Question.2997 - Your assignment for this week is to complete the following questions and problems from Chapter 4. Please submit your complete assignment in the course room by the due date. Chapter 4 Questions (4-2) What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used to evaluate all potential investments? (4-5) Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain. Chapter 4 Problems (4-1) If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years? (4-2) What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually? (4-6) What is the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this were an annuity due, what would its future value be? (4-7) An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is this investment’s present value? Its future value? (4-8) You want to buy a car, and a local bank will lend you $20,000. The loan would be fully amortized over 5 years (60 months), and the nominal interest rate would be 12%, with interest paid monthly. What is the monthly loan payment? What is the loan’s EFF%? (4-16) Find the amount to which $500 will grow under each of the following conditions. a. 12% compounded annually for 5 years b. 12% compounded semiannually for 5 years c. 12% compounded quarterly for 5 years d. 12% compounded monthly for 5 years (4-17) Find the present value of $500 due in the future under each of the following conditions. a. 12% nominal rate, semiannual compounding, discounted back 5 years b. 12% nominal rate, quarterly compounding, discounted back 5 years c. 12% nominal rate, monthly compounding, discounted back 1 year(4-18) Find the future values of the following ordinary annuities. a. FV of $400 each 6 months for 5 years at a nominal rate of 12%, compounded semiannually b. FV of $200 each 3 months for 5 years at a nominal rate of 12%, compounded quarterly c. The annuities described in parts a and b have the same total amount of money paid into them during the 5-year period, and both earn interest at the same nominal rate, yet the annuity in part b earns $101.75 more than the one in part a over the 5 years. Why does this occur? (4-19) Universal Bank pays 7% interest, compounded annually, on time deposits. Regional Bank pays 6% interest, compounded quarterly. a. Based on effective interest rates, in which bank would you prefer to deposit your money? b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? In answering this question, assume that funds must be left on deposit during an entire compounding period in order for you to receive any interest. (4-22) Washington-Pacific invested $4 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 10 years, at which time W-P plans to sell the forest at an expected price of $8 million. What is W-P’s expected rate of return? (4-25) While Mary Corens was a student at the University of Tennessee, she borrowed $12,000 in student loans at an annual interest rate of 9%. If Mary repays $1,500 per year, then how long (to the nearest year) will it take her to repay the loan? (4-28) Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling securities that call for 4 payments of $50 (1 payment at the end of each of the next 4 years) plus an extra payment of $1,000 at the end of Year 4. Your friend says she can get you some of these securities at a cost of $900 each. Your money is now invested in a bank that pays an 8% nominal (quoted) interest rate but with quarterly compounding. You regard the securities as being just as safe, and as liquid, as your bank deposit, so your required effective annual rate of return on the securities is the same as that on your bank deposit. You must calculate the value of the securities to decide whether they are a good investment. What is their present value to you?
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Answer- x Opportunity xxxx rate xx the xxxx that xxx would xxxx if xxx investment xx made xx some xxxxx place xx instrument xx opportunity xxxx is xxx difference xx return xxxxxxx an xxxxxxxxxx that xxx chosen xxx investment xxx one xxxx is xxxxxxxxxx gave xx For xxxxxxx if x person xxxxxxx in xxxxxx and xxx return xxxx a xxxxxx of xxxx then xx investing xxx her xxxxx on xxxxx that xxxxxx gave xx the xxxxxxxxxxx of xxxxxxx investment xxxxxxxxxxx cost xxxx is xxxx as x discounting xxxxxx to xxxxxxxxx present xxxxx of xxxxxx cash xxxx To xxxxxxx present xxxxx future xxxxx is xxxxxxx by x in xxxx year xxxxxxxxx in xxxx line xxxxxxxxxxx cost xx shown xx between xxx cash xxxxx No xxx same xxxxxxxxxxx cost xxxx cannot xx used xxx all xxx project xx different xxxxxxx has xxxxxxxxx risk xxx different xxxxxx Answer- x I xxxxx rather xxxx a xxxxxx account xxxx pays xxxxxxxx compounded xxxxx than xxxxxxxxxx semiannually xxxxxxx effective xxxx of xxxxxxxxxx interest xxxx is xxxxx effective xxxx of xxxxx compounding xx Calculation xx interest xxxxxxxxxx semiannually x Calculation xx interest xxxxxxxxxx daily x So x would xxxxxx daily xxxxxxxxxx interest xxxx - xxxxxxxxx P xxxx Rate x Amount x nbsp xxxx - xxxxxx A xxxx n xxxx r xxxxxxxxx P xxxx nbsp x Rate x Annuity x Future xxxxx FV xx anuity xxx nbsp xxxx - xxxx Amount xx Present xxxxx nbsp xxxxxx Value xxxx nbsp xxxx - xxxxxxx Loan xxxxxxx EAR xxxx nbsp xxxx - xxxxxxxxx Rate xxxx a xxxxxxx compounded xxxxxxxx for xxxxxx nbsp x Amount- xxxxxxxxxx semiannually xxx years xxxx c xxxxxxx compounded xxxxxxxxx for xxxxx nbsp x Amount- xxxxxxxxxx monthly xxx years xxxx nbsp xxxx - x PV-semiannual xxxxxxxxxxx b xxxxxxxxxxxx compounding x PV-monthly xxxxxxxxxxx nbsp xxxx - x FV xxxx b xx nbsp x because xxx money xx on xxxxxxx for x longer xxxxxx of xxxx and xx earns xxxx interest xxxx because xxxxxxxxxxx is xxxx frequent xxxx interest xx earned xx interest xxxx nbsp x EAR xx case xx Universal xxxx EAR xx case xx Regional xxxx nbsp xx funds xxxx be xxxx on xxxxxxx until xxx end xx the xxx not xxxxxxxx period xxxx for xxxxxxxxx and xxxxxxx for xxxxxxxx and xxx think xxxxx is x high xxxxxxxxxxx that xxx will xxxx a xxxxxxxxxx during xxx year xxx Regional xxxxxxx might xx preferable xxxx For xxxxxxx if xxx withdrawal xx made xxxxx months xxx would xxxx nothing xx the xxxxxxxxx account xxx - xx the xxxxxxxx account xxxx nbsp x Principal x nbsp xxxx t xxxx Amount x nbsp xxxx nbsp xxxx - xxxx M xxxx R xxxxxxx A xxxx Time xx Answer xxxxx nbsp xxxx - xxxxxx nbsp xxx nbsp xx nbsp xx nbspMore Articles From Accounting
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