Exam 2: Time Value of Money

Two assets, A and B, are purchased for the same price. Each loses 10% of its value in the first year. Subsequently, the value of A continues to decline in the same way by declining-balance depreciation, while the value of B continues to decline in the same way by straight-line depreciation. Which will have the greater book value in five years time?

Bill wants to buy a new car in three years from now. He expects that the price of a car will be $15 000 in three years. How much money should Bill put in his savings account now if a bank pays 5% interest rate on this account?

What is the major advantage and the major drawback of the straight line depreciation method?

Suppose that the nominal interest rate is 18%. Calculate the effective interest rate when interest is compounded: (i)Annually (ii)Semiannually (iii)Quarterly (iv)Monthly (v)Biweekly (vi)Weekly (vii)Daily (viii)Continuously

If an interest rate is 18% per year, what is the equivalent interest rate per quarter?

If a new technology comes into existence which partially replaces some old technology, how will the loss in the value of the old technology be classified?

If you borrow $2 000 today at 20% interest rate for 5 years, what is your simple interest in this case?