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1. On January 1 a company determines it will need a new computersystem costing $60,000 three years from now. It desires to make 3equal deposits into its bank each of the next three December 31. Ifthe bank is paying 5% interest compounded annually on suchdeposits, calculate the amount of the deposit that needs to be madeat the end of each of the next 3 years.

A. $22,032
B. $19,033
C. $20,000
D. $19,463

2. On January 1 a company determines it will need a new computersystem costing $60,000 three years from now. It desires to make asingle deposit into its bank today, January 1, that will grow to$60,000 three years from now. If the bank is paying 5% interestcompounded annually on such deposits calculate the amount of thedeposit that needs to be made today.

A. $57,143
B. $51,831
C. $54,422
D. $49,566

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Tod Thiel
Tod ThielLv2
28 Sep 2019

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The following are the time value of money formulas presented in the instructor notes. Use them as needed to answer the question below. You may also use the time value of money tables found on the last pages of your text. FV = PV * (FVIF, i, n ), FV = PV * (PVIF, i, n ) FVOA = PMT * (FVIFOA , i, n ), PVOA = PMT * (PVIFOA , i, n ) On January 1 a company determines it will need a new computer system costing $60,000 three years from now. It desires to make 3 equal deposits into its bank each of the next three December 31. If the bank is paying 5% interest compounded annually on such deposits, calculate the amount of the deposit that needs to be made at the end of each of the next 3 years. [answers may vary slightly due to rounding]

$22,032

$20,000

$19,033

$19,463

LBO Company reported the following information for its most recent year: Item amount Cash received from issuance of preferred stock $ 50,000 Cash collected on sales to customers 130,000 Cash paid to purchase equipment (18,000) Cash paid for selling expenses (15,000) Cash paid to purchase inventory (55,000) Cash received upon issuance of a note payable 20,000 Cash paid for general & administrative (G&A) expenses (19,000) Cash used to purchase treasury stock (15,000) Cash dividends paid (4,000) Change in cash for the year $ 74,000 Calculate LBO Company’s “free cash flow” for the year. [= net cash flow from operating activities – capital expenditures – cash dividends]

$19,000

$4,000

$74,000

$17,000

1Your family owns a velociraptor skeleton that is currentlyvalued at $86.7 thousand. Your grandfather, being an avid fossilcollector, bought it 50 years ago for $24.8 thousand. If theskeleton keeps appreciating at the same average annual rate, whatwould be its value 25 years from now?

2You would like to establish a trust fund that would pay annualpayments to your heirs of $98 thousand a year forever. You expectthe trust fund to earn an average return of 8.84 percent. How muchdo you need to deposit into this trust fund today to achieve yourgoal?

3You are thinking of investing in a project that will pay you$100,000 7 years from now, and another $100,000 10 years from now.You think the right discount rate for the project is 6.9%. What isthe maximum you should be willing to pay for this investment?

4A firm recently purchased a new facility costing $962 thousand.The firm financed this purchase with an amortized loan at aninterest rate of 9.7 percent APR, with monthly payments of $16.1thousand. How long will it take to pay off this loan? (Enter answerin months, accurate to two decimal places.)

5An investment is expected to produce $2,370 at the end of eachyear for the next 10 years. Other investments of similar riskinessavailable to you are yielding 8.4 percent return. What is themaximum you should be willing to pay for this investment?

6You are not thrilled about spending your entire life working.So, you have decided that you will save $6 thousand a year,starting at the end of this year, and retire as soon as you canaccumulate $1 million. If you can earn an average of 8.47 percenton your savings, how many years will pass before you get toretire?

7How much money must you invest today, at 7.7 percent fixedannual interest rate, in order to have 10 thousand in 13 years?

8You have $1,895 today, and want to double your money in 19years. What interest rate must you earn to achieve your goal?

9The house you want to buy costs $260 thousand. You plan to makea cash down payment of 10 percent, and borrow the rest in a 30 yearmortgage at 4.8 percent APR. What will be the amount of yourmonthly mortgage payment?

10You estimate that you will need $771 thousand in 30 years tobuy some cybernetic body enhancements, including infrared vision,retractable claws, and expanded brain storage capacity. To achieveyour financial goal, you want to make three equal-sized depositsinto an account paying a fixed annual rate of 8.82%. The firstdeposit will be made right now, the second 10 years from now, andthe third 20 years from now. What is the size of each deposit youneed to make in order to partake of future cybernetic goodness?(Hint: draw this out on a timeline.)

Mary has been working for a university for almost 25 years andis now approaching retirement. She wants to address severalfinancial issues before her retirement and has asked you to helpher resolve the situations below. Her assignment to you is toprovide a 4-5 page report, addressing each of the following issuesseparately. You are to show all your calculations and provide adetailed explanation for each issue. Issue A: For the last 19years, Mary has been depositing $500 in her savings account , whichhas earned 5% per year, compounded annually and is expected tocontinue paying that amount. Mary will make one more $500 depositone year from today. If Mary closes the account right after shemakes the last deposit, how much will this account be worth at thattime? Issue B: Mary has been working at the university for 25years, with an excellent record of service. As a result, the boardwants to reward her with a bonus to her retirement package. Theyare offering her $75,000 a year for 20 years, starting one yearfrom her retirement date and each year for 19 years after thatdate. Mary would prefer a one-time payment the day after sheretires. What would this amount be if the appropriate interest rateis 7%? Issue C: Mary’s replacement is unexpectedly hired away byanother school, and Mary is asked to stay in her position foranother three years. The board assumes the bonus should stay thesame, but Mary knows the present value of her bonus will change.What would be the present value of her deferred annuity? Issue D:Mary wants to help pay for her granddaughter Beth’s education. Shehas decided to pay for half of the tuition costs at StateUniversity, which are now $11,000 per year. Tuition is expected toincrease at a rate of 7% per year into the foreseeable future. Bethjust had her 12th birthday. Beth plans to start college on her 18thbirthday and finish in four years. Mary will make a deposit todayand continue making deposits each year until Beth starts college.The account will earn 4% interest, compounded annually. How muchmust Mary’s deposits be each year in order to pay half of Beth’stuition at the beginning of each school each year?

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