Question

a)

XYZ Inc entered in a 4 year contract with a client. XYZ will receive following cash flows at the end of each year. If they can earn 6% annual interest, what is the future value of this contract?

0                  1 2 3 4

|------------|--------------|---------------|----------------|

0              $800 $1,500          $3,800 $420

Choose the correct answer:

$7,086.21

7,232.87

$6,911.20

$4,521.34

$5,612.94

b)

Bank A is offering a loan of $4,000 at 8% interest rate compounded monthly while Bank B is offering $4,000 loan at 7.98% interest rate compounded daily. Which bank should you take the loan from?

Choose the correct answer:

Bank B as it has a lower effective rate of 8.51%

Bank B as it has a lower effective rte of 8.306099%

Both banks have same effective rate so it does not matter which bank you borrow from

Bank A since it has a lower effective rate of 8.299951%

Bank A as the effective rate is lower at 8.51%

c)

Jake bought an old car from the used car dealer “reliable autos Inc.” for a price of $8,000. Jake paid $2,000 down payment and financed the remaining amount with loan for seven years and monthly payments of $158.04 at the end of each month. what is the rate of this financing (APR)?

Choose the correct answer:

2.22%

17.39%

15.69%

13.59%

26.59%

d)

You need to start making monthly withdrawals of $8,500 at the beginning of each month starting today, for 25 years from your personal account. This account pays 6.5% return compounded monthly, how much money do you need in your account today?

Choose the correct answer:

$1,265,691.80

$2,550,000

$1,258.872.90

1,984,310.92

2,365,124.98

Answer 1

1) option a is correct

fvf=(1+r)ⁿ

2) effective interest rate =( 1+period rate )^m -1

bank A compounding monthly period  =8%/12 =0.6667% m=12

effective interest rate =( 1+0.6667%)¹² -1

=8.2995%

bank B compounding monthly period  =7.98%/365 =0.0219% m=365

effective interest rate =( 1+0.0219%)³⁶⁵ -1

=8.3061%

option d is correct since bank A has lower effective interest rate

3) laon amount = 8000-2000= 6000

monthly payment is 158.04

n=7 years *12= 84

option e is correct

4)

option a is correct