Question

1....AJ's Better Golf, Inc. wants to borrow $125,000 to buy a new piece of manufacturing equipment. The interest rate on the loan is 10% and the loan is for 15 years. Loan payments are to be made semi-annually. How much are the semi-annual payments?

Select one: A. $8,131 B. $9,250 C. $13,260 D. $17,383

The treasurer of DEF Imports expects to invest $280,000 of the firm's funds in a long-term investment vehicle at the beginning of each year for the next 3 years. He expects that the company will earn 8% interest that will compound annually. The value that these payments should have at the end of the 3-year period is calculated as:

Select one:

a. $981,711.36

b. $1,163,509.76

c. $754,463.36

d. $618,114.56

e. $1,436,207.36

3.....

If you invest $1,127 for 8 years at 12%, how much will you have at maturity?

Select one:

a. $2,790

b. $2,996

c. $3,957

d. $4,532

e. $2,416

4.....

The treasurer of GHI International expects to invest $140,000 of the firm's funds in a long-term investment vehicle at the end of each year for the next 3 years. He expects that the company will earn 7% interest that will compound annually. The value that these payments should have at the end of the 3-year period is calculated as:

Select one:

a. $450,086

b. $250,086

c. $950,086

d. $550,086

e. $50,086

Answer 1

1.

Periodic payment = P x r x (1+r) n/(1+r) n- 1

                     P = Principal of loan = $ 125,000

                     r = Periodic rate = 0.1/2 = 0.05 semi-annually

                     n = Number of periods = 15 x 2 = 30

Periodic payment = $ 125,000 x 0.05 x (1+0.05)30/ (1+0.05)30- 1

                                    = $ 125,000 x 0.05 x 4.32194237515066/ (4.32194237515066 -1)

                              = $ 125,000 x 0.216097118757533/ 3.32194237515066

                              = $ 125,000 x 0.0650514350802766

= $ 8,131.42938503457 or $ 8,131

Semi-annual payment is $ 8,131.

Option “A. $ 8,131” is correct answer.

2.

FV of annuity due = Periodic payment x FVIFAD (i, n)

                             = $ 280,000 x FVIFAD (8 %, 3)

                             = $ 280,000 x (1+0.08) x [(1+0.08)3 -1/0.08]

= $ 280,000 x 1.08 x [(1.08)3 -1/0.08]

= $ 280,000 x 1.08 x [(1.259712-1)/0.08]

= $ 280,000 x 1.08 x (0.259712/0.08)

= $ 280,000 x 1.08 x 3.2464

= $ 280,000 x 3.506112

= $ 981,711.36

Future value of the investment after 3 years will be $ 981,711.36

Option “a. $ 981,711.36” is correct answer.

3.

FV = PV x (1+r) n

r = 0.12; n = 8

FV = $ 1,127 x (1+0.12)8

      = $ 1,127 x (1.12)8

      = $ 1,127 x 2.47596317629481

      = $ 2,790.41049968425 or $ 2,790

Maturity amount in 8 years is $ 2,790

Option “a. $ 2,790” is correct answer.

4.

FV of ordinary annuity = Periodic payment x FVIFA (i, n)

                                     = $ 140,000 x FVIFA (7 %, 3)

                                     = $ 140,000 x [(1+0.07)3 -1/0.07]

                                     = $ 140,000 x [(1.07)3 -1/0.07]

                                    = $ 140,000 x [(1.225043-1)/0.07]

                                    = $ 140,000 x (0.225043/0.07)

                                     = $ 140,000 x 3.2149

                                    = $ 450,086

Future value of the investment after 3 years will be $ 450,086

Option “a. $ 450,086” is correct answer.