finance data bank
Essay Questions
51. You want to deposit sufficient money today into a savings account so that you will have $1,000 in the account three years from today. Explain why you could deposit less money today if you could earn 3.5 percent interest rather than 3 percent interest.
52. You are considering two separate investments. Both investments pay 7 percent interest. Investment A pays simple interest and Investment B pays compound interest. Which investment should you choose, and why, if you plan on investing for a period of 5 years?
53. What lesson does the future value formula provide for young workers who are looking ahead to retiring some day?
54. You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years. Assume you can earn 6 percent on your savings. Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different.
55. At an interest rate of 10 percent and using the Rule of 72, how long will it take to double the value of a lump sum invested today? How long will it take after that until the account grows to four times the initial investment? Given the power of compounding, shouldn't it take less time for the money to double the second time?
Multiple
Choice Questions
56. Assume the total cost of a college education will
be $300,000 when your child enters college in 16 years. You presently have
$75,561 to invest. What rate of interest must you earn on your investment to
cover the cost of your child's college education?
A. 7.75 percent
B. 8.50 percent
C. 9.00 percent
D. 9.25 percent
E. 9.50 percent
57. At 11 percent interest, how long would it take to
quadruple your money?
A. 6.55 years
B. 6.64 years
C. 13.09 years
D. 13.28 years
E. 13.56 years
58. Assume the average vehicle selling price in the
United States last year was $41,996. The average price 9 years earlier was
$29,000. What was the annual increase in the selling price over this time
period?
A. 3.89 percent
B. 4.20 percent
C. 4.56 percent
D. 5.01 percent
E. 5.40 percent
59. You're trying to save to buy a new $160,000
Ferrari. You have $56,000 today that can be invested at your bank. The bank
pays 6 percent annual interest on its accounts. How many years will it be
before you have enough to buy the car? Assume the price of the car remains constant.
A. 16.67 years
B. 17.04 years
C. 17.41 years
D. 17.87 years
E. 18.02 years
60. Imprudential, Inc. has an unfunded pension
liability of $850 million that must be paid in 25 years. To assess the value of
the firm's stock, financial analysts want to discount this liability back to
the present. The relevant discount rate is 6.5 percent. What is the present
value of this liability?
A. $159,803,162
B. $171,438,907
C. $176,067,311
D. $184,519,484
E. $191,511,367
61. You have just received notification that you have
won the $1.4 million first prize in the Centennial Lottery. However, the prize
will be awarded on your 100^{th} birthday, 70 years from now. The
appropriate discount rate is 8 percent. What is the present value of your
winnings?
A. $4,288.16
B. $6,404.20
C. $15,309.91
D. $23,333.33
E. $25,000.00
62. Your coin collection contains fiftyfour 1941
silver dollars. Your grandparents purchased them for their face value when they
were new. These coins have appreciated at a 10 percent annual rate. How much
will your collection be worth when you retire in 2060?
A. $3,611,008
B. $3,987,456
C. $4,122,394
D. $4,421,008
E. $4,551,172
63. In 1895, the winner of a competition was paid
$110. In 2006, the winner's prize was $70,000. What will the winner's prize be
in 2040 if the prize continues increasing at the same rate?
A. $389,400
B. $421,122
C. $479,311
D. $505,697
E. $548,121
64. Suppose that the first comic book of a classic
series was sold in 1954. In 2000, the estimated price for this comic book in
good condition was about $340,000. This represented a return of 27 percent per
year. For this to be true, what was the original price of the comic book in
1954?
A. $5.00
B. $5.28
C. $5.50
D. $5.71
E. $6.00
65. Suppose you are committed to owning a $140,000
Ferrari. You believe your mutual fund can achieve an annual rate of return of 9
percent and you want to buy the car in 7 years. How much must you invest today
to fund this purchase assuming the price of the car remains constant?
A. $74,208.16
B. $76,584.79
C. $77,911.08
D. $78,019.82
E. $79,446.60
66. You have just made a $1,500 contribution to your
individual retirement account. Assume you earn a 12 percent rate of return and
make no additional contributions. How much more will your account be worth when
you retire in 25 years than it would be if you waited another 10 years before
making this contribution?
A. $8,306.16
B. $9,658.77
C. $16,311.18
D. $16,907.17
E. $17,289.75
67. You are scheduled to receive $30,000 in two years.
When you receive it, you will invest it for 5 more years, at 8 percent per
year. How much money will you have 7 years from now?
A. $39,909.19
B. $41,381.16
C. $44,079.84
D. $47,209.19
E. $51,414.73
68. You expect to receive $9,000 at graduation in 2
years. You plan on investing this money at 10 percent until you have $60,000.
How many years will it be until this occurs?
A. 18.78 years
B. 19.96 years
C. 21.90 years
D. 23.08 years
E. 25.00 years
47. Kelly's Corner Bakery purchased a lot in Oil City
6 years ago at a cost of $280,000. Today, that lot has a market value of
$340,000. At the time of the purchase, the company spent $15,000 to level the
lot and another $20,000 to install storm drains. The company now wants to build
a new facility on that site. The building cost is estimated at $1.47 million.
What amount should be used as the initial cash flow for this project?
A. $1,470,000
B. $1,810,000
C. $1,825,000
D. $1,845,000
E. $1,860,000
48. Sailcloth & More currently produces boat sails
and is considering expanding its operations to include awnings for homes and
travel trailers. The company owns land beside its current manufacturing
facility that could be used for the expansion. The company bought this land 5
years ago at a cost of $319,000. At the time of purchase, the company paid
$24,000 to level out the land so it would be suitable for future use. Today,
the land is valued at $295,000. The company currently has some unused equipment
that it currently owns valued at $38,000. This equipment could be used for
producing awnings if $12,000 is spent for equipment modifications. Other
equipment costing $490,000 will also be required. What is the amount of the
initial cash flow for this expansion project?
A. $785,000
B. $823,000
C. $835,000
D. $859,000
E. $883,000
49. Webster & Moore paid $139,000, in cash, for a
piece of equipment 3 years ago. At the beginning of last year, the company
spent $21,000 to update the equipment with the latest technology. The company
no longer uses this equipment in its current operations and has received an
offer of $89,000 from a firm that would like to purchase it. Webster &
Moore is debating whether to sell the equipment or to expand its operations so
that the equipment can be used. When evaluating the expansion option, what
value, if any, should the firm assign to this equipment as an initial cost of
the project?
A. $0
B. $21,000
C. $89,000
D. $110,000
E. $160,000
50. The Fluffy Feather sells customized handbags.
Currently, it sells 18,000 handbags annually at an average price of $89 each.
It is considering adding a lowerpriced line of handbags that sell for $59
each. The firm estimates it can sell 7,000 of the lowerpriced handbags but
will sell 3,000 less of the higherpriced handbags by doing so. What is the
amount of the sales that should be used when evaluating the addition of the
lowerpriced handbags?
A. $146,000
B. $275,000
C. $413,000
D. $623,000
E. $680,000
51. Mason Farms purchased a building for $729,000
eight years ago. Six years ago, repairs were made to the building which cost
$136,000. The annual taxes on the property are $11,000. The building has a
current market value of $825,000 and a current book value of $494,000. The
building is totally paid for and solely owned by the firm. If the company decides
to use this building for a new project, what value, if any, should be included
in the initial cash flow of the project for this building?
A. $494,000
B. $582,000
C. $825,000
D. $865,000
E. $953,000
52. You own a house that you rent for $1,100 a month.
The maintenance expenses on the house average $200 a month. The house cost
$219,000 when you purchased it 4 years ago. A recent appraisal on the house
valued it at $239,000. If you sell the house you will incur $14,000 in real
estate fees. The annual property taxes are $4,000. You are deciding whether to
sell the house or convert it for your own use as a professional office. What
value should you place on this house when analyzing the option of using it as a
professional office?
A. $211,800
B. $221,000
C. $225,000
D. $235,000
E. $239,000
53. Nelson Mfg. owns a manufacturing facility that is
currently sitting idle. The facility is located on a piece of land that
originally cost $159,000. The facility itself cost $1,460,000 to build. As of
now, the book value of the land and the facility are $159,000 and $458,000,
respectively. The firm owes no debt on either the land or the facility at the
present time. The firm received a bid of $1,500,000 for the land and facility
last week. The firm's management rejected this bid even though they were told
that it is a reasonable offer in today's market. If the firm was to consider
using this land and facility in a new project, what cost, if any, should it
include in the project analysis?
A. $0
B. $617,000
C. $1,460,000
D. $1,500,000
E. $1,619,000

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