Exam 2: Time Value of Money

You have $100 to deposit. Bank A offers 16% interest, compounded annually, Bank B offers 15% interest, compounded monthly. How many years would you have to keep your money in the bank for Bank B to be a better choice?

You would like to have $8 500 for future spending in three years from now. How much should you deposit in your bank account now if the account pays you 0.4% interest per month?

A transportation company just bought a new truck for $25 000. The service life of the truck is seven years. The company has to pay a $100 registration fee at the beginning of every year plus maintenance costs of $1 000 in the first year and$200 at the beginning of the second year. At the end of the truck's service life, it will be sold at 10% of its purchase price. Construct a cash flow diagram from the company's perspective.

Bill deposits $100 to his savings account biweekly. His savings account pays a nominal interest rate of 5% per year, compounded every six months. What is his savings account's effective interest rate for a 6-month period?

If the nominal annual interest rate is 10% and interest is continuously compounded, what is the effective annual interest rate?

How many compounding periods are needed to obtain an effective interest rate of 25% if the interest rate per sub-compounding period is 1.88%?

If the book value of an item at the beginning of the first year is $20,000 and its useful life is 5 years, tabulate the depreciation deduction over the course of the first four years. After four years, what is the total of the interest that Jennifer will have received during that period? Assume a salvage value of $2000 and use the Single Declining Balance method.

It is known that the total interest paid over a 5-year period is $2 081.13. What was the principal amount borrowed at a 6% nominal interest rate compounded quarterly?

Charles has just purchased a car for $9 520. He expects that the value of this car will decline by 5% each year. Eventually Charles wants to sell this car for at least $6 000 and buy a new one. How many years should Charles use this car before he can sell it?

A piece of equipment has just been purchased. It is expected to have a 5-year service life and to depreciate via the declining balance method. The present worth of its salvage value is $1 000. If the depreciation rate is 10%,and the MARR is also 10%, what was the purchase price of this equipment?

What is the difference between market value and book value?

Suppose you invested $1 000 in a new savings account with an annual interest rate of 3% compounded daily. What is your accumulated interest at the end of the first year?

You need to borrow $1 000. Bank A will lend you the money at 5% interest, compounded annually, whereas Bank B will lend you the money at 5% interest, compounded monthly. Bank B also offers you a free cell phone, valued at $100, if you do business with them. What is the longest duration of the loan for which Bank B would be a better choice?

Michael is indifferent about paying $1 500 for a new computer now and $2 000 two years from now. Define Michael's implied interest rate.

Consider the following statement: "Financial data are collected based on discrete time periods. However, in real life time is continuous. The error when using discrete compounding instead of continuous compounding is smaller the briefer the discrete compounding period is." Do you agree or disagree with this statement and why?

Suppose that you just paid $9.91 monthly interest compounded daily on an outstanding balance of on your credit card. What is the nominal annual interest rate in this case?

Joan is deciding whether she should remodel her house now or one year from now. If she does it now, the cost will be $1 500. If she waits one year, the cost is expected to be $1 600. At current interest rate of 5.6%, should Joan remodel her house now or one year from now?

Your credit card statement says that your card charges 0.0562% interest per day. What is the actual interest rate per year?

If you borrow $1 000 now at 10% interest for 5 years, what is the compound interest owed at the end of the fifth year?

Equivalence is a condition that exists when