Question
1. A couple who just had a girl decide to save up to pay the fees. of the child's university. It may create a university
1. A couple who just had a girl decide to save up to pay the fees. of the child's university. It may create a university fund which bears interest on a annual rate of 7% assuming the child is starting university at the age of 18, the parents estimate that an amount of $40,000 per year will be necessary to cover university fees for 4 years. Determine the equal annual amounts that the couple will have to set aside until admission of their daughter at university. (It is assumed that the first deposit will be made on the day of the child's first birthday and that the last deposit will take place on the day of his eighteenth birthday. The first withdrawal will occur at the start of the first year of university, when the child turns 18. Show your calculations in your working document. Support your answer with a diagram of monetary flows.
2. Suppose you make monthly deposits of $500 into a plan retirement savings account (RRSP) which earns 10% interest component quarterly. Calculate the balance after 10 years. To resolve this problem apply the principle that as soon as a deposit is made it starts to earn interest. Show your calculations in your working document.
3. Bond yield
Michael Nguyen buys a new corporate bond for $1,000. The issuing company promises to pay the holder $45 every 6 months interest on $1,000 corresponding to the face value (at par) of the security and repay this $1000 after 10 years. Two years later, Michael sells bond to Maria Garcia for $900. Show your calculations in your work document.
a) What is Michael's return on investment?
b) If Maria retains the bond for the remaining 8 years before her maturity, what is the return to maturity of his investment?
c) What was the current yield when Maria bought the bond?
4. Apex must use a chemical finishing process for a product subject to a 6-year manufacturing contract. Neither option 1 nor option 2 may be repeated once their useful life is over. However the company H&H Chemicals will offer option 3 at the same time throughout the contract length.
Option 1: Treatment device A, which costs $100,000, incurs a fee annual operating and labor costs of $60,000; its useful life is estimated at 4 years and its salvage value, at $10,000.
Option 2: Treatment device B, which costs $150,000, incurs a fee operating and labor costs of $50,000; its useful life is estimated at 6 years and its salvage value, at $30,000.
Option 3: Use subcontracting at a cost of $100,000 per year.
Based on the present value equivalent (NPV) criterion, which option would you recommend, if i = 12%. Show your calculations in your working document.
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