Question

1. On July 1.2010, a customer has agreed to make sux, $2.000 quarterly cash payments staring October 1. 2010 and $6,000 on July 1. 2013 in exchange for a piece of equipment that cost you $12,000. If the annual interest tate is 8% and the how much profit did you earn on the sale of the equipment? 2. When calculating the present or future value of an annuity we assume A) The number of compoundines each year is independent of the payments per year B) The number of compoundings per year is equal to the number of payments per year. C) The number of compoundings depends on the size of the payment D) The number of compoundings depends on the annual interest rate 3. Badger Corp is trying to decide whether to buy a new machine with a price of 340,000. IHeir analysis indicates the macthine will generate annual cash flows ot $11,000 for each of the next 6 years. The rate of return expected of any investment Badger make is 9%. Should Badger purchase the machine? 4. Interest calculated only on the amount borrowed is referred to ase A risk-free interest- B. inflation interest C. compound interest D simple interest generate $12,000 cash at the end of each of the next & years. If you must have 5. You are trying to decide whether to buy a machine today The machine will 10% rate of return on your investments, what is the most you would pay for this 6. Tanya Wagner plans to make annual deposits lof s 64 86 unnl she has accumulated $50,000. Assuming she earns 7% on her investment, Wagner will need to make a total of- A 9 payments C. 6 payments B cannot be determined from nformation given paynients BeautyCam

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Answer 1

	1
		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Interest Rate per quarter =(8/4)%=2%=0.02
		N=Period of Cash Flow
			N	CF	PV=CF/(1.02^N)
			Quarterly	Cash	Present Value
			Period	Flow	of Cash Flow
		October.1, 2010	1	$2,000	$1,960.78
		January.1, 2011	2	$2,000	$1,922.34
		April.1, 2011	3	$2,000	$1,884.64
		July.1, 2011	4	$2,000	$1,847.69
		October.1, 2011	5	$2,000	$1,811.46
		January.1, 2012	6	$2,000	$1,775.94
		April1.1, 2012	7	$2,000	$1,741.12
		July.1, 2012	8	$2,000	$1,706.98
		October.1, 2012	9	$2,000	$1,673.51
		January.1, 2013	10	$2,000	$1,640.70
		April.1, 2013	11	$2,000	$1,608.53
		July.1, 2013	12	$6,000	$4,730.96
				SUM	$24,304.66
	A	Present value of amount received	$24,304.66
	B	Cost of Equipment	$12,000
	C=A-B	Profit	$12,304.66
	2	When calculating Present or future value
		of annuity we assume:
		B)Number of compounding per year is equal to number of payments per year
	3
		N	CF	PV=CF/(1.09^N)
		Year	Cash Flow	Present Value
		0	($40,000)	($40,000)
		1	$11,000	$10,091.74
		2	$11,000	$9,258.48
		3	$11,000	$8,494.02
		4	$11,000	$7,792.68
		5	$11,000	$7,149.25
		6	$11,000	$6,558.94
			SUM	$9,345
		Net Present Value =Sumof PV of cash flow	$9,345
		Badger should purchase the machine
		Because Net Present Value is positive
	4
		D. Simple Interest
	5	N	CF	PV=CF/(1.1^N)
		Year	Cash Flow	Present Value
		1	$12,000	$10,909.09
		2	$12,000	$9,917.36
		3	$12,000	$9,015.78
		4	$12,000	$8,196.16
		5	$12,000	$7,451.06
			SUM	$45,489.44
		Most can be paid for this machine	$45,489.44
								6 Future value of payment after N Year FV (Deposit in year n)((1)(N-n)) -Interest rate-%0.07 For 9 payments; FV-Deposit in year(n))"(1.07(9-n) FV D/(1.07 (9-n)) Year Deposit Future value 1 $7,634 2 $7,634 3 $7,634 4 $7,634 5 $7,634 6 $7,634 7 $7,634 8 $7,634 9$7,634 $13,117.25 $12,259.11 $11,457.12 $10,707.58 $10,007.09 $9,352.42 $8,740.58 $8,168.77 $7,634.36 $91,444.28 SUM For 7 payments FV (Deposit in yearn(1.07(7-n)) FV D/(107(7-n)) Future value ear Deposit $7,634 $7,634 $7,634 $7,634 $7,634 $7,634 $7,634 $11,457.12 $10,707.58 $10,007.09 $9,352.42 $8,740.58 $8,168.77 $7,634.36 $66,067.91 SUM For 6 payments FV (Deposit in yearin)) 1.07 (6-n)) Fv-D/(1.074(6-n)) Year DepositFuture value $7,634 $7,634 $7,634 $7,634 $7,634 $7,634 $10,707.58 $10,007.09 $9,352.42 $8,740.58 $8,168.77 $7,634.36 $54,610.80 SUMM ANSWER: C. 6 Payment