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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

5-12B. (Future value) Reggie Jackson, formerly of the New York Yankees, hit 41 home runs in 1980. If his home-run output grew at a rate of 12 percent per year, what would it have been over the
5-11B. (Future value) Sales of a new marketing book were 10,000 copies this year and were expected to increase by 15 percent per year. VI/hat are expected sales during each of the next three years?
5-9B. (Compound interest with nonannual periods)a. Calculate the future sum of $6,000, given that it will be held in the bank five years at an annual interest rate of 6 percent.b. Recalculate part
5-7B. (Compound value) Trish Nealon, who recently sold her Porsche, placed $20,000 in a savings account paying annual compound interest of 7 percent.a. Calculate the amount ofmoney that will have
5-6B. (Present value ofan annuity) What is the present value of the following annuities?a. $3,000 a year for 10 years discounted back to the present at 8 percentb. $50 a year for 3 years discounted
5-5B. (Compound annuity) What is the accumulated sum of each of the following streams of payments?a. $500 a year for 10 years compounded annually at 6 percentb. $150 a year for 5 years compounded
5-4B. (Present value) What is the present value of the following future amounts?a. $800 to be received 10 years from now discounted back to the present at 10 percentb. $400 to be received 6 years
5-3B. (Compound value solvingfor i) At what annual rate would the following have to be invested?a. $550 to grow to $1,898.60 in 13 yearsb. $275 to grow to $406.18 in 8 yearsc. $60 to grow to $279.66
5-2B. (Compound value solvingfor n) How many years will the following take?a. $550 to grow to $1,043.90 if invested at 6 percent compounded annuallyb. $40 to grow to $88.44 if invested at 12 percent
5-1B. (Compound intel°est) To what amount will the following invesnnents accumulate?a. $4,000 invested for 11 years at 9 percent compounded annuallyb. $8,000 invested for 10 years at 8 percent
12. What is the annual percentage yield (APY) on an 8 percent bank Joan compounded quarterly?
11. Given a 10 percent discount rate, what is the present value of a perpetuity of $1 ,000 per year if the first payment does not begin until the end of year 1O?
10. What is the present value of a $1,000 annuity for 10 years with the first payment occurring at the end of year 10 (that is, ten $1,000 payments occurring at the end of year 10 through year 19)
9. What is the present value of a $1,000 perpetuity discounted back to the present at 8 percent?
8. You have just borrowed $100,000, and you agree to pay it back over the next 25 years in 25 equal end-of-year annual payments that include the principal payments plus 10 percent compound interest
7. What is the future value of an ordinary annuity of $1,000 per year for seven years compounded at 10 percent? What would be the future value if it were an annuity due?
6. What is the present value of an ordinary annuity of $1 ,000 per year for seven years discounted back to the present at 10 percent? What would be the present value if it were an annuity due?
5. What is an annuity due? How does this differ from an ordinary annuity?
4. Calculate the future sum of$I,OOO, given that it will be held in the bank for five years and earn 10 percent compounded semiannually.
3.a. What will $5,000 invested for 10 years at 8 percent compounded annually grow to?b. How many years will it take $400 to grow to $1,671, if it is invested at 10 percent compounded annually?c. At
2. What is the relationship between the PVIFi,n and PVIFAi,/
1. What is the relationship between discounting and compounding?
5-4W\Y. Understanding annuities. Home mortgage payments are an annuity, as are any loans where the payments remain constant. In effect, if you can understand annuities, you'll understand how
5-3W\Y. Financial calculators. Compare some of the different financial calculators that are available on the Internet. Look at both the Financial Visions calculators
5-2WW. How much money will you need to start with if you make no additional investments?You want to have $90,000 in six years and your invesnnent will gTow at 10 percent. Use the financial calculator
5-1WW How fast will my money grow? Use the financial calculaM' provided by Financenter(partners.financenter.com/financenter/calculate/us-eng/savings14.fcs) to determine how long it will take $50,000
,5-56A. (Nonannual compounding using a calculator) Should we have bet the kids' college fund at the dog track? In the early 2000s investors suffered substantial declines of mutual funds used in
5-55A. (Nonannual compounding using a calculator) Dennis Rodman has a $5,000 debt balance on his Visa card that charges 12.9 percent APR compounded monthly. Dennis' current minimum monthly payment is
S-S4A. (Calculating an APY) Your Grandma asks for your help in choosing a CD. CD #1 pays 4.95 percent APR compounded daily. CD #2 pays 5.0 percent APR compounded monthJy. Wbat is the annual
S-S3A. (Nonannual compounding using a calculator) Ronnie Rental plans to invest $1,000 at the end of each quarter for four years into an account that pays 6.4 percent APR compounded quarterly.He will
S-S2A. (Nonannual compounding using a calculator) Ford's current incentives include 4.9 percent APR financing for 60 months or $1,000 cash back on a Mustang. Let's assume Suzie Student wants to buy
S-SlA. (Nonannual compounding using a calculator) Bowflex's television ads say you can get a fitness machine that selJs for $999 for $33 a month for 36 months. What is the APR for this Bowflex loan?
S-SOA. (Nonannual compounding using a calculator) Prof. Finance is thinking about trading cars.He estimates he will still have to borrow $25,000 to pay for his new car. How large will Prof.Finance's
S-49A. (Compounding using a calculator and annuities due) Imagine Homer Simpson actually invested the $100,000 he earned providing Mr. Bums entertainment five years ago at 7.5 percent annual interest
S-48A. (Compounding using a calculator) Springfield mogul Montgomery Bums, age 80, wants to retire at age 100 in order to steal candy from babies fuJI time. Once Mr. Burns retires, he wants to
S-47A. (Compounding using a calculator) Lisa Simpson wants to have $1,000,000 in 45 years by making equal annual end-of-the-year deposits into a tax-deferred account paying 8.75 percent annually.
S-46A. (Compounding using a calculator) Bart Simpson, age 10, wants to be able to buy a really cool new car when he turns 16. His really cool car costs $15,000 today, and its cost is expected to
5-45A. (Future and present value using a calculator) Bill Gates' billions! Over the past few years Microsoft founder Bill Gates' net worth has fluctuated between $30 and $130 billion. In early 2003
5-44A. (Spreadsheet problem) You take out a 2s-year mortgage for $300,000 to buy a new house.What will your monthly interest rate payments be if the interest rate on your mortgage is 8 percent?Use a
5-43A. (Spreadsheet problem) In 20 years you would like to have $250,000 to buy a vacation home, but you have only $30,000. At what rate must your $30,000 be compounded annually for it to grow to
5-42A. (Spreadsheet problem) If you invest $900 in a bank where it will earn 8 percent compounded annually, how much will it be worth at the end of seven years? Use a spreadsheet to do your
5-41A. (Comprehensive present value) You have just inherited a large sum of money, and you are trying to determine how much you should save for retirement and how much you can spend now. For
5-40A. (Solving far i in compound interest-financial calmlatar needed) In September 1963, the first issue of the comic book X-MEN was issued. The original price for the issue was 12 cents. By
5-39A. (Present value ofa future annuity) Determine the present value of an ordinal)' annuity of$1,000 per year for 10 years with the first cash flow from the annuity coming at the end of year 8(that
5-38A. (Present value ofan annuity due) Determine the present value of an annuity due of $1,000 per year for 10 years discounted back to the present at an annual rate of 10 percent. What would be the
5-37A. (Compounding an annuity due) Find the future value at the end of year 10 of an annuity due of$I,OOO per year for 10 years compounded annually at 10 percent. What would be the future value of
5-36A. (Present value) The state lottel)"s million-dollar payout provides for $1 million to be paid.over 19 years in $50,000 amounts. The first $50,000 payment is made immediately and the 19
5-35A. (Loan amortiz.ation) To buy a new house you must borrow $150,000. To do this, you take out a $150,000, 30-year, 10 percent mortgage. Your mortgage payments, which are made at the end of each
5-34A. (Loan amortization) On December 31, Son-Nan Chen borrowed $100,000, agreeing to repay this sum in 20 equal annual installments that include both the principal and 15 percent interest on the
5-33A. (Crrmprehensive pr'esent value) You are trying to plan for retirement in 10 years and currently you have $100,000 in a savings account and $300,000 in stocks. In addition, you plan to add to
5-32A. (Complex present value) You would like to have $50,000 in 15 years. To accumulate this amount, you plan to deposit each year an equal sum in the bank, which will earn 7 percent interest
5-31A. (Crrmpound annuity) You plan to buy some property in Florida five years from today. To do this, you estimate that you will need $20,000 at that time for the purchase. You would like to
5-30A. (Present-value comparison) You are offered $1,000 today, $10,000 in 12 years, or $25,000 in 25 years. Assuming that you can earn 11 percent on your money, which should you choose?
5-29A. (Loan amortization) A firm borrows $25,000 from the bank at 12 percent compounded annually to purchase some new machinery. This loan is to be repaid in equal annual installments at the end of
5-28A. (Solving for i in crrmpound interest) You lend a friend $10,000, for which your friend will repay you $27 ,027 at the end of five years. What interest rate are you charging your "friend"?
5-27A. (Solvingfor i in an annuity) You lend a friend $30,000, which your friend will repay in five equal annual payments of $10,000, with the first payment to be received one year from now.What rate
5-26A. (Loan amortization) On December 31, Beth Klernkosky bought a yacht for $50,000, paying$10,000 down and agreeing to pay the balance in 10 equal annual installments that include both the
5-25A. (Crrmplex present value) How much do you have to deposit today so that beginning 11 years from now you can withdraw $10,000 a year for the next five years (periods 11 through 15) plus an
5-23A. (Solvingftr n with nonannualperiods) About how many years would it take for your investment to grow fourfold if it were invested at 16 percent compounded semiannually?
5-22A. (Present value ofan annuity due) What is the present value of a 10-year annuity due of$1,000 annually given a 10 percent discount rate?
5-21A. (Perpetuities) What is the present value of the following?a. A $300 perpetuity discounted back to the present at 8 percentb. A $1,000 perpetuity discounted back to the present at 12 percentc.
5-20A. (Present value) The Kumar Corporation plans to issue bonds that pay no interest but can be converted into $1,000 at maturity, seven years from their purchase. To price these bonds
5-18A. (Compound interest with nonannualperiods) After examining the various personal loan rates available to you, you find that you can borrow funds from a finance company at 12 percent compounded
5-17A. (Compound value) The Aggarwal Corporation needs to save $10 million to retire a$10 million mortgage that matures in 10 years. To retire this mortgage, the company plans to put a fixed amount
5-16A. (Future value ofan annuity) In 10 years, you plan to retire and buy a house in Oviedo, Florida. The house you are looking at currently costs $100,000 and is expected to increase in value each
5-15A. (Solvingfor i in compound interest) If you were offered $1,079.50 10 years from now in return for an investment of $500 currently, what annual rate of interest would you earn if you took the
5-14A. (Solvingftr PMT in an annuity) To pay for your child's education, you wish to have accumulated$15,000 at the end of 15 years. To do this, you plan to deposit an equal amount into the bank at
5-13A. (Loan amortization) Mr. Bill S. Preston, Esq., purchased a new house for $80,000. He paid $20,000 down and agreed to pay the rest over the next 25 years in 25 equal annual payments that
5-12A. (Future value) Reggie Jackson, formerly of the New York Yankees, hit 41 home runs in 1980. If his home-run output grew at a rate of 10 percent per year, what would it have been over the
5-11A. (Future value) Sales ofa new finance book were 15,000 copies this year and were expected to increase by 20 percent per year. What are expected sales during each of the next three years?Graph
5-9A. (Compound interest with nonannual periods)a. Calculate the future sum of $5,000, given that it will be held in the bank five years at an annual interest rate of 6 percent.b. Recalculate part
5-7A. (Compound value) Brian Mosallam, who recently sold his Porsche, placed $10,000 in a savings account paying annual compound interest of 6 percent.a. Calculate the amount of money that will have
5-6A. (Present value ofan annuity) What is the present value of the following annuities?a. $2,500 a year for 10 years discounted back to the present at 7 percentb. $70 a year for 3 years discounted
5-5A. (Compound annuity) What is the accumu,lated sum of each of the following streams of payments?a. $500 a year for 10 years compounded annually at 5 percentb. $100 a year for 5 years compounded
5-4A. (Present value) What is the present value of the following future amounts?a. $800 to be received 10 years from now discounted back to the present at 10 percentb. $300 to be received 5 years
5-3A. (CrrmpouruJ. value solvingfol' i) At what annual rate would the following have to be invested?a. $500 to grow to $1,948.00 in 12 yearsb. $300 to grow to $422.10 in 7 yearsc. $50 to grow to
5-1A. (Compound interest) To what amount will the following investments accumulate?a. $5,000 invested for 10 years at 10 percent compounded annuallyb. $8,000 invested for 7 years at 8 percent
ST-3. For an investment to grow eightfold in nine years, at what rate would it have to grow?
ST-2. You purchase a boat for $35,000 and pay $5,000 down and agree to pay the rest over the next 10 years in 10 equal annual payments that include principal payments plus 13 percent of compound
ST-l. You place $25,000 in a savings account paying annual compound interest of 8 percent for three years and then move it into a savings account that pays 10 percent interest compounded annually.
5-6. What is an annuity? Give some examples of annuities. Distinguish between an annuity and aperpetuity.
5-5. What is the relationship between the PVIFi,n (Table 5-4) and the PVIFAi,n (Table 5-8)?What is the PVIFA 1O%.lOyr/ Add up the values of the PVIF10%,1I for n = 1, ... , 10. What is this value? Why
5-4. Suppose you were considering depositing your savings in one of three .banks, all of which pay 5 percent interest; bank A compounds annually, bank B compounds semiannually, and bank C compounds
5-3. How would an increase in the interest rate (I) or a decrease in the holding period (n) affect the future value (FVn) of a sum of money? Explain why.
5-2. The processes of discounting and compounding are related. Explain this relationship.
5-1. 'What is the time value of money? 'Why is it so important?
million units per year. Its life is expected to be five years and its scrap value at that time £100,000.The accountant has prepared the following cost estimates based on the expected output of 1
million units per year but typically it has been run at only 80 per cent of capacity because of the lack of demand for its output. The new line has a capacity of
Haverhill Engineers Ltd manufactures components for the car industry. It is considering automating its line for producing crankshaft bearings. The automated equipment will cost£700,000. It will
Chesterfield Wanderers is a professional football club that has enjoyed considerable success in recent years. As a result, the club has accumulated £10 million to spend on its further development.
Newton Electronics Ltd has incurred expenditure of £5 million over the past three years researching and developing a miniature hearing aid. The hearing aid is now fully developed.The directors are
The accountant of your business has recently been taken ill through overwork. In his absence his assistant has prepared some calculations of the profitability of a project, which are to be discussed
C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used cost £540,000 and
Arkwright Mills plc is considering expanding its production of a new yarn, code name X15.The plant is expected to cost £1 million and have a life of five years and a nil residual value.It will be
The directors of Mylo Ltd are currently considering two mutually exclusive investment projects. Both projects are concerned with the purchase of new plant. The following data are available for each
The payback method has been criticised for not taking into account the time value of money. Could this limitation be overcome? If so, would this method then be preferable to the NPV method?
How might classification help in this way?
Earlier in the chapter, we discussed the limitations of the PP method. Can you explain why it is still a reasonably popular method of investment appraisal among managers?
The directors of Manuff (Steel) Ltd are considering closing one of the business’s factories.There has been a reduction in the demand for the products made at the factory in recent years. The
A garage has an old car that it bought several months ago for £3,000. The car needs a replacement engine before it can be sold. It is possible to buy a reconditioned engine for £300. This would

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