Chapter 5 Review Worksheet If you deposit $10,000 in a bank account paying 10.38
ID: 2815707 • Letter: C
Question
Chapter 5 Review Worksheet If you deposit $10,000 in a bank account paying 10.38%, how much will you have in one year? If you need $12,000 in one year, how much do you have to deposit today? 1. 2. An art collector has the opportunity to invest in paintings: the investment requires an initial outlay of $2 million today. The collector is certain that he will be able to sell the paintings for $2.18 million one year from now. He also has the opportunity to invest in bank certificates of deposit which pay 10% per year, what is the future value of the $2MM if the collector elects to purchase a bank CD? Is the investment in paintings a good idea? 3. In problem 2, what is the rate of return for the investment in paintings? 4. As a newly-minted MBA embarking on a career in investment banking, you must own a new car immediately. The car costs $28,320. You also have to spend $3,248 on new suits for work. Your salary this year is $42,000, and next year it will be $46,000. Your routine living expenses this year will be $34,000. You plan to make up the difference between current income and current consumption by borrowing; the interest rate for the loan is 14% and you intend to repay the loan, plus interest in one year. How much will you have left to spend next year?Explanation / Answer
1)
Future value = Present value ( 1 + r)n
Future value = 10,000 ( 1 + 0.1038)1
Future value = 11,038
You will have $11,038 in one year
Present value = 12,000 / ( 1 + 0.1038)
Present value = $10,871.53
2)
Future value = 2 ( 1 + 0.1)
Future value = 2.2 million
future value of bank CD is 2.2 million
Investment in painting is NOT a good idea as it's future return is less than CD.
3)
Rate of return = ( Ending value - beginning value) / beginning value
Rate of return = ( 2.18 - 2) / 2
Rate of return = 0.09 or 9%
4)
Difference = 28,320 + 3,248 + 34,000 - 42,000 = 23,568
Future value = 23,568 ( 1 + 0.14)
Future value = 26,867.52
Remaing amount = 46,000 - 26,867.52 = $19,132.48
5)
Return on investment = ( 900 + 300 - 1000) / 1000
Return on investment = 0.2 or 20%
6)
Pv of investment = 114 / ( 1 + 0.2)1 + 144 / ( 1 + 0.2)2
Pv of investment = 95 + 100
Pv of investment = 195
195 - 195 = 0
The investment os NOT acceptable since the value is 0
7)
PV = 145 / ( 1 + 0.08)5
PV = $98.68
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