Practice Problems for Ch5 Fina5003

891 Words Oct 21st, 2015 4 Pages
1. Comet Powder Company has purchased a piece of equipment costing $100,000. It is expected to generate a ten-year stream of benefits amounting to $16,273 per year. Determine the rate of return Comet expects to earn from this equipment. a. | 16.3% | b. | 62.7% | c. | 10% | d. | 20% |

ANS: C 2. The earnings of Omega Supply Company have grown from $2.00 per share to $4.00 per share over a nine year time period. Determine the compound annual growth rate. a. | 11.1% | b. | 8% | c. | 22.2% | d. | 100% |

ANS: B 3. Mr. Moore is 35 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 25 years so that he can retire at age 60.
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You sold 100 shares of stock today for $30 per share that you paid $20 for 6 years ago. Determine the average annual rate of return on your investment, assuming the stock paid no dividends. a. | 25% | b. | 8.33% | c. | 150% | d. | 7% |

ANS: D
Solution:
PV0 = FVn(PVIFi,n); n = 6; PV0 = $20; FV6 = $30
$20 = $30 (PVIFi,6)
(PVIFi,6) = 0 .667; Therefore i = 7% from Table II. 7. Billy Bob has decided to put $2,400 a year (at the end of each year) into an IRA over his 40 year working life and then retire. What will Billy have if the account will earn 10 percent compounded annually? a. | $394,786 | b. | $ 23,470 | c. | $1,062,223 | d. | $810,917 |

ANS: C
Solution:
FVAN40 = $2,400(442.593) = $1,062,223 8. Jane wants to have $200,000 in an account in 20 years. If her account earns 11 percent per annum over the accumulation period, how much must she save per year (end of year) to have the $200,000? a. | $25,116 | b. | $3,115 | c. | $10,000 | d. | $3,492 |

ANS: B
Solution:
PMT = $200,000/64.203 = $3,115 9. Many IRA funds argue that investors should invest at the beginning of the year rather than at the end. What is the difference to an investor who invests $2,000 per year at 11 percent over a 30 year period? a. | $43,785 | b. | $36,189 | c. | $54,244 | d. |

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