1



An investment has the following cash flows:

|Time |Contributions |Returns |

|0 |100,000 |0 |

|1 |5,000 |0 |

|2 |4,000 |10,000 |

|3 |2,000 |10,000 |

|4 |0 |20,000 |

|5 |0 |40,000 |

|6 |0 |60,000 |

|7 |0 |80,000 |

Calculate the net present value of this investment at an interest rate of 10%.

a. 18,038

b. 19,841

c. 31,955

d. 35,151

e. 38,666

1. An investment has the following cash flows:

|Time |Contributions |Returns |

|0 |100,000 |0 |

|1 |5,000 |0 |

|2 |4,000 |10,000 |

|3 |2,000 |10,000 |

|4 |0 |20,000 |

|5 |0 |40,000 |

|6 |0 |60,000 |

|7 |0 |80,000 |

Calculate the internal rate of return on this investment.

a. 11.5%

b. 12.0%

c. 13.0%

d. 13.5%

e. 14.0%

2. You are the President of XYZ Manufacturing Company. You are considering building a new factory. The factory will require an investment of 100,000 immediately. It will also require an additional investment of 15,000 at the beginning of year 2 to initiate production. Finally, maintenance costs for the factory will be 5000 per year at the beginning of years 3 through 6.

The factory is expected to generate profits of 10,000 at the end of year one, 15,000 at the end of year two, 20,000 at the end of year 3, and 30,000 at the end of years 4 through 6.

Calculate the internal rate of return on the potential factory.

a. -2.0%

b. -1.0%

c. 0.0%

d. 1.0%

e. 2.0%

3. An investment has the following cash flows:

|Time |Contributions |Returns |

|0 |100,000 |0 |

|1 |0 |10,000 |

|2 |0 |20,000 |

|3 |0 |30,000 |

|4 |0 |20,000 |

|5 |0 |10,000 |

Calculate the internal rate of return on this investment.

a. -6.6%

b. -3.4%

c. 0.0%

d. 3.4%

e. 6.6%

4. Lauren has 100,000 invested in a fund earning 5%. Each year the interest is paid to Lauren who is able to invest the interest at 8%.

Calculate the amount that Lauren will have at the end of 10 years.

a. 172,433

b. 178,228

c. 194,321

d. 200,623

e. 205,654

5. Julie has a sum of money, S, invested in a fund which earns 10%. Each year the fund pays the interest earned to Julie. Julie can only reinvest the interest at an annual effective interest rate of 6%. After 20 years, Julie has 100,000 total including the amount in the fund plus the reinvested interest.

Calculate S.

a. 21,374

b. 22,540

c. 34,121

d. 46,577

e. 66,189

6. Megan invests 500 at the end of each year. The investment earns 8% per year which is paid to Megan who reinvests the interest at 6%.

Calculate how much Megan will have after 5 years.

a. 2675

b. 2755

c. 2836

d. 2925

e. 3150

7. Thomas invests X into Fund 1 at the beginning of each year for 10 years. Fund 1 pays interest annually into Fund 2. Fund 1 earns 7% annually while Fund 2 earns 6% annually. After 10 years, Thomas has a total of 50,000.

Calculate X.

a. 3417

b. 3522

c. 3647

d. 3874

e. 3986

8. Chris is investing 1000 at the beginning of each year into Fund A. Fund A earns interest at a nominal interest rate of 12% compounded monthly. Fund A pays Chris interest monthly. Chris reinvests that interest in Fund B earning an annual effective rate of 8%.

Calculate the total amount in Fund A and Fund B after 10 years.

a. 15,419

b. 16,973

c. 18,774

d. 19,225

e. 21,604

9. John invests 100 at the end of year one, 200 at the end of year two, etc until he invests 1000 at the end of year ten. The investment goes into a bank account earning 4%. At the end of each year, the interest is paid into a second bank account earning 3%.

Calculate the total amount John will have after 10 years.

a. 6201

b. 6306

c. 6529

d. 6770

e. 6937

10. Kathy pays 1000 at the end of each year into Fund A which earns interest at an annual effective interest rate of i. At the end of each year, the interest earned is transferred to Fund B earning 10% interest. After 10 years. Kathy has 15,947.52.

Calculate i.

a. 0.08

b. 0.09

c. 0.10

d. 0.11

e. 0.12

11. Lisa invests 1200 at the beginning of each year for 8 years into an account earning 8%. The interest earned each year is transferred an account earning 6%. At the end of 8 years, the total amount is paid out.

Calculate the amount an investor would pay now for the final payout if the investor wanted a return of 10%.

a. 5,895

b. 6,338

c. 11,714

d. 12,636

e. 13,586

12. A fund has 10,000 at the beginning of the year and 12,000 at the end of the year. Net contributions of 1000 were made into the fund during year. Calculate the net yield earned by the fund assuming that the net contributions were contributed uniformly throughout the year.

a. 9.1%

b. 9.5%

c. 10.0%

d. 10.5%

e. 10.9%

13. A fund has 100,000 on January 1 and 125,000 on December 31. Interest earned by the fund during the year totaled 10,000. Calculate the net yield earned by the fund assuming that the net contributions occurred on April 1.

a. 0.090

b. 0.091

c. 0.092

d. 0.093

e. 0.096

14. A fund has 100,000 on January 1 and 125,000 on December 31. Interest earned by the fund during the year totaled 10,000. The net yield earned by the fund during the year was 9.6385%. Two contributions were made to the fund during the year and there were no withdrawals. The contributions were for equal amounts made two months apart.

Determine the date of the first contribution.

a. July 1

b. August 1

c. September 1

d. October 1

e. November 1

15. A fund has 100,000 at the start of the year. Six months later, the fund has a value of 75,000 at which time, Stuart adds an additional 75,000 to the fund. At the end of the year, the fund has a value of 200,000.

Calculate the time weighted rate of return.

a. 0.0%

b. 9.1%

c. 13.6%

d. 18.2%

e. 18.4%

16. A fund has 100,000 at the start of the year. Six months later, the fund has a value of 75,000 at which time, Stuart adds an additional 75,000 to the fund. At the end of the year, the fund has a value of 200,000.

Calculate the exact dollar weighted rate of return.

a. 0.0%

b. 9.1%

c. 13.6%

d. 18.2%

e. 18.4%

17. A fund has 10,000 at the start of the year. Six months later, the fund has a value of 15,000 at which time, Stuart removes 5,000 from the fund. At the end of the year, the fund has a value of 10,000.

Calculate the exact dollar weighted rate of return less the time weighted rate of return.

a. -14%

b. -7%

c. 0%

d. 7%

e. 14%

Use the following chart of interest rates to answer Questions 19 through 21.

| |i1 |i2 |i3 |i4 |Portfolio |Year |

|1997 |0.0650 |0.0625 |0.0600 |0.0575 |0.0550 |2001 |

|1998 |0.0600 |0.0575 |0.0550 |0.0525 |0.0500 |2002 |

|1999 |0.0500 |0.0475 |0.0460 |0.0450 |0.0450 |2003 |

|2000 |0.0450 |0.0440 |0.0430 |0.0420 |0.0410 |2004 |

|2001 |0.0400 |0.0390 |0.0380 |0.0370 | | |

|2002 |0.0300 |0.0300 |0.0325 | | | |

|2003 |0.0300 |0.0325 | | | | |

|2004 |0.0300 | | | | | |

18. Jordan invests 1000 in a fund on January 1, 1998. The fund uses the investment year method of determining interest rates.

Calculate the amount that Jordan will have at the end of 2004.

a. 1245

b. 1307

c. 1322

d. 1422

e. 1529

19. Jenna invests 1000 in a fund on January 1, 2002. The fund uses the portfolio method of determining interest rates.

Calculate the amount that Jenna will have at the end of 2004.

a. 1093

b. 1095

c. 1097

d. 1116

e. 1142

20. James invests 1000 into a fund at the beginning of each year from 2002 to 2004. The fund pays interest using the investment year interest rate.

Calculate the amount of money that James will have at the end of 2004.

a. 3189

b. 3290

c. 3322

d. 3387

e. 3435

21. Jacque owns an annuity worth 100,000. At the end of each year for the next 10 years, the annuity will pay 10,000 plus the interest earned during the year. The annuity pays 10% interest. Jacque reinvests the proceeds at 8%. Calculate the amount that Jacque will have at the end of 10 years.

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