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1. The annual payment on a $1,000 loan over a four year period at 10% per year interest is $315.42. The balance immediately after the first payment has been made is nearest to: (a) $684.58 (b) $784.58 – simple test, 1000*.1=100 interest, add to 1000 prin., subtract 315.42 pymt. (c) $884.58 (d) $1,100 2. A permanent scholarship fund is started through a donation of $100,000. If five scholarships of $5,000 are awarded each year beginning ten years from now, the rate of return for the invested money is nearest to: (a) 20% (b) 14% (c) 10% – fv(100,000 at 10% for ten years equals approx. 250,000. 10% is 25,000 per year. (d) 6% 3. You are making $1,000 monthly deposits into a fund that pays interest at a rate of 6% compounded monthly. What would be the balance at the end of 10 years? (a) $163,879 = fv of an annuity, 120 monthly pmts, 6/12 monthly interest, $1000 pd monthly. (b) $158,169 (c) $127,200 (d) $159,423 4. You borrow $20,000 from a bank to be repaid in monthly installments for 3 years at 9% interest compounded monthly. What is the portion of interest payment for


the 18th payment? (a) $150 (b) $88.28 (c) $80.04 (d) $84.17 did amortization schedule. 20,000, 9%, 36 pymts. 5. You are buying your first car and need to borrow $16,000 over 5 years. If interest is 6%, what are your monthly payments? (a)$267 (b)$309 = pmt(.06/12, 60,16000) (c)$347 (d)$389 6. How many years will it take for the dollar’s purchasing power to be one-half what it is now, if the general inflation rate is expected to continue at the rate of 6% for an indefinite period? (a) About 7 years (b) About 8 years (c) About 11 years (d) About 12 years = 1/1.06, then multiply each succeeding year by 1/1.06, 12 years gets it to $.4969 7. If you deposit $1,000 now and are promised payments of $500 three years from now and $1500 five years from now, the equation that will yield the correct rate of return is: (a) 0 = -1000 + 500(P/F,i,3) + 1500(P/F,i,5) (b) 0 = 1000 + 500(P/F, i, 3) + 1500 (P/F, i, 5) (c) 1000 = -500(P/F,i,3) – 1500(P/F, i,5) (d) -1000= 500(P/F,i,3) + 1500 (P/F,i,5) 8. Consider the following project balance profiles for proposed investment projects. Project Balances N Project A Project B Project C 0 -$600 -$500 -$200 1 200 300 0 2 300 650 150 NPW - $416 Rate Used 15% ? Statement 1—For Project A, the cash flow at the end of year 2 is $100 Statement 2—For Project C, its net future worth at the end of year 2 is $150 Statement 3—For Project B, the interest rate used is 25% Statement 4—For Project A, the rate of return should be greater than 15% Which of the statement(s) above is (are) correct? (a) Just Statements 1 and 2 (b) Just Statements 2 and 3 statements 1 and 4 are incorrect. A has a negative return. Choice b is the only possible answer. (c) Just Statements 1 and 3 (d) Just Statements 2, 3 and 4 9. A couple wants to save for their daughter’s college expenses. The daughter will enter college 8 years from now and she will need $40,000, $41,000, $42,000 and $43,000 in actual dollars for 4 school years. Assume that these college payments will be made at the beginning of the school year. The future general inflation rate


is estimated to be 6% per year and the annual inflation-free interest rate is 5%. What is the equal amount, in actual dollars, the couple must save each year until their daughter goes to college? (a) $11,838 : NPV of 11838 annuity at 11% for eight years equals the NPV of the payment stream at 11%. (b) $11,945 (c) $12,142 (d) $12,538 10. What annual investment is required at 8% per year compounded annually to accumulate to $100,000 at the end of 20 years? (a) $1400 (b) $2100 (c) $2200 = pv of an annuity of $2,185.22 for 20 years at 8%. (d) $5400

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