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Flashcards in Module 18 Quiz Deck (25)
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1
Q

An investment of $1,000 per month with an annual return of 2% would accumulate to ___________ after 20 years.

A) $249,273.70
B) $29,479.68
C) $24,927.37
D) $294,796.83

A

D) $294,796.83

2
Q

Interest paid (earned) on only the original principal borrowed (lent) is often referred to as

A) compound interest.
B) simple interest.
C) present value.
D) future value.

A

B) simple interest.

3
Q

To increase a given future value, the discount rate should be adjusted

A) neither upward nor downward.
B) upward.
C) downward.
D) first upward and then downward

A

B) upward.

Note: As interest (discount) rates rise, the FV increases. For example, the FV of $100 received in 1 year given a 10% return is worth $110 in one year. If rates increase to 12%, the FV rises to $112.

4
Q

With compounding at 8% for 20 years, what is the approximate future value of a $20,000 initial investment?

A) $915,240
B) $99,061
C) $93,219
D) $52,000

A

C) $93,219

5
Q

Your office building will need a new roof in seven years. How much must be set aside annually to accumulate the $50,000 needed for the roof if a 3% interest rate is available for the investment?

A) $6,525.32
B) $6,428.00
C) $642.80
D)$783.04

A

A) $6,525.32

Note: 7n, 3i, FV 50000, PMT

6
Q

Kramer put $12,000 into an investment on August 10th and took out $3,000 on September 30th. How should the cash flows be recorded (i.e., money direction)?

A) +$12,000 and -$9,000
B) +$12,000 and -$3,000
C) -$12,000 and -$3,000
D) -$12,000 and +$3,000

A

D) -$12,000 and +$3,000

Note: On a cash flow (CF) diagram, the investor’s perspective is $12,000 when the money is invested because the cash is leaving the investor’s hand. The money taken out ($3,000) is positive because it comes back to the investor

7
Q

A client is discussing with an appraiser the annual debt service she has on a commercial property owned by her investment company. What does the client mean by the term “annual debt service”?

A) a loan that is repaid in equal annual installments
B) the annual amount of interest paid on debt
C) the annual amount of principal and interest paid on debt
D) the annual amount of principal paid on debt

A

C) the annual amount of principal and interest paid on debt

Note: Generally the term is used in reference to mortgage payments accumulated over a one year period

8
Q

Sharon is debating whether she should take out a 15-year mortgage at 3.75% or a 30-year mortgage at 5.25% on a $175,000 loan. What would be her savings per month by going with the lower payment?

A) $966.36 savings per month with the 30-year mortgage
B) $306.28 savings per month with the 30-year mortgage
C) $1,272.64 savings per month with the 15-year mortgage
D)$596.34 savings per month with the 15-year mortgage

A

B) $306.28 savings per month with the 30-year mortgage

Note: The 15-year loan has a payment of $1,272.64 and the 30-year loan has a payment of $966.36. The difference is $306.28 lower for the 30-year loan. See

9
Q

You have just agreed to a new loan and have purchased a $3,000 computer today. The loan has a 19.6% annual interest rate, compounded monthly. The minimum monthly payment is $58 and you do not expect to
ever pay more than the minimum payment. Assuming no additional charges or costs will occur with this loan, approximately what will you owe on the loan at the end of 3 years (36 months) when you expect to need
another new computer?

A) $2,676
B) $2,304
C) $2,564
D) $2,088

A

C) $2,564

This is really a two-step solution. 1) Find the FV of the $58 annuity for 36 months is $2,812 and 2) Find the FV of the $3,000 PV in 36 months at 1.6333% per month is $5,376. Subtract 1) from 2) is the $2,564 that is still owed!

10
Q

Peterson began saving $10 per week that she deposited every month in her money market account, earning 4.25% and compounding monthly. If she continues this practice, how much will she have after 10 years?

A) $6,316.04
B) $6,289.15
C) $5,968.29
D) $6,465.65

A

D) $6,465.65

11
Q

Jeff and Tina loaned $4,000 to their daughter so she could buy a used car to go to and from the college campus. The parents arranged for their daughter to repay the $4,000 after 4 years plus simple annual interest of 6% to be paid each year. How much will they receive in total when the loan
is repaid?

A

$4,960

Note:
$4,000 x .06 x 4 = $960 interest + $4,000

12
Q

If you placed $1,000 into an investment earning
6% annual interest for 1 year, it would earn $60 of simple interest. Let’s contrast that with the effects of compounding. How much would it be compounding monthly?

A

$1,061.68

1 [g][n]; 6[g][n]; 1,000[CHS][PV]; 0 [PMT]; [FV]

13
Q

If you placed $1,000 into an investment earning
6% annual interest for 1 year, it would earn $60 of simple interest. Let’s contrast that with the effects of compounding How much would it be compounding quarterly?

A

$1,061.36

1*4[n]; 6/4[i]; 1,000[CHS][PV]; 0 [PMT]; [FV]

14
Q

What will an investment of $12,000 grow to if it earns 6% annually over 15 years?

A

$28,758.70

Note: solve for FV

15
Q

What will $5,000 grow to if it earns 5.25% annually over 7 years?

A

$7,153.60

Note: Solve for FV

16
Q

What will an investment of $5,000 per year grow to in 6 years at 6% annual interest?

A

$34,876.59

Note: Solve for FV

17
Q

If Sullivan places $3,000 each year in her Roth IRA,

what will it grow to in 15 years at 8% annual interest?

A

$81,456.34

Solve for FV

18
Q

What amount must be deposited annually in an investment earning 6% so that you will have $25,000 in 10 years?

A

$1,896.70

Solve for PMT

19
Q

Acme Hardware plans to resurface the parking lot in
7 years. What amount must be set aside annually to accumulate the $60,000 cost of resurfacing if 5% annual interest is used?

A

$7,369.19

Solve for PMT

20
Q

What should an investor pay for the right to receive $10,000 in 11 years at 6%?

A

$5,267.88

Solve for PV

21
Q

The reversion value of a commercial property three

years from now is estimated to be $900,000. What is the present value of the property if the discount rate is 9 percent?

A

$694,965.13

Solve for PV

22
Q

What might an investor pay to receive an income stream of $120,000 per year for 18 years if the investor wanted a 6% yield?

A

$1,299,312.42

Solve for PV

23
Q

Willis is analyzing an investment that will pay $20,000

per year over a period of 8 years. If Willis wants to yield 8%, what might he pay for this investment?

A

$114,932.78

Solve for PV

24
Q

Smith loaned $65,000 to his business partner for a 5-year term at 6% annual interest and with annual payments. What is the payment amount?

A

$15,430.77

Solve for PMT

25
Q

Matthews negotiated a refi nance with her bank for a

$285,000 mortgage based on a 5.75% rate and a 25-year term. What is the monthly payment for this mortgage?

A

$1,792.95

Solve for PMT