Susan is beginning to plan college savings accounts for her two children. Her son Bobby is 8 and will begin college in 10 years when he turns 18. Her daughter Mallory is 2 and will begin college in 16 years when she is 18. Susan plans to deposit $10,000 per year starting next year into a joint account that earns 8.0% annually. Her last deposit will occur in the year that Bobby starts school. If Bobby’s schooling costs $25,000 each year for four years, and Mallory’s schooling costs $30,000 each year for four years, will Susan’s plan provide enough money for both her children’s college education? By how much will Susan meet/miss the goal when she quits depositing money in year 10? (Assume schooling costs are paid after the year is completed, i.e. Bobby’s first tuition payment will occur at end of year 11)

Considering the choice between investing $50,000 in a conventional 1-year bank CD offering an interest rate of 5% and a 1-year “Inflation-Plus” CD offering 1.5% per year plus the rate of inflation.

a. Which is the safer investment?

a. Conventional 1-year bank CD

b. 1-year “Inflation-Plus” CD

b. Can you tell which offers the higher expected return?

a. Expected rate of inflation

b. Bank rate

c. Cannot be determined

c. If you expect the rate of inflation to be 3% over the next year, which is the better investment?

a. Conventional CD

b. “Inflation-Plus” CD

d. If we observe a risk-free nominal interest rate of 5% per year and a risk-free real rate of 1.5% on inflation-indexed bonds, can we infer that the market’s expected rate of inflation is 3.5% per year?

a. Yes

b. No

You are saving for the college education of your two children. They are two years apart in age; one will begin college in 7 years, and another in 10 years. You estimate your first child’s college expenses to be $30,000 per year, paid at the beginning of each college year (first payment is at year 7 and so on). You estimate your second child’s college expenses to be $50,000 per year, paid at the beginning of each college year (first payment at year 10 and so on). The annual interest rate is 8 percent. How much money must you deposit in an account each year to fund your children’s education? You will begin payments one year from today. You will make your last deposit when your oldest child enters college. Also assume that each child will take 4 years to graduate from college.

$45,714.29

$35,863.17

$25,869.35

$27,938.94

None of the above

You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $490 per unit and sales volume to be 1,000 units in year 1; 1,250 units in year 2; and 1,325 units in year 3. The project has a 3-year life. Variable costs amount to $270 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $192,000 in assets, which will be depreciated on a straight-line basis with a life of 3 years. The actual market value of these assets at the end of year 3 is expected to be $44,000. NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year. The tax rate is 34 percent and the required return on the project is 10 percent. (Use SL depreciation table) What will the cash flows for this project be for years 0-3?

You bought a 10-year zero-coupon bond with a face value of $1,000 and a yield to maturity of 2.7% (EAR). You keep the bond for 5 years before selling it.

a:What was the price of the bond when you bought it?

b:What is your personal 5-year rate of return if the yield to maturity is still 2.7% when you sell the bond? (i.e. what is your rate of return given what you sold it for at the end of year 5 and what you paid at year-0.)

c:What is your personal 5-year rate of return if the yield to maturity is 4% when you sell the bond? (i.e. what is your rate of return given what you sold it for at the end of year 5 and what you paid at year-0.)

d:What is your personal 5-year rate of return if the yield to maturity is 1% when you sell the bond?

Information: $250 deposit upfront $500 yearly fee for 5 years

1. Assuming an interest rate of 5% per year over a period of 5 years on the money put in the bank, how much will A-Design have in its bank account at the end of the first year?

2. Assuming an interest rate of 5% per year over a period of 5 years on the money put in the bank, calculate the simple interest and the compound interest earned by A-Design at the end of the fifth year?

3. Assuming an interest rate of 5% per year compounded every 6 months over a period of 5 years on the money put in the bank, how much will A-Design have in its bank account at the end of the fifth year?

4. Assuming an interest rate of 5% per year compounded monthly over a period of 5 years on the money put in the bank, how much will A-Design have in its bank account at the end of the fifth year?

4. Assume that the economy of Stockland produces four goods, rocks, socks, blocks, and clocks. Rocks and blocks are both used as weapons; they are good substitutes for each other. The quantities and prices for each of the goods in years one and two are given by the following table:

       YEAR 1                  YEAR 2      
   good quantity price good quantity price      
   rocks       200       $1   rocks   150   $4
   socks       200       $2   socks   220   $5
   blocks   200       $3   blocks   400   $2
   clocks   200       $4   clocks 300    $6

   a. What is nominal GDP in year 1?
   b. What is real GDP in year 1?
   c. What is nominal GDP in year 2?
   d. What is real GDP in year 2? (Use year 1 as the base year.)
   e. What is the percentage increase in nominal GDP? Real GDP?
   f. What is the GDP price deflator?

1.Marilyn operates a day care center as a cash-method sole proprietorship. On August 1st of this year, Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

2 .David purchased a deli shop on February 1st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31st of this year as follows:

....... . .... ... .. Receipts . . Expenses
February through December last year $ 112,000 . .    $ 84,500
January this year . . . $10,400 . . $6,200
  

What income should David report from his sole proprietorship?

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