Practice Problems for Ch5 Fina5003

869 words 4 pages
1. Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment. a. | 16.3% | b. | 62.7% | c. | 10% | d. | 20% |

ANS: C 2. The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a nine year time period. Determine the compound annual growth rate. a. | 11.1% | b. | 8% | c. | 22.2% | d. | 100% |

ANS: B 3. Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60.
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What is the effective rate of interest on a CD that has a nominal rate of 9.5 percent with interest compounded monthly? a. | 9.92% | b. | 9.74% | c. | 10.02% | d. | 9.86% |

ANS: A
Solution:
ieff = (1 + .095/12)12 - 1 = 0.0992 or 9.92% 11. A bank has agreed to loan you $10,000 at 11% for 5 years. You are required to make equal, annual, end-of-year payments that include both principal and interest on the outstanding balance. Determine the amount of these annual payments (to the nearest dollar). a. | $2,000 | b. | $3,100 | c. | $2,706 | d. | $1,100 |

ANS: C
Solution:
PVANo = $10,000; n = 5; i = 11%
PVANo = PMT(PVIFAi,n )
$10,000 = PMT(PVIFA0.11,5 ) = PMT(3.696)
PMT = $2,706 12. What is the most you should pay to receive the following cash flows if your required rate of return is 12 percent?

Year 1 | $5,000 | Year 2 | $8,000 | Year 3 | $12,000 | Year 4-10 | $15,000 |

a. | $58,580 | b. | $104,135 | c. | $68,105 | d. | $40,000 |

ANS: C
Solution:
PV =$ 5,000(0.893) + $8,000(0.797) + $12,000(0.712) + $15,000(5.650 - 2.402) =

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