# Tman625 Midterm Exam

Pages: 7 (2066 words) Published: July 8, 2012
TMAN 625 Midterm Exam, Spring 2012

Name

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TVOM‐qualitative Annual Annuity Annual Loan Loan Annuity stocks verses bonds Discounted Payback PW, FW, AW IRR independent ‐ cost only IRR mutually exclisive

TMAN625 Midterm Exam, Summer 2012

Name

Eric D. Choi

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Question 1

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Explain where or when each of the following should be used. Use not more than 100 words for each, which is about what the allotted space below holds. This can be answered below or in a MS Word formatted document. a Effective Annual Rate Used when compounding is not annual and deposits use a different period length

b Annual Percentage Rate Used when compounding and deposits are both one year

c Periodic Interest Rate Used when compounding and deposits are more often than annual, and both have the same frequency

Question 2

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Maria had a rich uncle who left her a trust fund of \$200,000 that earns interest at an effective annual rate of 5% . a If she receives \$10,000 annually until the funds are gone, how many payments including the final partial  payment, will she receive. If she take out \$30,000 immediately to buy  a car but no more, how much will she have in the fund at the end  of 45 years when she retires? If she wants the fund to be worth \$1,000,000 in 30 years, how much can she withdraw today (single  payment)? What is the maximum amount that she can withdraw annually for 30 years, starting at the end of the coming  year? PV RATE PMT FV NPER (\$200,000) 5% \$10,000 \$0 #NUM!

b

c d

a)

Because the question does not state that compounding is monthly, I took it that compounding is annual. Because compounding is annual, the EAR is the same as the APR. The number of payments is infinity b) PV RATE PMT NPER FV Original PV FV NPER (\$170,000) 5% 45 \$1,527,451 (\$200,000) \$1,000,000 30

c)

RATE Desired PV Withdraw

5% (\$231,377) (\$31,377)

She can not withdraw anything today. She has to add \$31,377 into the fund. d) PV RATE NPER PMT (\$200,000) 5% 30 \$13,010

Question 3

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Pierre is starting a new company and borrowed \$200,000 from relatives.  The interest rate is to be 3.5 compounded annually).  The plan is to make no payments on the loan, and then pay the relatives back 6th year. a b a) If he wants to pay off the loans in full with equal payments in years 6 through 10, what would th payment be in those years? How long would it take to pay off the loan starting in year 6 if he pays his relatives \$100,000 an PV RATE NPER FV PV after 5 yrs PMT b) PV after 5 yrs PMT RATE NPER \$200,000 3.5% 5 \$237,537 \$237,537 (\$52,610) \$237,537 (\$100,000) 3.5% 2.5

5% annually (and  k starting in the

he annual  nually.

Question 4 Score Fred and Wilma are comparing two loans, both for \$300,000.  One has payments of \$1,850 monthly for The other has payments of \$1,750 for 25 years plus a balloon payment at the end of \$50,000 to pay it o both, which one should be chosen from purely a financial perspective? Loan 1 PV \$300,000 PMT (\$1,850) NPER 300 Total amount paid after 25 yrs PV \$300,000 PMT (\$1,750) NPER 300 Total amount paid after 25 yrs

(\$555,000)

Loan 2

(\$575,000)

Loan 1 is better because the total amount paid is lower

0 r 25 years to pay if off completely.   off completely.  If they can afford

Question 5

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Rebecca and Salvador have a grand plan.  They will deposit their combined annual bonuses and other sav annually (annual deposits) for  the upcoming ten years and then take a year off from their jobs and live it 11 spending \$8,000 monthly (end of month). They also will withdraw a total of \$15,000 at the end of yea up an apartment, and to live on for the first month.  The last months payment will pay for getting home, ...