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Finance
Mark each statement true (T) or false (F), and fill in the blanks in Part (e). a. T F The nominal interest rate will always be less than the effective interest rate when r = 10% and M = ∞. b. T
A mutual fund investment is expected to earn 11% per year for the next 25 years. If inflation will average 3% per year during this 25-year period of time, what is the compounded value (in today's
Javier just bought a condominium in College-town, USA. His $100,000 mortgage is 6% compounded monthly, and Javier will make monthly payments on his loan for 30 years. In addition, property taxes and
Analyze the truth of this statement, assuming you are 20 years old: "For every five years that you wait to start accumulating money for your retirement, it takes twice as much savings per year to
A mortgage company advertises that their 6% APR is an effective annual rate of 6.58% with monthly payments and compounding. Let's assume this is made possible by paying points on a mortgage (one
Create a spreadsheet that duplicates Table 4-1. Make it flexible enough that you can investigate the impact of different interest rates and principal loan amounts without changing the structure of
A $15,000 investment is to be made with anticipated annual returns as shown in the spreadsheet in Figure P4-130. If the investor's time value of money is 10% per year, what should be entered in cells
Refer to Example 4-23. Suppose the cash-flow sequence continues for 10 years (instead of four). Determine the new values of P, A, and F.
Higher interest rates won't cost you as much to drive a car as do higher gasoline prices. This is because automobile loans have payment schedules that are only modestly impacted by Federal Reserve
After Enrico's car is paid off, he plans to continue setting aside the amount of his car payment to accumulate funds for the car's replacement. If he invests this amount at a rate of 3% compounded
Enrico has planned to have $40,000 at the end of 10 years to place a down payment on a condo. Property taxes and insurance can be as much as 30% of the monthly principal and interest payment (i.e.,
If Enrico is more daring with his retirement investment savings and feels he can average 10% per year, how much will he have accumulated for retirement at the end of the 10-year period?
If you borrow $5,000 at 8% simple interest per year for ten years, how much will you have to repay at the end of ten years? (a) $3,000 (b) $4,511 (c) $6,000 (d) $8,000 (e) $9,000
Your monthly mortgage payment (principal plus interest) is $1,200. If you have a 15-year loan with a fixed interest rate of 2% per month, how much did you borrow from the bank to purchase your house?
Consider the following sequence of year-end cash flows:What is the uniform annual equivalent if the interest rate is 12% per year?
A cash flow at time zero (now) of $9,982 is equivalent to another cash flow that is an EOY annuity of $2,500 over five years. Each of these two cash-flow series is equivalent to a third series, which
Sixty monthly deposits are made into an account paying 6% nominal interest compounded monthly. If the objective of these deposits is to accumulate $100,000 by the end of the fifth year, what is the
What is the principal remaining after 20 monthly payments have been made on a $20,000 five-year loan? The annual interest rate is 12% nominal compounded monthly. (a) $10,224 (b) $13,333 (c)
If you borrow $5,000 to buy a car at 6% compounded monthly, to be repaid over the next five years, what is your monthly payment? (a) $81.7 (b) $96.5 (c) $112 (d) $89 (e) $104
If you invest $7,000 at 12% compounded continuously, how much would it be worth in three years? (a) $9,449 (b) $4,883 (c) $10,033 (d) $9,834 (e) $2,520
Mr. Smith has saved $1,200 each year for 20 years. A year after the saving period ended, Mr. Smith withdrew $7,500 each year for a period of five years. In the sixth and seventh years, he only
Use the rule of 72 to determine how long it takes to accumulate $10,000 in a savings account when P = $5,000 and i = 10% per year.Rule of 72: The time (years) required to double the value of a
Suppose you are considering borrowing $140,000 to finance your house. The annual rate of interest is 15% and payments are made monthly. If the mortgage is on a 30-year schedule, what are the monthly
An enterprising student invests $1,000 at an annual interest rate that will grow the original investment to $2,000 in four years. In four more years, the amount will grow to $4,000, and this pattern
You are 20 years old and planning for retirement, when you will need $15,000 per year after retirement up to the age of 80. You plan to make annual deposits into your account till you turn 60. If the
A good stock-based mutual fund should earn at least 10% per year over a long period of time. Consider the case of Barney and Lynn, who were overheard gloating (for all to hear) about how well they
At a certain state-supported university, annual tuition and fees have risen dramatically in recent years as shown in the table below.a. If all tuition and fees are paid at the beginning of each
Liam O'Kelly is 20 years old and is thinking about buying a term life insurance policy with his wife as the beneficiary. The quoted annual premium for Liam is $8.48 per thousand dollars of insurance
Luis wants to have $2,000,000 in net worth when he retires. To achieve this goal, he plans to invest $10,000 each year (starting one year from now) into an account that earns 10% interest compounded
Twelve payments of $10,000 each are to be repaid monthly at the end of each month. The monthly interest rate is 2%. a. What is the present equivalent (i.e., P0) of these payments? b. Repeat Part (a)
You are saving up for your ten-year-old daughter's wedding (when she turns 21) and you want to invest $10,000 per year for five years from now, at the rate of interest of 15% per year. How much will
Automobiles of the future will most likely be manufactured largely with carbon fibers made from recycled plastics, wood pulp, and cellulose. Replacing half the ferrous metals in current automobiles
It is estimated that a certain piece of equipment can save $22,000 per year in labor and materials costs. The equipment has an expected life of five years and no market value. If the company must
Spivey just won the Powerball lottery! The $20,000,000 jackpot will be paid in 20 annual installments of $1,000,000 each, with the first payment to be paid immediately. Spivey's opportunity cost of
John Smith took out a student loan to complete his four-year engineering degree. He borrowed $5000, four years ago when the interest rate was 5% per year. A further $6000 was borrowed 3 years ago at
The U.S. stock market has returned an average of about 9% per year since 1900. This return works out to a real return (i.e., adjusted for inflation) of approximately 6% per year. a. If you invest
A series of 10 annual payments of $8,000 is equivalent to four equal payments at the end of years 6, 10, 12, and 15 when the interest rate is 10% compounded annually. What is the amount of these four
Qwest Airlines has implemented a program to recycle all plastic drink cups used on their aircraft. Their goal is to generate $5 million by the end of the recycle program's five-year life. Each
A large automobile manufacturer has developed a continuous variable transmission (CVT) that provides smooth shifting and enhances fuel efficiency by 2 mpg of gasoline. The extra cost of a CVT is $800
What present amount, at 12% interest compounded annually, is equivalent to this series of payments: Year 1-$10,000, Year 2-$9,000, Year 3- $8,000, Year 4-$7,000, Year 5-$6,000? Solve using the
$15,000 was invested, from which can be withdrawn a geometric gradient series of annual payments decreasing at the rate of 10% per year. The first payment received was $3,000 and it occurred after
The Golden Gate Bridge in San Francisco was financed with construction bonds sold for $35 million in 1931. These were 40-year bonds, and the $35 million principal plus almost $39 million in interest
What single amount at the end of the fifth year is equivalent to a uniform annual series of $10,000 per year for 12 years? The interest rate is 7% compounded annually.
Consider the accompanying cash-flow diagram.a. If P = $1,000, A = $200, and i % = 12% per year, then N = ?b. If P = $1,000, A = $200, and N = 10 years, then i = ?c. If A = $200, i % = 12% per year,
A father, whose dream is to see his son grow up to be an engineer, plans to invest a certain sum towards his son's education upon his birth. He will need to withdraw $12,000 each year from the 21st
Suppose that your rich uncle has $1,000,000 that he wishes to distribute to his heirs at the rate of $100,000 per year. If the $1,000,000 is deposited in a bank account that earns 6% interest per
A cash flow series increases geometrically at the rate of 6% per year. The initial payment in the first year is $5000 with increasing annual payment ending at the end of 20 years. The interest rate
An annually increasing uniform gradient series begins at the end of the 1st year with a payment of $1500 which increases each year by G and ends after the 20th year. What is the value of gradient G
Sam and Smith want to buy a car that costs $100,000. The bank will lend them the money at 10% APR for 30 years, with monthly payments to begin in one month. How much will their monthly payments be?
Kris borrows money in her senior year to buy a new car. The car dealership allows her to defer payments for 12 months, and Kris makes 36 end-of-month payments thereafter. If the original note (loan)
A saving system yields $5,000 at the end of the first six months, and a further $1,000 increase every six months for a total of 5 years. Find the equivalent amount A, at the end of each six month
You are currently investing your money in a bank account which has a nominal annual rate of 8% compounded annually. If you invest $2,000 today, how many years will it take for your account to grow to
What lump sum of money must be deposited into a bank account at the present time so that $500 per month can be withdrawn for five years, with the first withdrawal scheduled for six years from today?
You can buy a machine for $100,000 that will produce a net income, after operating expenses, of $10,000 per year. If you plan to keep the machine for four years, what must the market (resale) value
Major overhaul expenses of $5,000 each are anticipated for a large piece of earthmoving equipment. The expenses will occur at EOY four and will continue every three years thereafter up to and
Suppose that, in Plan 1 of Table 4-1, $8,500 of the original unpaid balance is to be repaid at the end of months two and four only. How much total interest would have been paid by the end of month
Maintenance costs for a small bridge with an expected 50-year life are estimated to be $1,000 each year for the first 5 years, followed by a $10,000 expenditure in the year 15 and a $10,000
It is estimated that you will pay about $80,000 into the social security system (FICA) over your 40-year work span. For simplicity, assume this is an annuity of $2,000 per year, starting with your
A father wants to set up a bank account that will pay his daughter $15,000 at the end-of-quarter (EOQ) 4 and $25,000 at EOQ 8. He will fund this account by making quarterly payments of $X from the
The Turners have 10 years to save a lump-sum amount for their child's college education. Today a four-year college education costs $75,000, and this is expected to increase by 10% per year into the
Baby boomers can save up to $22,000 per year in a 401 (k) account. If Eileen's starting balance at age 50 is $200,000 and she saves the full amount available to her, how much money will she have
An auto dealership is running a promotional deal whereby they will replace your tires free of charge for the life of the vehicle when you purchase your car from them. You expect the original tires to
Transform the cash flows on the left-hand side of the accompanying diagram (see Figure P4-66) to their equivalent amount, F, shown on the right-hand side. The interest rate is 8% per year.
In recent years, the United States has gone from being a "positive savings" nation to a "negative savings" nation (i.e., we spend more money than we earn). Suppose a typical American household spends
Determine the value of W on the right-hand side of the accompanying diagram (see Figure P4-68) that makes the two cash-flow diagrams equivalent when i = 12% per year.
A friend of yours just bought a new sports car with a $5,000 down payment, and her $30,000 car loan is financed at an interest rate of 0.75% per month for 48 months. After 2 years, the "Blue Book"
Refer to Plan 2 in Table 4-1. This is the customary way to pay off loans on automobiles, house mortgages, etc. A friend of yours has financed $24,000 on the purchase of a new automobile, and the
A certain fluidized-bed combustion vessel has an investment cost of $100,000, a life of 10 years, and negligible market (resale) value. Annual costs of materials, maintenance, and electric power for
It costs $30,000 to retrofit the gasoline pumps at a certain filling station so the pumps can dispense E85 fuel (85% ethanol and 15% gasoline). If the station makes a profit of $0.08 per gallon from
An expenditure of $20,000 is made to modify a material-handling system in a small job shop. This modification will result in first-year savings of $2,000, a second-year savings of $4,000, and a
Determine the value of P0, as a function of H, for these two investment alternatives to be equivalent at an interest rate of i = 15% per year:
Suppose that annual income from a rental property is expected to start at $1,300 per year and decrease at a uniform amount of $50 each year after the first year for the 15-year expected life of the
For a repayment schedule that starts at EOY four at $Z and proceeds for years 4 through 10 at $2Z, $3Z,..., what is the value of Z if the principal of this loan is $10,000 and the interest rate is 7%
Refer to the accompanying cash-flow diagram, and solve for the unknown quantity in Parts (a) through (d) that makes the equivalent value of cash outflows equal to the equivalent value of the cash
You owe your best friend $2,000. Because you are short on cash, you offer to repay the loan over 12 months under the following condition. The first payment will be $100 at the end of month one. The
In the accompanying diagram, Figure P4-79, what is the value of K on the left-hand cash-flow diagram that is equivalent to the right-hand cash-flow diagram? Let i = 12% per year.
Rick wants to have earned $10,000 at the end of 6 years. How much must he deposit today in order to do so, if his rate of interest is fixed at 8% compounded annually?
Calculate the future equivalent at the end of 2012, at 8% per year, of the following series of cash flows in Figure P4-80.
Suppose that the parents of a young child decide to make annual deposits into a savings account, with the first deposit being made on the child's fifth birthday and the last deposit being made on the
The heat loss through the exterior walls of a certain poultry processing plant is estimated to cost the owner $3,000 next year. A salesman from Superfiber Insulation, Inc., has told you, the plant
What value of N comes closest to making the left-hand cash-flow diagram of the accompanying figure, Figure P4-83, equivalent to the one on the right? Let i = 15% per year. Use a uniform gradient
A retail outlet is being designed in a strip mall in Nebraska. For this outlet, the installed fiberglass insulation to protect against heat loss in the winter and heat gain in the summer will cost an
You are the manager of a large crude-oil refinery. As part of the refining process, a certain heat exchanger (operated at high temperatures and with abrasive material flowing through it) must be
A geometric gradient has a positive cash flow of $1,000 at EOY zero (now), and it increases 5% per year for the following five years. Another geometric gradient has a positive value of $2,000 at EOY
A small company heats its building and spends $8,000 per year on natural gas for this purpose. Cost increases of natural gas are expected to be 10% per year starting one year from now (i.e., the
In a geometric sequence of annual cash flows starting at EOY zero, the value of AQ is $1,304.35 (which is a cash flow). The value of the last term in the series, A10, is $5,276.82. What is the
An electronic device is available that will reduce this year's labor costs by $10,000. The equipment is expected to last for eight years. If labor costs increase at an average rate of 7% per year and
Consider an EOY geometric gradient, which lasts for eight years, whose initial value at EOY one is $5,000 and f = 6% per year thereafter. Find the equivalent uniform gradient amount over, the same
Suppose that you have a money market certificate earning an annual rate of interest, which varies over time as follows:If you invest $10,000 in this certificate at the beginning of year one and do
Determine the present equivalent value of the cash-flow diagram of Figure P4-97 when the annual interest rate, it, varies as indicated
Mary's credit card situation is out of control because she cannot afford to make her monthly payments. She has three credit cards with the following loan balances and APRs: Card 1, $4,500, 21%; Card
Compute the effective annual interest rate in each of these situations: a. 10% nominal interest, compounded semiannually. b. 10% nominal interest compounded quarterly. c. 10% nominal interest
The higher the MARR the higher the price that a company should be willing to pay for equipment that reduces annual operating expenses. Do you agree with this statement? Explain your answer.
What is the maximum price you will pay for a bond with a face value of $1,000 and a coupon rate of 14%, paid annually, if you want a yield to maturity of 10%? Assume that the bond will mature in 10
Last month Jim purchased $10,000 of U.S. Treasury bonds (their face value was $10,000). These bonds have a 30-year maturity period, and they pay 1.5% interest every three months (i.e., the APR is
A student buys a laptop for $1,500 which he hopes to resell upon completion of his degree. The laptop has an estimated salvage value of $300 at the end of 3 years. For an interest rate of 15%, find
A company sold a $1,000,000 issue of bonds with a 15-year life, paying 4% interest per year. The bonds were sold at par value. If the company paid a selling fee of $50,000 and has an annual expense
A U.S. government bond matures in 10 years. Its quoted price is now 97.8, which means the buyer will pay $97.80 per $100 of the bond's face value. The bond pays 5% interest on its face value each
The Western Railway Company (WRC) has been offered a 100-year contract to haul a fixed amount of coal each year from Wyoming to Illinois. Under the terms of the agreement, WRC will receive $4,200,000
a. What is the CW, when i = 10% per year, of $1,500 per year, starting in year one and continuing forever; and $10,000 in year five, repeating every four years thereafter, and continuing forever? b.
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