Question

25. The annual payment necessary to amortize (pay off) a 5% $200,000 loan with a 20 year repayment period (annual end of year payments required) is   __________________

26. A prospective new creditor (a vendor for materials purchases) is evaluating financial ratios for ABC Company. The creditor is likely most interested in the __________ ratios

a. inventory management related
b. return on equity related
c. return on assets related
d. liquidity related

27. ABC Inc. signs a note payable in the face amount of $12,000. The interest rate is 9% and the note term is 120 days. Calculate the dollar amount of interest due at the end of the 120 day period.

_________________________

28. RST Inc. is considering the purchase of an investment that will provide $12,000 of annual cash flow at the end of each year for 12 years. The required rate of return is 8%. How much should RST be willing to pay for this investment.          _______________________

29. For a capital project if the NPV is negative

a. The hurdle rate is greater than the internal rate of return
b. The internal rate of return is greater than the hurdle rate
c. The project is showing an accounting net loss
d. all of the above (a,b, and c)
e. none of the above
f. more than one but not all of the above (out of a,b,c)

Answer 1

25).

Calculating the Annual year end payment:-

Where, P = Loan Amount = $ 200,000

r = Periodic Interest rate = 0.05

n= no of periods =20

Annual Payment will be $ 16048.52

26). Ans- Option D. Liquidity ratio

As, Creditors are more concerned about whether the firm will able to make payment of his dues on time. Thus, he evaluates Liquidity Ratio so as to seek whether the firm has enough liquidity to pay his dues on time.

27). Face Value of Notes Payable = $ 12,000

Calculate the dollar amount of interest due at the end of the 120 day period:-

Interest amount = Face Value *Interest rate*No of days/360

= $12,000*9%*120/360

= $ 360

Note- Assuming 360 days a year

28). Annual cash flows = $ 12000

Calculating the present value of cash flows:-

Present Value of cash flows = Annual cash flows*PVIFa(8%, 12 years)

= $12000*7.5361

= $ 90433.2

So, RST be willing to pay for this investment is $ 90433.2

29). Ans- Option A The hurdle rate is greater than the internal rate of return

As hurdle rate is the discount rate at which we compute NPV. Hurdle rate should be less than IRR to have a positive NPV.

So, if NPV is negative, hurdle rate is greater than IRR.

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