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Question # 00005283 Posted By: spqr Updated on: 12/13/2013 02:05 PM Due on: 12/15/2013
Subject Finance Topic Finance Tutorials:
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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 100th 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 fifty-four 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 lower-priced line of handbags that sell for $59 each. The firm estimates it can sell 7,000 of the lower-priced handbags but will sell 3,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced 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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Tutorials for this Question
  1. Tutorial # 00005105 Posted By: spqr Posted on: 12/13/2013 10:19 PM
    Puchased By: 3
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    B. $3,987,456 C. $4,122,394 D. $4,421,008 E. $4,551,172 FV = $54ยด (1.10)119 = $4,551,172 63. In 1895, the winner of a ...
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    sed...705 Rating Great work by the experts 03/21/2015

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