3
(1+g)3

7
C7
C7
C5
(1+g)2
C3
(1+g)4

1) Find the annual growth rate

We know that Cb = Ca (1+g)b-a so C8 = C5 (1+g)8-5 = C5 (1+g)3
C5 = 1,950
C8 = 2,160
So 2,160 = 1,950 (1+g)3
(2,160/1,950) = (1+g)3
(2,160/1,950)1/3 = [(1+g)3]1/3 = 1 + g
= 1.0347
So g = 1.0347 1 = .0347
2) Find the cash flow expected in 3 years
We know that Cb = Ca (1+g)b-a so C5 = C3 (1+g)5-3 = C3 (1+g)2
C5 = 1,950 and g = .0347
So 1,950 = C3 (1.0347)2
So C3 = 1,950 (1.0347)2
= 1,821.40
We also know that Cb = Ca (1+g)b-a so C8 = C3 (1+g)8-3 = C3 (1+g)5
C8 = 2,160 and g = .0347
So 2,160 = C3 (1.0347)5
So C3 = 2,160 (1.0347)5
= 1,821.30
Answers may differ somewhat due to rounding

40

8
C8
2,160
C5
(1+g)3
C3
(1+g)5

9
C9
C9
C5
(1+g)4
C3
(1+g)6

10
C10
C10
C5
(1+g)5
C3
(1+g)7

FNAN 301, Spring 2014, test 1, solutions

7. An investment is expected to generate annual cash flows forever. The first annual cash flow is
expected in 1 year and all subsequent annual cash flows are expected to grow at a constant rate
annually. We know that the cash flow expected in 5 years from today is expected to be $1,950
and the cash flow expected in 8 years from today is expected to be $2,430. What is the cash flow
expected to be in 3 years from today?
A. $1,683.92 (plus or minus $5.00)
B. $1,401.77 (plus or minus $5.00)
C. $2,129.43 (plus or minus $5.00)
D. $1,564.81 (plus or minus $5.00)
E. None of the above is within $5.00 of the correct answer
Approach:
1) Find the annual growth rate
2) Find the cash flow expected in 3 years
Time
CF
CF

0
0
0

1
C1
C1

2
C2
C2

3
C3
C3

4
C4
C4

5
C5
1,950

CF

C1

C2

C3

C4

C5

CF

C1

C2

C3

C3
(1+g)

C3
(1+g)2

6
C6
C6
C5
(1+g)
C3
(1+g)3

7
C7
C7
C5
(1+g)2
C3
(1+g)4

1) Find the annual growth rate

We know that Cb = Ca (1+g)b-a so C8 = C5 (1+g)8-5 = C5 (1+g)3
C5 = 1,950
C8 = 2,430
So 2,430 = 1,950 (1+g)3
(2,430/1,950) = (1+g)3
(2,430/1,950)1/3 = [(1+g)3]1/3 = 1 + g
= 1.0761
So g = 1.0761 1 = .0761
2) Find the cash flow expected in 3 years
We know that Cb = Ca (1+g)b-a so C5 = C3 (1+g)5-3 = C3 (1+g)2
C5 = 1,950 and g = .0761
So 1,950 = C3 (1.0761)2
So C3 = 1,950 (1.0761)2
= 1,683.95
We also know that Cb = Ca (1+g)b-a so C8 = C3 (1+g)8-3 = C3 (1+g)5
C8 = 2,430 and g = .0761
So 2,430 = C3 (1.0761)5
So C3 = 2,430 (1.0761)5
= 1,684.00
Answers may differ somewhat due to rounding

41

8
C8
2,430
C5
(1+g)3
C3
(1+g)5

9
C9
C9
C5
(1+g)4
C3
(1+g)6

10
C10
C10
C5
(1+g)5
C3
(1+g)7

FNAN 301, Spring 2014, test 1, solutions

Find growth from PV, R, and nect CF with a growing perpetuity
8. Lovie owns a romantic gazebo worth $56,800 that is expected to produce cash flows that grow
at a constant rate forever. The next cash flow is expected in 1 year and is expected to be $4,700.
The cost of capital for the romantic gazebo is 15.60 percent. By how much are cash flows
expected to grow each year?
A. A rate equal to or greater than 7.00 percent but less than 7.40 percent
B. A rate equal to or greater than 7.40 percent but less than 7.80 percent
C. A rate equal to or greater than 7.80 percent but less than 8.20 percent
D. A rate equal to or greater than 8.20 percent but less than 8.60 percent
E. A rate less than 7.00 percent or an amount equal to or greater than 8.60 percent
The cash flows represent a growing perpetuity with the first payment in one year
We are trying to determine the growth rate
Time
Cash flow
Present value

0
$0
$56,800

1
$4,700

2
$4,700 (1+g)

3
$4,700 (1+g)2

4
$4,700 (1+g)3

For a growing perpetuity, PV = C1/(r g) and g = r (C1/PV)

C1 = $4,700
PV = $56,800
r = .1560
g = .1560 (4,700 / 56,800)
= .1560 .0827
= .0733 = 7.33%
Answer: A
7.33 percent is a rate equal to or greater than 7.00 percent but less than 7.40 percent

42

FNAN 301, Spring 2014, test 1, solutions

8. Lovie owns a romantic gazebo worth $56,800 that is expected to produce cash flows that grow
at a constant rate forever. The next cash flow is expected in 1 year and is expected to be $4,700.
The cost of capital for the romantic gazebo is 16.40 percent. By how much are cash flows
expected to grow each year?
A. A rate less than 7.80 percent or an amount equal to or greater than 9.40 percent
B. A rate equal to or greater than 7.80 percent but less than 8.20 percent
C. A rate equal to or greater than 8.20 percent but less than 8.60 percent
D. A rate equal to or greater than 8.60 percent but less than 9.00 percent
E. A rate equal to or greater than 9.00 percent but less than 9.40 percent
The cash flows represent a growing perpetuity with the first payment in one year
We are trying to determine the growth rate
Time
Cash flow
Present value

0
$0
$56,800

1
$4,700

2
$4,700 (1+g)

3
$4,700 (1+g)2

4
$4,700 (1+g)3

For a growing perpetuity, PV = C1/(r g) and g = r (C1/PV)

C1 = $4,700
PV = $56,800
r = .1640
g = .1640 (4,700 / 56,800)
= .1640 .0827
= .0813 = 8.13%
Answer: B
8.13 percent is a rate equal to or greater than 7.80 percent but less than 8.20 percent

43

FNAN 301, Spring 2014, test 1, solutions

8. Lovie owns a romantic gazebo worth $56,800 that is expected to produce cash flows that grow
at a constant rate forever. The next cash flow is expected in 1 year and is expected to be $4,500.
The cost of capital for the romantic gazebo is 15.60 percent. By how much are cash flows
expected to grow each year?
A. A rate less than 7.00 percent or an amount equal to or greater than 8.80 percent
B. A rate equal to or greater than 7.00 percent but less than 7.40 percent
C. A rate equal to or greater than 7.40 percent but less than 7.80 percent
D. A rate equal to or greater than 7.80 percent but less than 8.30 percent
E. A rate equal to or greater than 8.30 percent but less than 8.80 percent
The cash flows represent a growing perpetuity with the first payment in one year
We are trying to determine the growth rate
Time
Cash flow
Present value

0
$0
$56,800

1
$4,500

2
$4,500 (1+g)

3
$4,500 (1+g)2

4
$4,500 (1+g)3

For a growing perpetuity, PV = C1/(r g) and g = r (C1/PV)

C1 = $4,500
PV = $56,800
r = .1560
g = .1560 (4,500 / 56,800)
= .1560 .0792
= .0768 = 7.68%
Answer: C
7.68 percent is a rate equal to or greater than 7.40 percent but less than 7.80 percent

44

FNAN 301, Spring 2014, test 1, solutions

8. Lovie owns a romantic gazebo worth $56,800 that is expected to produce cash flows that grow
at a constant rate forever. The next cash flow is expected in 1 year and is expected to be $4,500.
The cost of capital for the romantic gazebo is 16.40 percent. By how much are cash flows
expected to grow each year?
A. A rate equal to or greater than 7.80 percent but less than 8.20 percent
B. A rate equal to or greater than 8.20 percent but less than 8.70 percent
C. A rate equal to or greater than 8.70 percent but less than 9.20 percent
D. A rate equal to or greater than 9.20 percent but less than 9.70 percent
E. A rate less than 7.80 percent or an amount equal to or greater than 9.70 percent
The cash flows represent a growing perpetuity with the first payment in one year
We are trying to determine the growth rate
Time
Cash flow
Present value

0
$0
$56,800

1
$4,500

2
$4,500 (1+g)

3
$4,500 (1+g)2

4
$4,500 (1+g)3

For a growing perpetuity, PV = C1/(r g) and g = r (C1/PV)

C1 = $4,500
PV = $56,800
r = .1640
g = .1640 (4,500 / 56,800)
= .1640 .0792
= .0848 = 8.48%
Answer: B
8.48 percent is a rate equal to or greater than 8.20 percent but less than 8.70 percent

45

FNAN 301, Spring 2014, test 1, solutions

PV of an annuity due from r and time of last PMT
9. Valentina took out a loan from the bank today for X. She plans to repay this loan by making
payments of $4,800 per year for a certain amount of time. If the interest rate on the loan is 12.67
percent per year, she makes her first $4,800 payment later today, and she makes her final annual
payment of $4,800 in 4 years, then what is X, the amount of the loan?
A. $19,176 (plus or minus $10)
B. $16,197 (plus or minus $10)
C. $17,020 (plus or minus $10)
D. $14,376 (plus or minus $10)
E. None of the above is within $10 of the correct answer
This is a problem where we need to find the present value of an annuity due. We have a
series of fixed payments that start immediately and a discount rate and we want to know
what the value of those payments is. The size of a loan is the opposite of the present value
of the cash flows associated with the loan payments.
Time
Payment #
Cash flow
Present value

0
1
-$4,800
?

BEGIN mode
Enter
5
12.67
N
I%
Solve for
Valentina took out a loan for $19,176

1
2
-$4,800

2
3
-$4,800

-4,800
PMT

46

PV
19,176

3
4
-$4,800

0
FV

4
5
-$4,800

FNAN 301, Spring 2014, test 1, solutions

9. Valentina took out a loan from the bank today for X. She plans to repay this loan by making
payments of $4,800 per year for a certain amount of time. If the interest rate on the loan is 12.67
percent per year, she makes her first $4,800 payment later today, and she makes her final annual
payment of $4,800 in 3 years, then what is X, the amount of the loan?
A. $16,197 (plus or minus $10)
B. $12,841 (plus or minus $10)
C. $14,376 (plus or minus $10)
D. $11,397 (plus or minus $10)
E. None of the above is within $10 of the correct answer
This is a problem where we need to find the present value of an annuity due. We have a
series of fixed payments that start immediately and a discount rate and we want to know
what the value of those payments is. The size of a loan is the opposite of the present value
of the cash flows associated with the loan payments.
Time
Payment #
Cash flow
Present value

0
1
-$4,800
?

BEGIN mode
Enter
4
12.67
N
I%
Solve for
Valentina took out a loan for $16,197

1
2
-$4,800

2
3
-$4,800

-4,800
PMT

47

PV
16,197

3
4
-$4,800

0
FV

FNAN 301, Spring 2014, test 1, solutions

9. Valentina took out a loan from the bank today for X. She plans to repay this loan by making
payments of $4,800 per year for a certain amount of time. If the interest rate on the loan is 17.62
percent per year, she makes her first $4,800 payment later today, and she makes her final annual
payment of $4,800 in 4 years, then what is X, the amount of the loan?
A. $17,808 (plus or minus $10)
B. $15,300 (plus or minus $10)
C. $15,141 (plus or minus $10)
D. $13,008 (plus or minus $10)
E. None of the above is within $10 of the correct answer
This is a problem where we need to find the present value of an annuity due. We have a
series of fixed payments that start immediately and a discount rate and we want to know
what the value of those payments is. The size of a loan is the opposite of the present value
of the cash flows associated with the loan payments.
Time
Payment #
Cash flow
Present value

0
1
-$4,800
?

BEGIN mode
Enter
5
17.62
N
I%
Solve for
Valentina took out a loan for $17,808

1
2
-$4,800

2
3
-$4,800

-4,800
PMT

48

PV
17,808

3
4
-$4,800

0
FV

4
5
-$4,800

FNAN 301, Spring 2014, test 1, solutions

9. Valentina took out a loan from the bank today for X. She plans to repay this loan by making
payments of $4,800 per year for a certain amount of time. If the interest rate on the loan is 17.62
percent per year, she makes her first $4,800 payment later today, and she makes her final annual
payment of $4,800 in 3 years, then what is X, the amount of the loan?
A. $15,300 (plus or minus $10)
B. $12,351 (plus or minus $10)
C. $13,008 (plus or minus $10)
D. $10,500 (plus or minus $10)
E. None of the above is within $10 of the correct answer
This is a problem where we need to find the present value of an annuity due. We have a
series of fixed payments that start immediately and a discount rate and we want to know
what the value of those payments is. The size of a loan is the opposite of the present value
of the cash flows associated with the loan payments.
Time
Payment #
Cash flow
Present value

0
1
-$4,800
?

BEGIN mode
Enter
4
17.62
N
I%
Solve for
Valentina took out a loan for $15,300

1
2
-$4,800

2
3
-$4,800

-4,800
PMT

49

PV
15,300

3
4
-$4,800

0
FV

FNAN 301, Spring 2014, test 1, solutions

Find payment with PV annuity and an extra, interim cash flow
10. Lovie just took out a loan from the bank for $26,000. He plans to repay this loan by making
a special payment to the bank of $9,000 in 4 years and by also making equal, regular annual
payments of X for 7 years. If the interest rate on the loan is 6.5 percent per year and he makes
his first regular annual payment in 1 year, then what is X, Lovies regular annual payment?
A. An amount less than $3,000.00 or an amount equal to or greater than $3,890.00
B. An amount equal to or greater than $3,000.00 but less than $3,220.00
C. An amount equal to or greater than $3,220.00 but less than $3,430.00
D. An amount equal to or greater than $3,430.00 but less than $3,650.00
E. An amount equal to or greater than $3,650.00 but less than $3,890.00
This is a problem where we need to find the payment amount associated with the present value of
an annuity and an extra cash flow.
Timeline tip for FNAN 301: everything is annual so the timeline period is a year
Time
0
1
2
3
4
5
Payment #
0
1
2
3
4
5
Reg Pmts
0
X
X
X
X
X
Extra Pmt
0
0
0
0
-$9,000
0
Present value
$26,000

6
6
X
0

7
7
X
0

The annual payment can not be found in one step on the financial calculator.
Approach
1) Find the present value of the extra payment made in 4 years
2) Find the present value of the stream of regular payments
3) Find the amount of each regular payment
1) Find the present value of the extra payment made in 4 years
The present value of a -$9,000 cash flow in 4 years at an annual rate of 6.5% is -9,000/1.065 4 = -6,995.91
2) Find the present value of the stream of regular payments
The present value of all cash flows associated with all loan payments is -26,000
If the -9,000 cash flow in 4 years has a present value of -6,995.91, then the present value of the 7
annual fixed cash flows that start in 1 year and end in 7 years is -26,000 (-6,995.91) = -19,004.09
Find the payment associated with an annuity with a present value of -19,004.09, a total of 7
payments, and a periodic discount rate of 6.5%
END mode
Enter

7
N

6.5
I%

Solve for

PMT
-3,465.04

19,004.09
PV

0
FV

3) Find the amount of each regular payment

The regular annual payment would be $3,465.04
Answer: D
$3,465.04 an amount equal to or greater than $3,430.00 but less than $3,650.00

50

FNAN 301, Spring 2014, test 1, solutions

10. Lovie just took out a loan from the bank for $26,000. He plans to repay this loan by making a
special payment to the bank of $9,000 in 3 years and by also making equal, regular annual
payments of X for 7 years. If the interest rate on the loan is 6.5 percent per year and he makes his
first regular annual payment in 1 year, then what is X, Lovies regular annual payment?
A. An amount less than $3,000.00 or an amount equal to or greater than $3,890.00
B. An amount equal to or greater than $3,000.00 but less than $3,220.00
C. An amount equal to or greater than $3,220.00 but less than $3,430.00
D. An amount equal to or greater than $3,430.00 but less than $3,650.00
E. An amount equal to or greater than $3,650.00 but less than $3,890.00
This is a problem where we need to find the payment amount associated with the present value of
an annuity and an extra cash flow.
Timeline tip for FNAN 301: everything is annual so the timeline period is a year
Time
0
1
2
3
4
5
Payment #
0
1
2
3
4
5
Reg Pmts
0
X
X
X
X
X
Extra Pmt
0
0
0
-$9,000
0
0
Present value
$26,000

6
6
X
0

7
7
X
0

The annual payment can not be found in one step on the financial calculator.
Approach
1) Find the present value of the extra payment made in 3 years
2) Find the present value of the stream of regular payments
3) Find the amount of each regular payment
1) Find the present value of the extra payment made in 3 years
The present value of a -$9,000 cash flow in 3 years at an annual rate of 6.5% is -9,000/1.065 3 = -7,450.64
2) Find the present value of the stream of regular payments
The present value of all cash flows associated with all loan payments is -26,000
If the -9,000 cash flow in 3 years has a present value of -7,450.64, then the present value of the 7
annual fixed cash flows that start in 1 year and end in 7 years is -26,000 (-7,450.64) = -18,549.36
Find the payment associated with an annuity with a present value of -18,549.36, a total of 7
payments, and a periodic discount rate of 6.5%
END mode
Enter

7
N

6.5
I%

Solve for

PMT
-3,382.13

18,549.36
PV

0
FV

3) Find the amount of each regular payment

The regular annual payment would be $3,382.13
Answer: C
$3,382.13 an amount equal to or greater than $3,220.00 but less than $3,430.00

51

FNAN 301, Spring 2014, test 1, solutions

10. Lovie just took out a loan from the bank for $26,000. He plans to repay this loan by making
a special payment to the bank of $9,000 in 4 years and by also making equal, regular annual
payments of X for 7 years. If the interest rate on the loan is 5.6 percent per year and he makes
his first regular annual payment in 1 year, then what is X, Lovies regular annual payment?
A. An amount equal to or greater than $3,000.00 but less than $3,280.00
B. An amount equal to or greater than $3,280.00 but less than $3,490.00
C. An amount equal to or greater than $3,490.00 but less than $3,670.00
D. An amount equal to or greater than $3,670.00 but less than $3,890.00
E. An amount less than $3,000.00 or an amount equal to or greater than $3,890.00
This is a problem where we need to find the payment amount associated with the present value of
an annuity and an extra cash flow.
Timeline tip for FNAN 301: everything is annual so the timeline period is a year
Time
0
1
2
3
4
5
Payment #
0
1
2
3
4
5
Reg Pmts
0
X
X
X
X
X
Extra Pmt
0
0
0
0
-$9,000
0
Present value
$26,000

6
6
X
0

7
7
X
0

The annual payment can not be found in one step on the financial calculator.
Approach
1) Find the present value of the extra payment made in 4 years
2) Find the present value of the stream of regular payments
3) Find the amount of each regular payment
1) Find the present value of the extra payment made in 4 years
The present value of a -$9,000 cash flow in 4 years at an annual rate of 5.6% is -9,000/1.056 4 = -7,237.47
2) Find the present value of the stream of regular payments
The present value of all cash flows associated with all loan payments is -26,000
If the -9,000 cash flow in 4 years has a present value of -7,237.47, then the present value of the 7
annual fixed cash flows that start in 1 year and end in 7 years is -26,000 (-7,237.47) = -18,762.53
Find the payment associated with an annuity with a present value of -18,762.53, a total of 7
payments, and a periodic discount rate of 5.6%
END mode
Enter

7
N

5.6
I%

Solve for

PMT
-3,313.40

18,762.53
PV

0
FV

3) Find the amount of each regular payment

The regular annual payment would be $3,313.40
Answer: B
$3,313.40 an amount equal to or greater than $3,280.00 but less than $3,490.00

52

FNAN 301, Spring 2014, test 1, solutions

10. Lovie just took out a loan from the bank for $26,000. He plans to repay this loan by making a
special payment to the bank of $9,000 in 3 years and by also making equal, regular annual
payments of X for 7 years. If the interest rate on the loan is 5.6 percent per year and he makes his
first regular annual payment in 1 year, then what is X, Lovies regular annual payment?
A. An amount equal to or greater than $3,000.00 but less than $3,110.00
B. An amount equal to or greater than $3,110.00 but less than $3,220.00
C. An amount equal to or greater than $3,220.00 but less than $3,440.00
D. An amount equal to or greater than $3,440.00 but less than $3,690.00
E. An amount less than $3,000.00 or an amount equal to or greater than $3,690.00
This is a problem where we need to find the payment amount associated with the present value of
an annuity and an extra cash flow.
Timeline tip for FNAN 301: everything is annual so the timeline period is a year
Time
0
1
2
3
4
5
Payment #
0
1
2
3
4
5
Reg Pmts
0
X
X
X
X
X
Extra Pmt
0
0
0
-$9,000
0
0
Present value
$26,000

6
6
X
0

7
7
X
0

The annual payment can not be found in one step on the financial calculator.
Approach
1) Find the present value of the extra payment made in 3 years
2) Find the present value of the stream of regular payments
3) Find the amount of each regular payment
1) Find the present value of the extra payment made in 3 years
The present value of a -$9,000 cash flow in 3 years at an annual rate of 5.6% is -9,000/1.056 3 = -7,642.77
2) Find the present value of the stream of regular payments
The present value of all cash flows associated with all loan payments is -26,000
If the -9,000 cash flow in 3 years has a present value of -7,642.77, then the present value of the 7
annual fixed cash flows that start in 1 year and end in 7 years is -26,000 (-7,642.77) = -18,357.23
Find the payment associated with an annuity with a present value of -18,357.23, a total of 7
payments, and a periodic discount rate of 5.6%
END mode
Enter

7
N

5.6
I%

Solve for

PMT
-3,241.82

18,357.23
PV

0
FV

3) Find the amount of each regular payment

The regular annual payment would be $3,241.82
Answer: C
$3,241.82 an amount equal to or greater than $3,220.00 but less than $3,440.00

53