Exam 2: Time Value of Money

You have $100 to deposit. Bank A offers 20% simple interest, Bank B offers 15% interest compounded annually. How many years would you have to keep your money in the bank for Bank B to be a better choice than Bank A?

What does a cash flow diagram of a project represent?

Nominal interest rate is

Suppose that the effective interest rate associated with a VISA credit card is 20.9% while the nominal interest rate is 18.9%. What are the card's terms with respect to compounding?

A computer was bought for $2 000. After three years of service it can be sold for $500. If straight line depreciation is assumed, what was the computer's book value at the end of year 2?

What is depreciation?

A credit card quotes its annual interest rate as 21%. If the interest rate is compounded monthly, what is the effective interest rate for this credit card?

Stan has invested $1 000 into mutual fund at a 5% annual rate of return, compounded daily. What are the nominal and effective interest rates in this case? Discuss how these two interest rates affect Stan's investment?

Calculate the salvage value of equipment with a service life of 15 years if it was purchased 5 years ago for and depreciates at the rate of 10% per year.

What is the depreciation rate of a physical asset with the purchase price of $150 000 and salvage value of $16 100 after 10 years of service?

Suppose that the purchase price of a piece of equipment is $1 million. Its salvage value at the end of its 5-year service life is $500 000. Depreciate this asset using straight line depreciation and declining balance depreciation.

Jennifer lends $2 000 to her friend who is launching a small business. Her friend promises to pay her 9% per year compounding interest. How much interest would Jennifer get at the end of four years?

What makes one dollar in the future less desirable than one dollar today?

A company buys a corrugated-metal building to store fertiliser. Because of a change in plans, no fertiliser is ever stored in the building, but it rusts away due to exposure to the rain. What kind of depreciation is this?

Suppose that a power plant project requires $10 million in period zero, has operating costs of $1 million per year over 10 years, and brings revenue of $2 million per year over that period of time. Based on this information and the concept of time value of money, comment on whether this is a profit generating project or not?

The most popular depreciation method for physical assets in Canada is

COSCO invested $5.5 million in a project ten years ago. As of today the worth of this project is $24.9 million. What annual interest rate has the project been earning if interest is compounded monthly?

A machinist's lathe was purchased five years ago and, with installation and setup, has an initial cost of $250 000. It will have a salvage value of $20 000 three years from now. Assuming straight-line depreciation is a reasonable model, determine the current book value.

The only depreciation models needed for corporate tax calculations in Canada are

The nominal interest rate is 6% per year compounded quarterly. What is the effective annual rate?