QUESTION 2 You borrow $10,000 for a car. Your 5-year loan has a monthly payment
ID: 1189458 • Letter: Q
Question
QUESTION 2
You borrow $10,000 for a car. Your 5-year loan has a monthly payment of $205. Your annual interest rate is closest to:
3.0%
6.0%
9.0%
12.0%
QUESTION 3
You spend $40,000 to upgrade your heating and cooling system and add insulation to your building. As a result, you expect to reduce electricity costs by $12,000 per year for each of the next 6 years. The rate of return on this investment is closest to:
6%
15%
18%
20%
QUESTION 4
You spend $40,000 to upgrade your heating and cooling system and add insulation to your building. As a result, you expect to reduce electricity costs by $12,000 per year for each of the next 6 years. Which equation correctly calculates the rate of return on this investment?
40000 = 12000(P/A,i,6)
40000 = 12000(A/P,i,6)
40000(P/A,i,6) = 72000
40000(P/A,i,6) = 12000(A/P,i,6)
QUESTION 5
If a potential project’s calculated internal rate of return is greater than or equal to the minimum attractive rate of return (MARR):
the project is economically justified and should be accepted
the project is economically justified but should be rejected
the project is not economically justified and should be rejected
the project is not economically justified but should be accepted
QUESTION 6
You won the lottery and can either receive a one-time payment of $500,000 or receive 20 annual payments of $50,000 each. If you give up the 20 annual payments and accept the one-time payment of $500,000, which equation will determine your IRR?
500,000(P/A,i,20) = 50,000
i = 50,000/500,000
500,000 = 50,000(A/P,i,20)
500,000 = 50,000(P/A,i,20)
QUESTION 7
Which is true about the internal rate of return (IRR) of an investment?
IRR is the interest rate that allows PWb to exceed PWc
IRR is the interest rate when PWb = PWc
IRR is the interest rate when B/C > 1
IRR is the interest rate when B/C <1
QUESTION 8
You donate $150,000 for an endowed scholarship at OIT. What rate of return must be received on your investment to be able to pay a deserving student $7,500 per year indefinitely?
4.7%
5.0%
8.5%
10.0%
QUESTION 9
You buy a bond that will mature at the end of 8 years and pay you the face value of $1000 at that time. The bond also pays interest every 6 months at an annual “coupon rate” of 6%. The current yield of this bond is 7%. The market price of this bond =
$940
$1000
$1095
$1109
QUESTION 10
You consider spending $3,500,000 to build a new office complex. You expect this will produce $850,000 in net rental income per year for 10 years. You will only invest if the expected IRR (your MARR) is at least 18%. Should you invest in this complex?
Yes, because IRR > 18%
Yes, because IRR < 18%
No, because IRR > 18%
No, because IRR < 18%
QUESTION 11
You buy a bond that will mature at the end of 8 years and pay you the face value of $1000 at that time. The bond also pays interest every 6 months at an annual “coupon rate” of 6%. The current yield of this bond is 7%. Based on the current yield, the market price of the bond is:
P = $1000
P = 30(P/A,3%,16) + 1000(P/F,3%,16)
P = 30(P/A,3.5%,8) + 1000(P/F,3.5%,8)
P = 30(P/A,3.5%,16) + 1000(P/F,3.5%,16)
QUESTION 12
You won the lottery and can either receive a one-time payment of $500,000 or receive 20 annual payments of $50,000 each. What is your IRR if you give up the 20 annual payments and accept the one-time payment of $500,000?
IRR = 7.0%
IRR = 7.8%
IRR = 8.6%
IRR = 10.0%
a.3.0%
b.6.0%
c.9.0%
d.12.0%
Explanation / Answer
Q.No.2:
Borrowed Amount = $10,000
EMI = $ 205
No. of Installements = 60
let r be the interest rate
205*(1+r)^60 = 10,000
(1+r)^60 = 10000/205 = 48.78
1+r = 48.78^(1/60)
r = 6.69%
which is closest to 6%i.e. B
Q.No.3:
Initial investment = 40,000
Decrease in electricity per yr = 12000
No of years = 6
Let r be the return on investment.
12000*PVAF@r% for 6 yrs = 40000
(1+r)^6 = 40,000/12,000
1+r = (3.33)^1/6
1+r = 1.222
r = 22.2%
which is closest to 20%i.e.D
Q.No.4 :
equation to calculate the return on investment for the above problem is
40,000 = 12000*PVAF,i,6
i.e..A
Q.No.5:
If IRR is more than MARR,
then,the project is economically justified and should be accepted
therefore Ans is A
Q.No. 6
at IRR, cashinflows is equals to cashoutflows(i.e. one time payment),
therefore, 500,000 = 50,000*PVAF,i,20
i.e, D
Q.No.7.
B.IRR is the interest rate when PWb = PWc
Q.No.8
Return per year = 7500
Investment = 150,000
rate per year indefinitely = 7500/150000 = 5%
i.e.B
Q.No.9:
Face value of bond = 1000
Coupon rate = 6% semi annually
No of Years = 8 Yrs i.e. 16 payments
Interest = 1000*6%/2 = 30
Present value of interest at market yield @7%i.e.3.5% semi annually.
Interest = 30*PVAF,3.5%,16
= 30*12.09 = 362.83
PV of bond at 8th year i.e. after the 16th payment = 1000*.577 = 577
Value of bond = 363 +577 = 940
i.e.A
Q.No.10.
Initial Outlay = 3,500,000
No of Years = 10
Interest = 18%
Income per year = 850000
Present value of Income = 850000*PVAF,18%,10 Yrs
= 850000*4.49 = $3819973.35
at MARR, NPV is +ve so the project can be viable.
IRR, at IRR NPV is zero so in this case,IRR is > 18%.
a.Yes, Because IRR >18%.
Q.No.11.
As calculated in Q.No.9, price of the bond is
P = 30(P/A,3.5%,16) + 1000(P/F,3.5%,16)
i.e.,D
Q.No.12:
IRR is
5,00,000= 50,000*(1+r)^20
1+r = 1.122
r =12.2%