Question 1

Calculate the salvage value of equipment with a service life of 15 years if it was purchased 5 years ago for  and depreciates at the rate of 10% per year.

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Question 2

Explain why equivalences are just convenient assumptions. Give examples of two real world financial situations in which these equivalences do not hold

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Question 3

Joan is deciding whether she should remodel her house now or one year from now. If she does it now, the cost will be $1 500. If she waits one year, the cost is expected to be $1 600. At current interest rate of 5.6%, should Joan remodel her house now or one year from now?

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Question 4

Two assets, A and B, are purchased for the same price. Each loses 10% of its value in the first year. Subsequently, the value of A continues to decline in the same way by declining-balance depreciation, while the value of B continues to decline in the same way by straight-line depreciation. Which will have the greater book value in five years time?

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Question 5

If a new technology comes into existence which partially replaces some old technology, how will the loss in the value of the old technology be classified?

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Question 6

Your accounting records show that an asset in use has book value of $7 119.14. The asset cost $30 000 when it was purchased and has been depreciated under the declining balance depreciation method with a 25% depreciation rate. How many years has the asset been in service?

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Question 7

Suppose you invested $1 000 in a new savings account with an annual interest rate of 3% compounded daily. What is your accumulated interest at the end of the first year?

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Question 8

Paul just bought a car for $15 000 and paid in cash. Calculate Paul's opportunity cost as "funds tied up in the car" if you know that otherwise it was possible to invest the money at a 5% annual interest rate compounded monthly for five years.

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Question 9

Michael is indifferent about paying $1 500 for a new computer now and $2 000 two years from now. Define Michael's implied interest rate.

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Question 10

Consider the following statement: "Financial data are collected based on discrete time periods. However, in real life time is continuous. The error when using discrete compounding instead of continuous compounding is smaller the briefer the discrete compounding period is." Do you agree or disagree with this statement and why?

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Question 11

Charles has just purchased a car for $9 520. He expects that the value of this car will decline by 5% each year. Eventually Charles wants to sell this car for at least $6 000 and buy a new one. How many years should Charles use this car before he can sell it?

Accepted Answer

The car's value declines by 5% each year, so its value after n years is given by the formula: Value = 9520 * (0.95)^n. We need to find the smallest n such that the value is at least $6,000. Solving 9520 * (0.95)^n = 6000 gives n ≈ 8.

Question 12

Suppose that a power plant project requires $10 million in period zero, has operating costs of $1 million per year over 10 years, and brings revenue of $2 million per year over that period of time. Based on this information and the concept of time value of money, comment on whether this is a profit generating project or not?

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Question 13

Suppose that the nominal interest rate is 18%. Calculate the effective interest rate when interest is compounded:
(i)Annually
(ii)Semiannually
(iii)Quarterly
(iv)Monthly
(v)Biweekly
(vi)Weekly
(vii)Daily
(viii)Continuously

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Question 14

A credit card quotes its annual interest rate as 21%. If the interest rate is compounded monthly, what is the effective interest rate for this credit card?

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Question 15

A hydraulic press has just been purchased. It will have a book value of $6 465 in year 5. The present worth of its salvage value at the end of year 10 is $700, assuming a MARR of 7%. What is the purchase price of the press?

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Question 16

Stan has invested $1 000 into mutual fund at a 5% annual rate of return, compounded daily. What are the nominal and effective interest rates in this case? Discuss how these two interest rates affect Stan's investment?

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Question 17

Calculate the depreciation rate of a vehicle if it was bought 5 years ago for $25 000 and can be sold now for $8 200.

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Question 18

A transportation company just bought a new truck for $25 000. The service life of the truck is seven years. The company has to pay a $100 registration fee at the beginning of every year plus maintenance costs of $1 000 in the first year and$200 at the beginning of the second year. At the end of the truck's service life, it will be sold at 10% of its purchase price. Construct a cash flow diagram from the company's perspective.

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Question 19

A company buys a corrugated-metal building to store fertiliser. Because of a change in plans, no fertiliser is ever stored in the building, but it rusts away due to exposure to the rain. What kind of depreciation is this?

Accepted Answer

The building's deterioration over time due to environmental factors like rain, without any relation to its use, is considered a time-related physical loss.

Question 20

Suppose that the effective interest rate associated with a VISA credit card is 20.9% while the nominal interest rate is 18.9%. What are the card's terms with respect to compounding?

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Quiz 2: Time Value of Money

Calculate the salvage value of equipment with a service life of 15 years if it was purchased 5 years ago for and depreciates at the rate of 10% per year.