Question
In: Accounting
1. Jerry was recently offered a position with a major accounting firm. The firm offered Jerry...
1. Jerry was recently offered a position with a major
accounting firm. The firm offered Jerry either a
signing bonus of $23,000 payable on the first day of work or a
signing bonus of $26,000 payable after
one year of employment. Assuming that he will remain at the firm
for a least one year and given a
relevant interest rate of 15%, which option should Jerry
choose?
a. The options are equivalent.
b. Insufficient information to determine.
c. The signing bonus of $23,000 payable on the first day of
work.
d. The signing bonus of $26,000 payable after one year of
employment.
2. If Jethro wanted to save a set amount each month in order to buy
a new pick-up truck when the new
models are next available, which time value concept would be used
to determine the monthly payment?
a. Present value of one.
b. Future value of one.
c. Present value of an annuity due.
d. Future value of an ordinary annuity.
3. Assume ABC Company deposits $95,000 with First National Bank in
an account earning interest at 5%
per annum, compounded semi-annually. How much will ABC have in the
account after five years if
interest is reinvested?
a. $120,953.
b. $95,500.
c. $117,005.
d. $121,247.
4. You can afford an $800 / month car payment. What is the most
expensive car you can buy if you think
you can qualify for 4 year loan at 3% APR.
a. $32,879
b. $29,687.
c. $36,143.
d. $20,213.
Solutions
Expert Solution
Question No 1:
The 2 scenarios are:
(a) Receive $23,000 at the date of joining - Assume today
(b) Receive $26,000 at the end of one year.
Since, the time frame for both the options are different, we have to bring them to a single time frame.
So, we will discount the $26,000 receivable at the end of one year to today's value.
PV of $26,000 @ 15% int rate = $26,000 / 1.15 = $22,608.70
Therefore, Jerry is better off if he takes the money when he joins. - Option C
Question No 2:
When we want to know the monthly investment required to obtain a predefined amount required at a future stage, we use present value of annuity due. Option C
Question No 3:
The Formula for computing the value of amount if interest is compounded is:
Amount = Principal (1 + rate of interest per compounding (R) )^ Number of times compounded (N)
Total Amount = $ 95,000 (1 + (5/2)% )^10
= $ 121,608.
It is not available in the options provided.
However, the compounding is considered as annually,
Total Amount = $ 95,000 (1 + 5%)^5
= $ 121,247 - Option D
Question No 4:
The answer is Option C. The answer can be derived in a trial and error basis. The solution is:
| 0.0025 | $ 800.00 | |||
| Month | Loan outstanding at beginning of month | Interest for month | Principal Repayment | Loan outstanding at month end |
| 1 | $ 36,143.00 | $ 90.36 | $ 709.64 | $ 35,433.36 |
| 2 | $ 35,433.36 | $ 88.58 | $ 711.42 | $ 34,721.94 |
| 3 | $ 34,721.94 | $ 86.80 | $ 713.20 | $ 34,008.75 |
| 4 | $ 34,008.75 | $ 85.02 | $ 714.98 | $ 33,293.77 |
| 5 | $ 33,293.77 | $ 83.23 | $ 716.77 | $ 32,577.00 |
| 6 | $ 32,577.00 | $ 81.44 | $ 718.56 | $ 31,858.44 |
| 7 | $ 31,858.44 | $ 79.65 | $ 720.35 | $ 31,138.09 |
| 8 | $ 31,138.09 | $ 77.85 | $ 722.15 | $ 30,415.94 |
| 9 | $ 30,415.94 | $ 76.04 | $ 723.96 | $ 29,691.98 |
| 10 | $ 29,691.98 | $ 74.23 | $ 725.77 | $ 28,966.21 |
| 11 | $ 28,966.21 | $ 72.42 | $ 727.58 | $ 28,238.62 |
| 12 | $ 28,238.62 | $ 70.60 | $ 729.40 | $ 27,509.22 |
| 13 | $ 27,509.22 | $ 68.77 | $ 731.23 | $ 26,777.99 |
| 14 | $ 26,777.99 | $ 66.94 | $ 733.06 | $ 26,044.94 |
| 15 | $ 26,044.94 | $ 65.11 | $ 734.89 | $ 25,310.05 |
| 16 | $ 25,310.05 | $ 63.28 | $ 736.72 | $ 24,573.32 |
| 17 | $ 24,573.32 | $ 61.43 | $ 738.57 | $ 23,834.76 |
| 18 | $ 23,834.76 | $ 59.59 | $ 740.41 | $ 23,094.34 |
| 19 | $ 23,094.34 | $ 57.74 | $ 742.26 | $ 22,352.08 |
| 20 | $ 22,352.08 | $ 55.88 | $ 744.12 | $ 21,607.96 |
| 21 | $ 21,607.96 | $ 54.02 | $ 745.98 | $ 20,861.98 |
| 22 | $ 20,861.98 | $ 52.15 | $ 747.85 | $ 20,114.13 |
| 23 | $ 20,114.13 | $ 50.29 | $ 749.71 | $ 19,364.42 |
| 24 | $ 19,364.42 | $ 48.41 | $ 751.59 | $ 18,612.83 |
| 25 | $ 18,612.83 | $ 46.53 | $ 753.47 | $ 17,859.36 |
| 26 | $ 17,859.36 | $ 44.65 | $ 755.35 | $ 17,104.01 |
| 27 | $ 17,104.01 | $ 42.76 | $ 757.24 | $ 16,346.77 |
| 28 | $ 16,346.77 | $ 40.87 | $ 759.13 | $ 15,587.64 |
| 29 | $ 15,587.64 | $ 38.97 | $ 761.03 | $ 14,826.61 |
| 30 | $ 14,826.61 | $ 37.07 | $ 762.93 | $ 14,063.67 |
| 31 | $ 14,063.67 | $ 35.16 | $ 764.84 | $ 13,298.83 |
| 32 | $ 13,298.83 | $ 33.25 | $ 766.75 | $ 12,532.08 |
| 33 | $ 12,532.08 | $ 31.33 | $ 768.67 | $ 11,763.41 |
| 34 | $ 11,763.41 | $ 29.41 | $ 770.59 | $ 10,992.82 |
| 35 | $ 10,992.82 | $ 27.48 | $ 772.52 | $ 10,220.30 |
| 36 | $ 10,220.30 | $ 25.55 | $ 774.45 | $ 9,445.85 |
| 37 | $ 9,445.85 | $ 23.61 | $ 776.39 | $ 8,669.47 |
| 38 | $ 8,669.47 | $ 21.67 | $ 778.33 | $ 7,891.14 |
| 39 | $ 7,891.14 | $ 19.73 | $ 780.27 | $ 7,110.87 |
| 40 | $ 7,110.87 | $ 17.78 | $ 782.22 | $ 6,328.64 |
| 41 | $ 6,328.64 | $ 15.82 | $ 784.18 | $ 5,544.47 |
| 42 | $ 5,544.47 | $ 13.86 | $ 786.14 |
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