Exam. Review. — Questions Please note that your answer may differ slightly from the multiple choices listed due to rounding errors. You are re- quired to select the nearest (closest) answer from each mul. Ie choice list. Questions provided here for review are sug- gestive rather than complete. All questions are prepared by Professor Chan S. Park and copyrighted by Addison-Wesley Publishing Company. (2) John and Susan just opened their savings accounts at two differ: ent banks by depositing $1,000 respectively. John’s bank pays a simple interest at annual rate of 10%, whereas Susan's bank pays a compound interest at annual rale of 95%. No interest: would be taken out for a period of 3 years. Al the end of 3 years, whose balance would be greater and by how much (in nearest dollars)? (a) Susan's balance and by $30 (b) Johos balance and by $1 (©) Susan's balance and by $13 (A) Joho’s balance and by $18 (2) If you invest $2,000 today in 8 savings account stan interest rate of 12% compounded annually, how much principal and interest will be accumulated in 7 years? fa) $4,242. 2 397398 Part Il, Et’ Kxam Review Questions (b) $4,422 (©) $2,300 (a) $1,600 (8) How muctrdo you need To Tavest ii equal annusl amounts for the next 10 years if you want to withdraw $5,000 at the end of the eleventh year and increase the annual withdrawal by $1,000 ‘each year thereafter until year 25? The interest rate is 6% com- pounded annually. (a) $20,000 (b) $106,117 (6) $8,054 (a) $5,000 (4) What is the present worth of the following income strings at an interest rate of 10%? (All each flows occur at year end.) Net Cash Flow 1 $11,000 2 12,100 3 0 4 14ou (a) $37,741 (b) $30,000 (©) $43,923. (a) $32,450 (8) You want to find equivalent present worth for the following cash ig flow series at an interest cate of 15%. Which of the following statements is incorrect?Part ll, BLT. Exam Review Questions 399 1 Net Cash Plow 0 $2,000 1 1,000 2 1,000 31,000 a 41,000 5 2000 (a) $1, 000(P/A, 15%, 4) + $2, 000 + $2,000(P/F,15%,5) (b) $1,000(P/F,18%,5) + $1, 000(P/4, 15%, 5) + $2,000 (©) ($1, 000(F/4, 15%, 5) + $1, 000](P/F, 15%, 5) + $2,000 (A) (81,000(/A, 15%, 4) + $2, 000](P/F, 15%, 4) + $2,000 (6) Your R&D group has developed and tested computer software that assists engineers in controlling a proper chemical mix for the tiremanufacturing industry. If you decide to market the software, your first year operating net cath flow is estimated to be $1,000,000. Because of market completion, your product life will be about 4 years and its masket share will decrease by 25% feech year over the previous year's. You have been approached by a big software house who wants to purchase the right to manu: facture and distribute the product, Assuming that your interest Fate is 15%, for what minimum price would you be willing to sell the software? (a) $2,507,621 (b) $2,887,776 (6) $2,766,384 (A) $2,047,734 (7) A series of equal semiannual payments of $1,000 for 3 years is equivalent to what present amount at ait interest rate of 12% compounded annually? (All answers are rounded to nearest dol lars.) (a) 84,917400 Part Il BLT. Bxam Review Questions (b) $4,804 (e) $4,500 (a) $5,401 (8) Consider the following two cash flow tra % Cash Flow! Cash Flow 2 0% 80 1 0 A 2 0 A 3 2,000 A 4 0 A 5 ° A 6 2,000 A ‘To ind the value of A that males the two cash flow series equiva- lent at an interest rate of 10%, which of the following statements is correct? (a) $2,000(4/F,10%,3) (b) $2,000(P/A, 10%,3}(4/P, 10%, 6) (©) $2,000(F/4, 10%, 2)(4/, 10%, 6) (a) $2,000/3, (8) Find the equivalent lump sum amount (in nearest dollars) of the following cash flow series at the end of yene 5, assuming an in: terest rate of 10% compounded anallyWart ll. BLY. kxam Keview Questions 401 Bnd of yer Net Cosh Flow $200 200 200 200 =00 0 “o Py 100 180 (a) 81,75 (b) $1,075, (e) 8915 (a) $875 (10) At what rate of interest compounded quarterly will'an invest ment double itself in 5 years? (a) 14.87% (b) 3.72% (6) 3.59% (d) 140% (11) A series of equal quarterly depasite of $1,000 extends over s. period of 3 years. What is the future worth of this quarterly ‘deposit series at 9% interest. compounded monthly? (a) $13,160 (b) 812,590 (c) 813,615 (d) $13,112 =402 Part I]. BLT. Exam Review Questions (12) Au oil company has offered you a credit card that charges in terest at 1.8% per month compounded monthly. What is the ‘effective annual interest rate that this oil company charges ? (a) 21.60% (b) 22.34% (e) 23.87% (4) 18.00% (13) A series of equal quarterly receipts of $1,000 extends over a period of 5 years. What is the present worth of this quarterly payment series at 8% interest compounded continuowsly? fa) $16,351 (b) $16,320 (©) s15971 (a) 818,345 (14) You are considering purchasingindustrial equipment which costs $30,000. You will make a down payment in the amount of $5,000 and borrow the remainder from a local bank at an interest raie ‘of 9% compounded monthly, which isto be paid for 36 monthly installments. The amount of the monthly payment is nearest to (a) $954 (b) 8833 (©) $795 (a) 8694 (15) A building is priced at $100,000, If a down payment of $30,000 is made and a payment of $1,000 every month thereafter ie re. quired, how many months will it take to pay for the building? Interest is charged at a rate of 12% compounded monthly. (a) 70 (b) 100fares 44. coan Review Questions 403, (12 (a) 132 (16) You obtained a loan of $20,000 to fnance an automobile, Based. on monthly compounding for 24 months, the end-of-the-month ‘equal payment was figured to be $922.90. After making the 12th payment, you want to pay off the loan in a lamp sum. The size of this lump sum amount is nearest to (a) $10,498 () 811075, (e) $12,048 (a) $12,546 (21) To raise money for your business, you need to borrow 820,000 from a local bank. If the bank asks you repay the loan with 5 equal annual installments of $5,945.19, determine the bank's annual interest rate on ths loan transaction (a) 1% (b) 11.5% (©) 12% (a) 27.74% (18) Consider the following bank advertisement appearing in local sewspapesi"Open a Decatur National Bank Certifate of De posit (CD) and you get a guaranteed rate cf return (effective annual yield) of 8.87%" If there are 365 compounding periods per year, what is the nominal interest rate (annual percentage rate) for this CD? (a) 8.00% (b) 823% (c) 8.50% - (a) asm404 Part Il. E.LT. Bxan, Review Questions (19) You borrowed $1,000 at 8% compounded annually. The loan was repaid according to the following schedule. Find X, the ‘amount that is required to pay off the loan ai the end of year 4 (a) S108 (b) $298 (©) $345 (4) $460 1 Repayment Amount 1 100 2 $300 3 $500 4 x (20) An investment project costs P. It is expected to have an annual net cash flow of 0.125P for 20 years, What is the project's payback period (discounted payback), considering the cost of funds at 10%? (a) 8 years (b) 10 years (©) 17 years (A) 20 years (21) What is the capitalized equivalent amount st 10% of annual interest for a sevies of annual receipts of $400 for the first 10 ‘years, which will increase to $500 per year after 10 years and remains constant thereafter? (a) $4,621 (b) $4,386 (©) 84,452 (a) $9,854Port IL. E.LT. Exam Review Questions 405: (22) You just purchased a pin inserting machine to relieve some bot tleneck problems being created in manufacturing a PC board It cost $56,000 with an estimated service life of 5 yetrs. At that ‘ime, the estimated salvage value would be $5,000. The machine ted to operate 2,500 hours per year. ‘The expected an- ‘nual operating and maintenance cost would be $6,000. If your firm’s interest rate is 15%, what would be the machine cost per hour without considering any income taxes? (a) $8.79 (b) $5.89 (e) 81.85 (a) $7.85 (28) Consider the following two mutually exclusive projects Net Cash Flow End of Year Project A Project B 0 $1,000 —$2,000 1 475 915 2 915 3 915 AL an interest rate of 12%, what do you recommenc? (a) Select A. (b) Select B. (©) Se (A) Select neither lect either one. (24) Consider the following two investment alternatives. Net Cash Flow End of Year Machine A Machine B 0 $1,000 1 900 2 00800" 200 3 700408 Part Il. ELT. Exam Review Questions Suppose that your firm will need either machine for only 2 years. The net proceed from the sale of Machine B is estimated to be $200. What is the required net proceed from the sale of Machine A so that both machines would be economically indifferent at an interest rate of 10%)? = (a) $700 (b) $750 (6) $300 (4) $850 (25) A manufacturing company is considering two types of industrial projects which require the same level of intial investment but provide diferent levels of operating cash flows over the project life. ‘The in-house engineer has compiled the following finan date related to both projects, including the internal rate of te turn (IRR) figures. Net Cash Flow 8 Project A Project B 0 818,000 ~$13,000 1 96012,600 2 3 7,400 6,500, 13,100. 4,000 4 7360 3,122 IRR 18% ‘The company has been using the internal rate of return as project jusification tool, aud these projects will be evaluated based on the principle of rate of return, The firm's minisnnm required rate of return is known to be 12%. Which project should you select? (a) Select 4. (b) Select B,