1. Jerry was recently offered
1. Jerry was recently offered a position with a majoraccounting firm. The firm offered Jerry either asigning bonus of $23,000 payable on the first day of work or asigning bonus of $26,000 payable afterone year of employment. Assuming that he will remain at the firmfor a least one year and given arelevant interest rate of 15%, which option should Jerrychoose?a. The options are equivalent.b. Insufficient information to determine.c. The signing bonus of $23,000 payable on the first day ofwork.d. The signing bonus of $26,000 payable after one year ofemployment.2. If Jethro wanted to save a set amount each month in order to buya new pick-up truck when the newmodels are next available, which time value concept would be usedto determine the monthly payment?a. Present value of one.b. Future value of one.c. Present value of an annuity due.d. Future value of an ordinary annuity.3. Assume ABC Company deposits $95,000 with First National Bank inan account earning interest at 5%per annum, compounded semi-annually. How much will ABC have in theaccount after five years ifinterest is reinvested?a. $120,953.b. $95,500.c. $117,005.d. $121,247.4. You can afford an $800 / month car payment. What is the mostexpensive car you can buy if you thinkyou can qualify for 4 year loan at 3% APR.a. $32,879b. $29,687.c. $36,143.d. $20,213.
Answer:
Question No 1:
The 2 scenarios are:
(a) Receive $23,000 at the date of joining – Assume today
(b) Receive $26,000 at the end of one year.
Since, the time frame for both the options are different, wehave to bring them to a single time frame.
So, we will discount the $26,000 receivable at the end of oneyear to today’s value.
PV of $26,000 @ 15% int rate = $26,000 / 1.15 = $22,608.70
Therefore, Jerry is better off if he takes the money when hejoins. – Option C
Question No 2:
When we want to know the monthly investment required to obtain apredefined amount required at a future stage, we use present valueof annuity due. Option C
Question No 3:
The Formula for computing the value of amount if interest iscompounded is:
Amount = Principal (1 + rate of interest per compounding (R) )^Number of times compounded (N)
Total Amount = $ 95,000 (1 + (5/2)% )^10
= $ 121,608.
It is not available in the options provided.
However, the compounding is considered as annually,
Total Amount = $ 95,000 (1 + 5%)^5
= $ 121,247 – Option D
Question No 4:
The answer is Option C. The answer can bederived in a trial and error basis. The solution is:
| 0.0025 | $ 800.00 | |||
| Month | Loan outstanding at beginningof month | Interest formonth | PrincipalRepayment | Loan outstanding at monthend |
| 1 | $ 36,143.00 | $ 90.36 | $ 709.64 | $ 35,433.36 |
| 2 | $ 35,433.36 | $ 88.58 | $ 711.42 | $ 34,721.94 |
| 3 | $ 34,721.94 | $ 86.80 | $ 713.20 | $ 34,008.75 |
| 4 | $ 34,008.75 | $ 85.02 | $ 714.98 | $ 33,293.77 |
| 5 | $ 33,293.77 | $ 83.23 | $ 716.77 | $ 32,577.00 |
| 6 | $ 32,577.00 | $ 81.44 | $ 718.56 | $ 31,858.44 |
| 7 | $ 31,858.44 | $ 79.65 | $ 720.35 | $ 31,138.09 |
| 8 | $ 31,138.09 | $ 77.85 | $ 722.15 | $ 30,415.94 |
| 9 | $ 30,415.94 | $ 76.04 | $ 723.96 | $ 29,691.98 |
| 10 | $ 29,691.98 | $ 74.23 | $ 725.77 | $ 28,966.21 |
| 11 | $ 28,966.21 | $ 72.42 | $ 727.58 | $ 28,238.62 |
| 12 | $ 28,238.62 | $ 70.60 | $ 729.40 | $ 27,509.22 |
| 13 | $ 27,509.22 | $ 68.77 | $ 731.23 | $ 26,777.99 |
| 14 | $ 26,777.99 | $ 66.94 | $ 733.06 | $ 26,044.94 |
| 15 | $ 26,044.94 | $ 65.11 | $ 734.89 | $ 25,310.05 |
| 16 | $ 25,310.05 | $ 63.28 | $ 736.72 | $ 24,573.32 |
| 17 | $ 24,573.32 | $ 61.43 | $ 738.57 | $ 23,834.76 |
| 18 | $ 23,834.76 | $ 59.59 | $ 740.41 | $ 23,094.34 |
| 19 | $ 23,094.34 | $ 57.74 | $ 742.26 | $ 22,352.08 |
| 20 | $ 22,352.08 | $ 55.88 | $ 744.12 | $ 21,607.96 |
| 21 | $ 21,607.96 | $ 54.02 | $ 745.98 | $ 20,861.98 |
| 22 | $ 20,861.98 | $ 52.15 | $ 747.85 | $ 20,114.13 |
| 23 | $ 20,114.13 | $ 50.29 | $ 749.71 | $ 19,364.42 |
| 24 | $ 19,364.42 | $ 48.41 | $ 751.59 | $ 18,612.83 |
| 25 | $ 18,612.83 | $ 46.53 | $ 753.47 | $ 17,859.36 |
| 26 | $ 17,859.36 | $ 44.65 | $ 755.35 | $ 17,104.01 |
| 27 | $ 17,104.01 | $ 42.76 | $ 757.24 | $ 16,346.77 |
| 28 | $ 16,346.77 | $ 40.87 | $ 759.13 | $ 15,587.64 |
| 29 | $ 15,587.64 | $ 38.97 | $ 761.03 | $ 14,826.61 |
| 30 | $ 14,826.61 | $ 37.07 | $ 762.93 | $ 14,063.67 |
| 31 | $ 14,063.67 | $ 35.16 | $ 764.84 | $ 13,298.83 |
| 32 | $ 13,298.83 | $ 33.25 | $ 766.75 | $ 12,532.08 |
| 33 | $ 12,532.08 | $ 31.33 | $ 768.67 | $ 11,763.41 |
| 34 | $ 11,763.41 | $ 29.41 | $ 770.59 | $ 10,992.82 |
| 35 | $ 10,992.82 | $ 27.48 | $ 772.52 | $ 10,220.30 |
| 36 | $ 10,220.30 | $ 25.55 | $ 774.45 | $ 9,445.85 |
| 37 | $ 9,445.85 | $ 23.61 | $ 776.39 | $ 8,669.47 |
| 38 | $ 8,669.47 | $ 21.67 | $ 778.33 | $ 7,891.14 |
| 39 | $ 7,891.14 | $ 19.73 | $ 780.27 | $ 7,110.87 |
| 40 | $ 7,110.87 | $ 17.78 | $ 782.22 | $ 6,328.64 |
| 41 | $ 6,328.64 | $ 15.82 | $ 784.18 | $ 5,544.47 |
| 42 | $ 5,544.47 | $ 13.86 | $ 786.14 |
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