You purchase a bond for $25,000 which you plan to hold until it matures in 5 years. It pays 2% simple interest per year. How much interest will you earn on your investment if you hold it as planned.
2. To improve your earnings from the investment in question #1 you invest each year’s interest (which is paid at the end of the year) in a money market fund that pays 1.5% compound interest per year. You do this until the bond matures in the BEGINNING of year 10. What will you earn if you do this?
3. Your firm must replace its delivery truck so you purchase one for $42,500. You finance it for 5 years at 2.95% per year and make equal monthly payments each month for the 5 years (60 months). Assuming you finance the entire amount how much will you have paid for the truck?
4. When shopping to replace the delivery truck in the last question you found a competing dealer who offered this choice: Option A. Get $3000 “cash back,” then pay the balance in 5 annual payments at 2.5%; Option B. Pay the full price in 5 annual installments at no (0%) interest. Which is the better deal, that is, under which deal will you pay less? How much more or less does the better option cost compared to the answer in question 3 once all payments are made?
5. Your firm purchases a piece of property for $515,000. Historically, nearby property in the neighborhood has appreciated in value about 1.5% per year. Assuming you can rely on this historic appreciation what will the property be worth at the end of 20 years?
6. In doing some retirement planning you determined that you want to save $25,000 each year until you retire. You plan to invest it in a “guaranteed return mutual fund” which pays compound interest at 3% per year; you plan to keep it invested there until you retire in 30 years. What will the investment be worth then?
7. Your firm must replace its packaging machine after its useful life of 10 years passes and depreciation can no longer be claimed on it. The estimated replacement cost is $5,550,123. How much must the company save/invest each year at 2% to accumulate enough to replace the machine?
8. If the interest rate increased to 5% and the firm from question 7 determined it could only invest $235,000 per year, how long would it take to accumulate $5,550,123 to replace its packaging machine? If they needed to get this done within a 10-year period, could they do it under these circumstances?
9. You are offered two investments for the firm’s “retained earnings” ($4,238,000). You are looking for good ways to invest the firm’s hard earned money. Which option will give you a better return on and of investment (two ROIs)?
· Option A- which pays out at 4% simple interest for five years
· Option B- which pays out at 2% compound interest for four years
10. Increasing the number of periods could impact all of the following except
a. Present value of an annuity
b. Present value of $1
c. Future value of an annuity
d. Future value of $1