MBA 621 Module 1 Exam Questions with Correct Answers Latest Update

MBA 621 Module 1 Exam Questions with Correct Answers Latest Update At an annual interest rate of 7%, the present value of $5000 received in five years is closest to? Options: - $3565 - $6750 - $7015 - $7035 - Answers Answer: $7015 If the current market rate of interest is 10%, then the future value of $500 today in 3 years is closest to: Options: - $666 - $500 - $565 - $600 - Answers Answer: $666 You are to receive $100 in one year from now, $200 in two years, and $300 in three years. If the current market interest rate is 9%, the present value of these cash flows is Options: - $386 - $433 - $492 - $537 - Answers Answer: $492 Explanation: 100 / (1.09)^1 =91.743 200 / (1.09)^2 =168.336 300 / (1.09)^3 =231.655 Sum = 491.74, which is approximately $492 There is a cash inflow of $500 today and a cash outflow of $500 two years from now. If the current market rate of interest is 8%, then the value of the cash flows as of year 1 is closest to: Options: - $0 - $1003 - $540 - $77 - Answers Answer: $77 Explanation: = 500(1.08) - 500/1.08 = 77.037 You are to invest $1000 now, $2000 in one year, $3000 in two years and $4000 in three years in a savings account with an interest rate of 8%. How much will you have in four years? Options: - $10,832 - $10,339 - $11,699 - $12,635 - Answers Answer: $11,699 Explanation: FV = 1000 x 1.08^4 + 2000 x 1.08^3 + 3000 x 1.08^2 + 4000 x 1.08 = 11699 The British government has a consul bond outstanding that pays $100 in interest each year. Assuming that the current interest rate in Great Britain is 5% and that you will receive your first interest payment one year from now, then the value of the console bond is closest to: Options: - $1000 - $1100 - $2100 - $2000 - Answers Answer: 2000 Explanation: The consul bond pays a fixed amount of regular interest payment for ever but never pays the principal. So it fits exactly the definition of a perpetuity, of which the present is C/r = 100/0.05 =2,000 If the current rate of interest is 8%, then the present value of an investment that pays $1000 per year and lasts 20 years is closest to: Options: - $18,519 - $20,000 - $45,716 - $9,818 - Answers Answer: $9,818 Explanation: PV = C/r x (1 - 1/(1 + r)^N) = 1000/.08 (1 - 1/(1 + 0.08)^20) = 9818 If the current rate of interest is 8%, then the future value 20 years from now of an investment that pays $1000 per year and lasts 20 years is closest to: Options: - $45,762 - $36,725 - $9,818 - $93,219 - Answers Answer: $45,762 Explanation: FV = (C/r)((1 + r)^N - 1) = (1000/0.08)*((1 + 0.08)^20 - 1) = 45762 Consider a growing perpetuity that will pay $100 in one year. Each year after that, you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment. This pattern of payments will continue forever. If the interest rate is 11%, then the value of this perpetuity is closest to: Options - $1,667 - $588 - $2000 - $909 - Answers Answer: $2000 Explanation: growing Perpetuity = C/(r - g) = 100/(.11 - .06) = $2000 You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to: Options: - $71,429 - $500,000 - $166,667 - This problem cannot be solved - Answers Answer: $71,429 Explanation: PVP = C/(r - g) = 10,000/(.06 - (-.08)) = 10,000/.14 = $71,429 You are saving for retirement. To live comfortably, you decide that you will need $2.5 million dollars by the time you are 65. If today is your 30th birthday, and you decide, starting today, and on every birthday up to and including your 65th birthday, that you will deposit the same amount into your savings account. Assuming the interest rate is 5%, the amount that you must set aside each year on your birthday is closest to: Options: - $71,400 - $27,980 - $26,100 - $25,300 - Answers Answer: $26,100 Explanation: There are 36 deposits in total. PV (at age 29) = 2,500,000/(1.05)^36 = 431,643.54