1. Sally Guthrie is looking for an investment vehicle that will double her money in five years. If she can't find anything that pays more than 11%, approximately how long will it take to double her investment?
ANSWER: d
SOLUTION:

2. Sally Guthrie found an investment vehicle that will double her money in five years. At a rate of 15%, approximately how long will it take to triple her investment?
ANSWER: c
SOLUTION:

3. The Mutual Assurance and Life Company is offering an insurance policy under
either of the two following terms:
Alternative a) make a series of twelve $1,200 payments at the beginning of each
of the next 12 years, with the first payment being made today, or
Alternative b) make a single lumpsum payment today of $10,000 and receive coverage
for the next 12 years.
If you had investment opportunities offering an 8 percent annual return, which
alternative would you prefer?
ANSWER: a
SOLUTION:

ANSWER: d
SOLUTION:

ANSWER: b
SOLUTION:

ANSWER: c
SOLUTION:

ANSWER: c
SOLUTION:

ANSWER: a
SOLUTION:

9. Two investment opportunities are open to you: Investment 1 and Investment 2. Each has an initial cost of $10,000. Assuming that you desire a 10 percent return on your initial investment, compute the net present value of the two alternatives and determine which is the preferred alternative:
Investment
1

Investment
2


Cash Flows  Year  Cash Flows  Year 
$5,000  1  $8,000  1 
$6,000  2  $7,000  2 
$7,000  3  $6,000  3 
$8,000  4  $5,000  4 
ANSWER: b
SOLUTION:

ANSWER: c
SOLUTION:

ANSWER: a
SOLUTION:

ANSWER: b
SOLUTION:

ANSWER: c
SOLUTION:

ANSWER: c
SOLUTION:

ANSWER: b
SOLUTION:

ANSWER: a
SOLUTION:

17. An investment offers the following yearend cash flows:
End of Year  Cash Flow 
1  $20,000 
2  $30,000 
3  $15.000 
Using a 15 percent interest rate, convert this series of irregular cash flows to an equivalent (in present value terms) 3year annuity.
ANSWER: c
SOLUTION:

ANSWER: a
SOLUTION:

ANSWER: b
SOLUTION:

ANSWER: d
SOLUTION:

ANSWER: a
SOLUTION:

ANSWER: b
SOLUTION:

ANSWER: a
SOLUTION:

ANSWER: b
SOLUTION:

ANSWER: d
SOLUTION:

ANSWER: c
SOLUTION:

ANSWER: b
SOLUTION:

ANSWER: b
SOLUTION:

ANSWER: c
SOLUTION:

ANSWER: a
SOLUTION:

ANSWER: d
SOLUTION:

ANSWER: b
SOLUTION:

Year 1  $5,000 
Year 2  $8,000 
Year 3  $12,000 
Year 410  $15,000 
ANSWER: d
SOLUTION:

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