Question

1. You put $2,500 into an account earning interest at a rate of 8% per year. How much money will you have after 8 years, assuming simple interest and assuming no withdrawals? How much money will you have assuming compound interest and no withdrawals? (4 pts.)

2. Suppose you have an investment that pays 8% per year, compounded quarterly. What interest rate are you actually getting per year? (2 pts.)

3. What is the present value of $2,500 received in 7 years with monthly compounding at a 6% annual percentage rate (APR)? (2 pts.)

4. You are a financial manager for ABC Corp. trying to figure out which of three mutually exclusive projects to choose from, all of which are within the budget of the company. According to your projections, Project A will require an initial cash outlay of $2 million and promises to pay out $2 million after one year and $3 million after two years. Project B will require an initial cash outlay of $3 million and promises to pay out $3 million after one year and another $2.5 million after two years. Project C will require a cash outlay of $500,000 and will generate $1.2 million every year for the next five years. Which of the projects (A, B or C) should you choose to pursue, and why? (5 pts.)

Answer 1

Ans.

1. Amount (after 8 years) in case of simple interest :- $ 4100

Amount (after 8 years) in case of compound interest :- $ 4627.33

2. Interest rate (actually getting per year) :- 8.24%

3. Present Value :- $1644.34

4. Project to choose is :- C. Because it has lowest Payback period of 5 months amoungst all.

Detail calculation & explanation is attached below :-