Question

hi how to do 6 and 7) please

You are interested in taking out a loan of $30,000 from your local bank. The bank charges you an interest rate of 5% per year, and you would like to repay the loan in ten equal annual instalments, each one paid at the end of the year. How much would you need to pay to the bank at the end of each year? amo $3,000. $3,634.22. $3,885.14. $3,998.62. (7) Which of the following statements on the profitability index is FALSE? B) C) The profitability index measures the value created in terms of Net Present Value (NPV) per unit of resource consumed. In the presence of a constrained resource, choosing the highest NPV project might not lead to the best decision. The profitability index rule should not be used if more than one of the company's resources are simultaneously constrained. Ranking projects by the profitability index, one should firstly select the project with the lowest index value and proceed down the list until the constrained resource is consumed. D)

Answer 1

HI

6) This question is an example of annuity problem

where Present Value P = $30,000

interest rate r = 5%

time t = 10 years

periodic payment C =?

Present value of annuity P = (C/r)*(1-(1+r)^-n)

30000 = (C/0.05)*(1-1.05^-10)

30000*0.05 = C*(1-0.614)

C = 1500/0.386

C = $3,885.14

hence option C is correct here.

7) Profitability index = incremental profit from segment / number of constraint resource required

hence the higher the profitability, better will be the project.

Hence option D is false here.

Thanks