Chapter 6 Discounted Cash Flow Valuation

Chapter 06 Quiz A Student Name _________________________ Student ID ____________

________ 1. You are able to pay mortgage payments of $675 a month for thirty years. The interest rate is 9.5 percent,
compounded monthly. What price house can you afford to buy if you have $5,000 cash available as a down
payment?
a. $72,712.50 b. $75,275.51 c. $80,275.51 d. $85,275.51

________ 2. You are going to receive $6,000 at the end of each quarter for the next five years. What is the net
present value of these payments at a discount rate of 7 percent, compounded quarterly?
a. $63,564.09 b. $100,517.29 c. $102,276.34 d. $103,011.96

________ 3. You want to retire on the day you have $1,000,000 in your savings account. You expect to earn 4 percent,
compounded monthly, on your money during your retirement. Your plan is to withdraw $4,500 a month as
retirement income from this account. How many years can you be retired until you run out of money?
a. 33.80 b. 69.56 c. 202.34 d. 405.65

________ 4. A preferred stock pays annual dividends of $1.75. How much are you willing to pay today to buy one share
of this stock if you want to earn a 12.5 percent rate of return?
a. $6.00 b. $14.00 c. $24.00 d. $72.00

________ 5. A project will produce cash flows of $6,000, $7,500, $9,000, and $11,000 a year for the next four years,
respectively. What is the value of these cash flows today at a discount rate of 8.5 percent?
a. $24,588.74 b. $26,884.36 c. $27,559.03 d. $37,257.92

________ 6. Today you are opening a savings account and depositing an initial $1,000 into it. You plan to deposit $4,000
into the account one year from today and deposit another $4,000 two years from today. How much will you
have in your account ten years from today if you earn an 8 percent rate of return?
a. $6,008.85 b. $12,220.96 c. $17,558.66 d. $19,430.32

________ 7. What is the effective annual rate of 10.75 percent compounded continuously?
a. 11.04 percent b. 11.19 percent c. 11.30 percent d. 11.35 percent

________ 8. What is the effective annual rate of 14.5 percent compounded semiannually?
a. 15.03 percent b. 15.31 percent c. 15.50 percent d. 15.82 percent

________ 9. You borrow $135,000 for twenty years at 9 percent. This is an amortized loan with monthly payments. How
much of the first payment goes to the principle balance of the loan? Assume that one month is equal to 1/12
of a year.
a. $84.38 b. $87.50 c. $193.09 d. $202.13

________ 10. You just purchased a 15-year annuity at a cost of $70,000. The annuity will pay you $1,050 at the end of each
month, starting with this month. What rate of return are you earning on this investment?
a. 15.42 percent b. 15.52 percent c. 16.45 percent d. 16.74 percent

6­1
 Chapter 6 Discounted Cash Flow Valuation
Chapter 06 Quiz A Answers

1. d
   .095 
3012

1  1 / 1   
   12   
APV $675   
.095
 
 12 
 
 $675  118 .92668
 $80,275.51

Enter 3012 9.5/12 -675

N I/Y PV PMT FV
Solve for 80,275.51

Price of house = $80,275.51 + $5,000 = $85,275.51

2. b

   .07   
54

1  1 / 1   
   4   
APV  $6,000   
.07
 
 4 
 
 $6,000  16.7528813
 $100,517.29

Enter 54 7/4 6,000

N I/Y PV PMT FV
Solve for -100,517.29

6­2
 Chapter 6 Discounted Cash Flow Valuation
3. a
  .04  
t

1  1 / 1   
  12  
$1,000,000  $4,500 
.04
12
  .04  
t

1  1 / 1   
 
 12  
222.222222 
.04
12
  .04  
t

.74074074  1  1 / 1   
  12  
t
 .04 
.25925926  1 / 1  
 12 
3.857142846  1.003333333t
ln 3.857142846  t ln1.003333333
1.349926714  .00332779t
t  405.65 months  33.80 years

Enter 4/12 -1,000,000 4,500

N I/Y PV PMT FV
Solve for 405.65
Number of years = 405.65 / 12 = 33.80 years

$1.75
4. b PV   $14.00
.125

5. b
 1   1   1 
NPV  $6,000  1
 $7,500  2 
 $9,000  3
 1  .085   (1  .085)   (1  .085) 
 1 
 $11,000  4 
 1  .085 
 $5,529.954  $6,370.915  $7,046.173  $7,937.317
 $26,884.36

Enter 1 8.5 6,000

N I/Y PV PMT FV
Solve for -5,529.954

Enter 2 8.5 7,500

N I/Y PV PMT FV
Solve for -6,370.915

Enter 3 8.5 9,000

N I/Y PV PMT FV
Solve for -7,046.173

Enter 4 8.5 11,000

N I/Y PV PMT FV
Solve for -7,937.317

6­3
 Chapter 6 Discounted Cash Flow Valuation
NPV = $5,529.954 + $6,370.915 + $7,046.173 + $7,937.317 = 26,884.36

6. c
    
FV  $1,000  (1  .08)10  $4,000  (1  .08)9  $4,000  (1  .08)8 
 $2,158.92  $7,996.02  $7,403.72
 $17,558.66

Enter 10 8 -1,000
N I/Y PV PMT FV
Solve for 2,158.92

Enter 9 8 -4,000
N I/Y PV PMT FV
Solve for 7,996.02

Enter 8 8 -4,000
N I/Y PV PMT FV
Solve for 7,403.72

FV = $2,158.92 + $7,996.02 + $7,403.72 = $17,558.66

7. d EAR = e.1075 − 1 = 2.71828.1075 − 1 = .11349 = 11.35 percent

Input for Texas Instruments BA II plus

.1075, 2nd, ex, -1, =; EAR = 11.35 percent

2
  .145 
8. a EAR  1     1 = .15026 = 15.03 percent
  2 

Enter 14.5 2
NOM EFF C/Y
Solve for 15.03

9. d
   .09 
2012

1  1 / 1   
   12   
$135,000 C   
.09
 
 12 
 
$135,000  111 .144954C
C  $1,214.63

Enter 2012 9/12 135,000

N I/Y PV PMT FV
Solve for -1,214.63

.09
Interest1  $135,000   $1,012.50
12
First month’s principle = $1,214.63 – $1,012.50 = $202.13

6­4
 Chapter 6 Discounted Cash Flow Valuation
   r 
1512

1  1 / 1   
  
 12   
10. c $70,000  $1,050    ; This cannot be solved directly, so it’s easiest to just use the
 r 
 12 
 
calculator method to get an answer. You can then use the calculator answer taken to several decimal places as the
rate in the formula just to verify that your answer is correct.

Enter 1512 /12 -70,000 1,050

N I/Y PV PMT FV
Solve for 16.45
With more decimals, the answer is 16.44722824 percent.

6­5
 Chapter 6 Discounted Cash Flow Valuation
Chapter 06 Quiz B Student Name _________________________ Student ID ____________

________ 1. You want to pay mortgage payments of $750 a month for twenty-five years. The interest rate is 6.5 percent,
compounded monthly. What price house can you afford to buy if you have $7,500 cash available as a down
payment?
a. $103,577.02 b. $104,178.69 c. $111,077.02 d. $118,577.02

________ 2. You are going to receive $7,000 at the end of each quarter for the next eight years. What is the net
present value of these payments at a discount rate of 9 percent, compounded quarterly?
a. $158,463.72 b. $162,029.15 c. $477,809.07 d. $481,392.64

________ 3. You want to retire on the day you have $800,000 in your savings account. You expect to earn 5 percent,
compounded monthly, on your money during your retirement. Your plan is to withdraw $5,000 a month as
retirement income from this account. How many years can you be retired until you run out of money?
a. 21.85 b. 22.02 c. 262.23 d. 264.22

________ 4. A preferred stock pays annual dividends of $3.65. How much are you willing to pay today to buy one share
of this stock if you want to earn an 11 percent rate of return?
a. $17.73 b. $23.64 c. $33.18 d. $59.09

________ 5. A project will produce cash flows of $4,000, $4,500, $6,500, and $8,000 a year for the next four years,
respectively. What is the value of these cash flows today at a discount rate of 7.5 percent?
a. $18,837.57 b. $19,286.85 c. $23,915.49 d. $25,156.99

________ 6. Today you are opening a savings account and depositing an initial $2,000 into it. You plan to deposit $3,000
into the account three years from today and deposit another $5,000 four years from today. How much will
you have in your account five years from today if you earn a 10 percent rate of return?
a. $11,857.02 b. $12,351.02 c. $14,526.10 d. $16,105.10

________ 7. What is the effective annual rate of 12.5 percent compounded monthly?
a. 12.50 percent b. 13.10 percent c. 13.24 percent d. 13.31 percent

________ 8. What is the effective annual rate of 14.7 percent compounded daily?
a. 15.24 percent b. 15.53 percent c. 15.73 percent d. 15.83 percent

________ 9. You borrow $155,000 for thirty-five years at 7 percent. This is an amortized loan with monthly payments.
How much of the first payment goes to the principle balance of the loan? Assume that one month is equal to
1/12 of a year.
a. $80.31 b. $86.06 c. $984.48 d. $990.23

________ 10. You just purchased a 25-year annuity at a cost of $80,000. The annuity will pay you $1,200 at the end of each
month, starting with this month. What rate of return are you earning on this investment?
a. 17.78 percent b. 17.82 percent c. 18.06 percent d. 18.10 percent

6­6
 Chapter 6 Discounted Cash Flow Valuation
Chapter 06 Quiz B Answers

1. d
   .065 
2512

1  1 / 1   
   12   
APV $750   
.065
 
 12 
 
 $750  148.1026946
 $111,077.02

Enter 2512 6.5/12 -750

N I/Y PV PMT FV
Solve for 111,077.02

Home price = $111,077.02 + $7,500 = $118,577.02

2. a
   .09   
84

1  1 / 1   
   4   
APV  $7,000   
 .09 
 4 
 
 $7,000  22.63767419
 $158,463.72

Enter 84 9/4 7,000

N I/Y PV PMT FV
Solve for -158,463.72

3. b
   .05   
t

1  1 / 1   
   12   
$800,000  $5,000   
 .05 
 12 
 
   .05   
t

1  1 / 1   
   12   
160   
 .05 
 12 
 
  .05  
t

.666666667  1  1 / 1   
  12  
t
 .05 
.333333333  1 / 1  
 12 
3  .995850622t
ln 3  t ln1.004166667
1.098612289  .00415801t
t  264.22 months

6­7
 Chapter 6 Discounted Cash Flow Valuation
Enter 5/12 -800,000 5,000
N I/Y PV PMT FV
Solve for 264.22

Number of years = 264.22 / 12 = 22.02 years

$3.65
4. c PV   $33.18
.11

5. a

 1   1   1 
NPV  $4,000  1
 $4,500  2 
 $6,500  3
 1  .075   (1  .075)   (1  .075) 
 1 
 $8,000  4 
 1  .075 
 $3,720.93  $3,894.00  $5,232.24  $5,990.40
 $18,837.57

Enter 1 7.5 4,000

N I/Y PV PMT FV
Solve for -3,720.93

Enter 2 7.5 4,500

N I/Y PV PMT FV
Solve for -3,894.00

Enter 3 7.5 6,500

N I/Y PV PMT FV
Solve for -5,232.24
Enter 4 7.5 8,000
N I/Y PV PMT FV
Solve for -5,990.40

NPV = $3,720.93 + $3,894.00 + $5,232.24 + $5,990.40 = 18,837.57

6. b
    
FV  $2,000  (1  .10) 5  $3,000  (1  .10) 2  $5,000  (1  .10)1 
 $3,221.02  $3,630.00  $5,500.00
 $12,351.02

Enter 5 10 -2,000
N I/Y PV PMT FV
Solve for 3,221.02

Enter 2 10 -3,000
N I/Y PV PMT FV
Solve for 3,630.00

Enter 1 10 -5,000
N I/Y PV PMT FV
Solve for 5,500.00

FV = $3,221.02 + $3,630.00 + $5,500.00 = $12,351.02

6­8
 Chapter 6 Discounted Cash Flow Valuation
12
  .125 
7. c EAR  1     1  .1324  13.24 percent
  12 

Enter 12.5 12
NOM EFF C/Y
Solve for 13.24

8. d
365
  .147  
EAR  1     1  .1583  15.83 percent
  365  

Enter 14.7 365

NOM EFF C/Y
Solve for 15.83

9. b
   .07 
3512

1  1 / 1   
  
 12   
$155,000 C   
 . 07 
 12 
 
$155,000  C  156.5297092
C  $990.23

Enter 3512 7/12 155,000

N I/Y PV PMT FV
Solve for -990.23

.07
Interest1  $155,000   $904.17
12

First month’s principle = $990.23 – $904.17 = $86.06

10. a
   r 
2512

1   
1 / 1   
   12   
$80,000  $1,200    ; This cannot be solved directly, so it’s easiest to just use the
r
 
 12 
 
calculator method to get an answer. You can then use the calculator answer taken to several decimal places as the
rate in the formula just to verify that your answer is correct.

Enter 2512 /12 -80,000 1,200

N I/Y PV PMT FV
Solve for 17.78
With more decimals, the answer is 17.7818277 percent.

6­9
 Chapter 6 Discounted Cash Flow Valuation
Chapter 06 Quiz C Student Name _________________________ Student ID ____________

________ 1. You want to retire on the day you have $900,000 in your savings account. You expect to earn 6 percent,
compounded monthly, on your money during your retirement. Your plan is to withdraw $5,750 a month as
retirement income from this account. How many years can you be retired until you run out of money?
a. 24.75 b. 24.91 c. 25.20 d. 25.50

________ 2. Today you are opening a savings account and depositing an initial $5,000 into it. You plan to deposit $6,500
into the account two years from today and deposit another $8,000 four years from today. How much will you
have in your account five years from today if you earn an 11 percent rate of return?
a. $25,314.60 b. $26,194.89 c. $32,858.63 d. $29,602.37

________ 3. You want to pay mortgage payments of $700 a month for thirty-five years. The interest rate is 3.8 percent,
compounded monthly. What price house can you afford to buy if you have $10,000 cash available as a down
payment?
a. $172,466.25 b. $182,980.73 c. $186,466.25 d. $186,980.73

________ 4. A preferred stock pays annual dividends of $1.20. How much are you willing to pay today to buy one share
of this stock if you want to earn a 12 percent rate of return?
a. $10.00 b. $20.00 c. $40.00 d. $120.00

________ 5. A project will produce cash flows of $1,000, $1,500, $3,000, and $5,000 a year for the next four years,
respectively. What is the value of these cash flows today at a discount rate of 9.5 percent?
a. $7,927.09 b. $8,013.85 c. $12,013.85 d. $15,095.44

________ 6. You are going to receive $9,000 at the end of each quarter for the next six years. What is the net
present value of these payments at a discount rate of 11 percent, compounded quarterly?
a. $49,161.30 b. $98,776.25 c. $156,607.17 d. $160,913.87

________ 7. What is the effective annual rate of 10.20 percent compounded weekly?
a. 10.20 percent b. 10.60 percent c. 10.69 percent d. 10.73 percent

________ 8. What is the effective annual rate of 15.25 percent compounded continuously?
a. 16.36 percent b. 16.45 percent c. 16.47 percent d. 16.50 percent

________ 9. You borrow $300,000 for forty years at 8 percent. This is an amortized loan. How much of the first payment
goes to the principle balance of the loan? Assume that one month is equal to 1/12th of a year.
a. $72.12 b. $85.94 c. $2,072.12 d. $2,085.94

________ 10. You just purchased a 20-year annuity at a cost of $75,000. The annuity will pay you $1,100 at the end of each
month, starting with this month. What rate of return are you earning on this investment?
a. 14.67 percent b. 17.00 percent c. 17.28 percent d. 17.60 percent

6­10
 Chapter 6 Discounted Cash Flow Valuation
Chapter 06 Quiz C Answers

1. d
   .06  t  
1  1 / 1   
   12   
$900,000  $5,750   
 .06 
 12 
 
   .06    t

1  1 / 1   
   12   
156.5217391   
 .06 
 12 
 
  .06  t 
.782608696  1  1 / 1  
  12  
t
 .06 
.217391305  1 / 1  
 12 
4.599999997  1.005 t
ln 4.599999997  t ln1.005
1.526056303  .004987542t
t  305.97

Enter 6/12 -900,000 5,750

N I/Y PV PMT FV
Solve for 305.97

Number of years = 25.50

2. b
    
FV  $5,000  (1  .11) 5  $6,500  (1  .11) 3  $8,000  (1  .11)1 
 $8,425.29  $8,889.60  $8,880.00
 $26,194.89

Enter 5 11 -5,000
N I/Y PV PMT FV
Solve for 8,425.29

Enter 3 11 -6,500
N I/Y PV PMT FV
Solve for 8,889.60

Enter 1 11 -8,000
N I/Y PV PMT FV
Solve for 8,880.00

FV = $8,425.29 + $8,889.60 + $8,880.00 = $26,194.89

6­11
 Chapter 6 Discounted Cash Flow Valuation
3. a
   .038 
3512

1  1 / 1   
  
 12   
APV $700   
 .038 
 12 
 
 $700  232.0946471
 $162,466.25

Enter 3512 3.8/12 -700

N I/Y PV PMT FV
Solve for 162,466.25

Home price = $162,466.25 + $10,000 = $172,466.25

$1.20
4. a PV   $10.00
.12

5. a

 1   1   1   1 
NPV  $1,000  1
 $1,500  2 
 $3,000  3 
 $5,000  4 
 1  .095   (1  .095)   (1  .095)   1  .095 
 $913.24  $1,251.02  $2,284.96  $3,477.87
 $7,927.09

Enter 1 9.5 1,000

N I/Y PV PMT FV
Solve for -913.24

Enter 2 9.5 1,500

N I/Y PV PMT FV
Solve for -1,251.02

Enter 3 9.5 3,000

N I/Y PV PMT FV
Solve for -2,284.96

Enter 4 9.5 5,000

N I/Y PV PMT FV
Solve for -3,477.87

NPV = $913.24 + $1,251.02 + $2,284.96 + $3,477.87 = $7,927.09

6. c
   .11   
64

1  1 / 1   
  
 4   
APV  $9,000   
 .11 
 4 
 
 $9,000  17.4007967
 $156,607.17

6­12
 Chapter 6 Discounted Cash Flow Valuation
Enter 64 11/4 9,000
N I/Y PV PMT FV
Solve for -156,607.17

52
  .102 
7. d EAR  1     1 ; EAR = 10.73 percent
  52 

Enter 10.20 52
NOM EFF C/Y
Solve for 10.73

8. c EAR = e.1525 − 1 = 2.71828.1525 − 1 =.16474 = 16.47 percent

Input for Texas Instruments BA II plus

.1525, 2nd, ex, −1 = 16.47 percent

9. b
   .08 
4012

1  1 / 1   
   12   
$300,000 C   
 .08 
 12 
 
$300,000  C  143.8203923
C  $2,085.94

Enter 4012 8/12 300,000

N I/Y PV PMT FV
Solve for -2,085.94

.08
Interest1  $300,000   $2,000
12
First month’s principle = $2,085.94 – $2,000.00 = $85.94

10. b
   r 
2012

1  1 / 1   
   12   
$75,000  $1,100    ; This cannot be solved directly, so it’s easiest to just use the
 r 
 12 
 
calculator method to get an answer. You can then use the calculator answer taken to several decimal places as the
rate in the formula just to verify that your answer is correct.

Enter 2012 /12 -75,000 1,100

N I/Y PV PMT FV
Solve for 17.00
With more decimals, the answer is 16.99823943 percent.

6­13