Question 1

Today is your 21^st birthday and you just decided to start saving money so you can retire early. Thus, you are going to save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn an average of 8 percent on your savings, how old will you be when you retire?

Accepted Answer

To find out how many years it will take to accumulate $1 million, we can use the formula for future value of an annuity:

FV = Pmt x (((1 + r)^n - 1) / r)

where FV is the future value, Pmt is the monthly payment, r is the monthly interest rate, and n is the number of months.

Plugging in the numbers, we get:

$1,000,000 = $500 x (((1 + 0.08/12)^n - 1) / (0.08/12))

Simplifying this equation, we get:

2,000 = ((1 + 0.08/12)^n - 1)

Using a calculator or spreadsheet, we can solve for n, which is the number of months it will take to accumulate $1 million:

n = 505.93 months

Dividing this by 12 gives us the number of years:

n = 42.16 years

Since we are starting one month from now, we need to add one more month, which gives us:

n = 42.17 years

Therefore, we will retire when we are approximately 54.39 years old (21 + 42.17). The answer is C.

Question 2

You have just won a contest! You can either receive $10,000 a year for 15 years or $100,000 as a lump sum payment today. What is the interest rate on the annuity option?

Accepted Answer

To calculate the interest rate on the annuity option, we can use the present value formula: PV = Payment / (r * ((1 + r)^n - 1)), where PV is the present value, Payment is the annual payment, r is the interest rate, and n is the number of years. Plugging in the given values, we get:
$10,000 = Payment / (r * ((1 + r)^15 - 1))
Solving for r using a financial calculator or spreadsheet, we get an interest rate of 5.56 percent. Therefore, the best choice would be to take the lump sum payment of $100,000 today and invest it at a higher rate than the annuity option.

Question 3

Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously delinquent so your firm has offered to arrange a payment plan in the hopes that it might at least collect a portion of this receivable. Your firm's offer consists of weekly payments for one year at an interest rate of 3 percent. What is the amount of each payment?

Accepted Answer

The answer of Turntable Industrial, Inc. owes your firm $138,600....

Question 4

You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?

Accepted Answer

The answer of You just received a loan offer from...

Question 5

Used Motors will sell you a $13,000 car for $380 a month for 48 months. What is the interest rate?

Accepted Answer

The answer of Used Motors will sell you a $13,000...

Question 6

The manager of Gloria's Boutique has approved Carla's application for credit. The maximum payment that has been approved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carla can make given this credit approval?

Accepted Answer

Using the formula for monthly payments on a loan, we can solve for the maximum initial purchase:
P = (A/i)(1 - (1 + i)^(-n)),
where P is the principal (maximum initial purchase), A is the maximum monthly payment ($65), i is the monthly interest rate (APR divided by 12), and n is the total number of payments (24).
i = 0.157/12 = 0.01308
n = 24
P = (65/0.01308)(1 - (1 + 0.01308)^(-24))
P = $1,331.42
So the maximum initial purchase Carla can make is $1,331.42, which is answer choice C.

Question 7

Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?

Accepted Answer

The answer of Karl can afford car payments of $235...

Question 8

Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every 3 months?

Accepted Answer

The answer of Your grandfather started his own business 52...

Question 9

Stanley Enterprises is acquiring Berkley, Inc. for $899,000. Berkley has agreed to accept annual payments of $210,000 at an interest rate of 7.5 percent. How many years will it take Stanley Enterprises to pay for this purchase?

Accepted Answer

To find the number of years, we use the formula for the present value of an annuity: PV = PMT × [(1 - (1 + r)^-n) / r]. Here, PV = $899,000, PMT = $210,000, and r = 7.5% or 0.075. Solving for n gives approximately 5.35 years.

Question 10

Kurt wants to have $25,000 in an investment account 4 years from now. The account will pay 0.2 percent interest per month. If he saves money every month, starting one month from now, how much will he have to save each month to reach his goal?

Accepted Answer

The correct answer is A.The formula for calculating the future value of an investment is:FV = PV * (1 + r)^ntwhere:FV is the future valuePV is the present valuer is the monthly interest raten is the number of times per year that interest is compoundedt is the number of yearsIn this case, we have:FV = $25,000PV = ?r = 0.2% = 0.002n = 12 (since interest is compounded monthly)t = 4Substituting these values into the formula, we get:$25,000 = PV * (1 + 0.002)^12*4$25,000 = PV * (1.002)^48$25,000 = PV * 1.0968Dividing both sides by 1.0968, we get:PV = $22,800.65This means that Kurt needs to save $22,800.65 in the investment account today in order to have $25,000 in 4 years.To calculate how much he needs to save each month, we can use the formula:PMT = PV * (r / (1 - (1 + r)^-nt))where:PMT is the monthly paymentPV is the present valuer is the monthly interest raten is the number of times per year that interest is compoundedt is the number of yearsSubstituting the values we know into the formula, we get:PMT = $22,800.65 * (0.002 / (1 - (1 + 0.002)^-12*4))PMT = $22,800.65 * (0.002 / (1 - (1.002)^-48))PMT = $22,800.65 * (0.002 / (1 - 0.9048))PMT = $22,800.65 * (0.002 / 0.0952)PMT = $22,800.65 * 0.021PMT = $496.75Therefore, Kurt needs to save $496.75 each month to reach his goal of having $25,000 in the investment account in 4 years.

Question 11

You recently sold an antique car you owned and valued greatly. However, you needed money and agreed to sell the car at a price of $48,000, to be paid in monthly payments of $1,200 each for 48 months. What interest rate did you charge for financing the sale?

Accepted Answer

The answer of You recently sold an antique car you...

Question 12

The Solvent Insurance Co. will pay you $2,500 a year for 20 years in exchange for $30,000 today. What interest rate will you earn on this annuity?

Accepted Answer

The interest rate can be found using the present value of an annuity formula. Solving for the interest rate that equates the present value of $30,000 to the annuity payments of $2,500 over 20 years results in an interest rate of approximately 5.45 percent.

Question 13

Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting one year from today. What is the amount of each payment?

Accepted Answer

To find the amount of each payment, we can use the formula for present value of an annuity: PV = PMT x (1 - (1+r)^-n) / r, where PV is the present value of the annuity (which is given as $120,000), PMT is the amount of each payment, r is the annual interest rate (6% or 0.06), and n is the number of payments (20). 
Plugging in the values, we get: 
$120,000 = PMT x (1 - (1+0.06)^-20) / 0.06 
Solving for PMT, we get: 
PMT = $10,462.15 
Therefore, the amount of each payment is $10,462.15.

Question 14

Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?

Accepted Answer

Difference = 134.55 - 92.76 = 41.79 months

Question 15

Webster Mining is considering the purchase of a new sorting machine. The quote consists of a quarterly payment of $29,600 for 7 years at 8 percent interest. What is the purchase price of the equipment?

Accepted Answer

We can use the formula for the present value of an annuity to find the purchase price of the equipment:

PV = PMT * ((1 - (1 + r)^(-n)) / r)

Where PV is the present value, PMT is the quarterly payment, r is the interest rate per quarter, and n is the total number of quarters.

Plugging in the numbers given, we get:

PV = $29,600 * ((1 - (1 + 0.08/4)^(-28)) / (0.08/4))
PV = $629,925.66

Therefore, the purchase price of the equipment is $629,925.66, which corresponds to choice (B).

Question 16

The Furniture Hut is offering a bedroom suite for $1,999. The credit terms are 60 months at $50 per month. What is the interest rate on this offer?

Accepted Answer

The answer of The Furniture Hut is offering a bedroom...

Question 17

You want to purchase a new condominium which costs $329,000. Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent. What will be your monthly mortgage payment?

Accepted Answer

The correct answer is A. The monthly mortgage payment can be calculated using the formula:Monthly payment = (Loan amount * Annual interest rate) / (1 - (1 + Annual interest rate)^(-Number of years))In this case, the loan amount is $329,000 * 0.8 = $263,200, the annual interest rate is 6.25%, and the number of years is 25. Plugging these values into the formula, we get:Monthly payment = (263200 * 0.0625) / (1 - (1 + 0.0625)^(-25)) = $1,736.25

Question 18

How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 6 percent.

Accepted Answer

The answer of How much money does Suzie need to...

Question 19

Berkley Trucking recently purchased a new truck costing $147,800. The firm financed this purchase at 7.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?

Accepted Answer

The answer of Berkley Trucking recently purchased a new truck...

Question 20

Katie's Dinor spent $84,000 to refurbish its current facility. The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for 5 years. What is the amount of each monthly payment?

Accepted Answer

The answer of Katie's Dinor spent $84,000 to refurbish its...

Quiz 5: Discounted Cash Flow Valuation