Assignment 1 - Finance

Topics: Time value of money, Mathematics, Investment Pages: 5 (1226 words) Published: August 27, 2013
Question 1
(5 points) $50 today is worth MORE than $50 tomorrow.
Your AnswerScoreExplanation
TrueCorrect5.00Correct. You understand Time value of money. False
Total5.00 / 5.00
Question Explanation

We have assumed time value of money is positive.
Question 2
(5 points) $100 invested for 10 years at 12% interest is worth more in FV terms than $200 invested for 10 years at 4% interest. Your AnswerScoreExplanation
TrueCorrect5.00Correct. You know the mechanics for calculating FV. False
Total5.00 / 5.00
Question Explanation

All about compounding.
Question 3
(5 points) Shawn wants to buy a new telescope. He estimates that it will take him one year to save the money and that the telescope will cost $200. At an interest rate of 6%, how much does Shawn need to set aside today to purchase the telescope in one year? (Enter just the number without the $ sign or a comma) Answer for Question 3

You entered:

Your AnswerScoreExplanation
189Correct5.00Correct, You know it has to be less than $200. Total5.00 / 5.00
Question Explanation

Simple PV calculation.
Question 4
(10 points) Jeff has $1,000 that he invests in a safe financial instrument expected to return 3% annually. Marge has $500 and invests in a more risky venture that is expected to return 7% annually. Who has more after 20 years? And how much does he/she have in FV terms? Your AnswerScoreExplanation

Jeff; 1806
Jeff; 1935
Jeff; 1604
Marge; 1935Correct10.00Correct. You know how to calculate FVs! Marge; 1604
Marge; 1806
Total10.00 / 10.00
Question Explanation

FV calculations of simple one-shot cash flows. Shows power of compounding. Question 5
(10 points) Your dad invested $25 for you in 1942 in a fund and you have not withdrawn any money since.If the fund has averaged a return of 8 percent over the last 70 years, what is the current value of that investment? (Round to the nearest whole dollar; enter just the number without the $ sign or a comma) Answer for Question 5

You entered:

Your AnswerScoreExplanation
5465Correct10.00Correct. You know how to accurately calculate FV. Total10.00 / 10.00
Question Explanation

Simple FV calculation. The amount has to be at least $165 even if you ignore compounding because so many years have passed. Question 6
(10 points) Bridgette’s grandparents opened a savings account for her and placed $500 in the account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart set on a new karaoke machine. The machine costs $150. How much less will the account be worth in 8 years if she buys the karaoke machine now versus leaving the account untouched? (Enter just the number without the $ sign or a comma; round to the nearest whole dollar.) Answer for Question 6

You entered:

Your AnswerScoreExplanation
198Correct10.00Correct. You know that it has to be more than $150, and actually by at least $42. Total10.00 / 10.00
Question Explanation

Again a simple FV calculation, but need to read the question carefully to save time and calculate it only once. Question 7
(10 points) The Johnson family is worried about their ability to pay college tuition for their daughter Chloe. Tuition rates are currently $9,500 per year at the state college and have been increasing at a rate of 7% annually. Chloe will begin college in 7 years. The Johnson’s have $9,500 set aside now in a college plan that will earn 6% per year. They recently heard about a plan to pre-pay tuition at current rates, that is pay $9,500 per year of college. Should they pre-pay Chloe’s first year now or keep the money invested and pay the tuition 7 years from now? How much are they saving in FV terms with this decision? Your AnswerScoreExplanation

Pre-pay; 781
Don't Pre-pay; 781
Don't Pre-pay; 685
Pre-pay; 970Correct10.00Correct decision, and correct calculation. Pre-pay; 685
Don't Pre-pay; 970
Total10.00 / 10.00...
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