1) (10%) A corporation agreed to loan one of its subsidiaries $100,000 for three year. The note
states an interest rate of 5% with annual compounding. $25,000 payments are to be made at
the end of years 1 and 2, with the remaining balance to be paid at the end of year 3. Calculate
the amount of interest the subsidiary will pay each year.
2) (10%) Your company has $50,000 of additional funds it will need in three months to pay annual
employee bonuses. The money is sitting in an account that pays no interest. The company can
invest it all into 13-week (91 day) Treasury bills, with a discount rate of 0.185%.
A. How much of the investment will the government utilize?
B. How much total interest will the company earn on the funds?
C. How much money will the government pay back to your company at maturity?
3) (10%) A Major League Baseball team signs a free agent player to a new contract, which includes
a $2 million signing bonus. If the player puts the money into an account earning 9%,
compounded quarterly, how much will be in the account at the end of 5 years when his contract
expires?
4) (10%) Your company is owed a lump sum payment of $400,000 in one year. The customer that
owes the money has offered to settle the account now for $390,000. If your company can earn
3% on similar investments, what is the minimum amount you would accept now as a payoff?
Based just on the figures, would you accept the offer? Explain.
5) (10%) An assembly plant anticipates needing to replace some of its machinery in 4 years, at a
current cost of $2 million. The company expects annual inflation of 3%. It also believes it can
earn an 8% return on its money, compounded quarterly. How much money would the company
have to put into an account now in order to have the anticipated future cost of the machinery
available to withdraw at the end of 4 years?
6) (10%) What is the future value of $80,000 invested now for 5 years at a 6% rate under the
following compounding options?
A. Annual
B. Semi-annual
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C. Quarterly
D. Monthly
7) (10%) For each of the 4 compounding options in question 6, calculate the Effective Annual Rate.
8) (10%) A company invested $40,000 into a project and 5 years later its estimated return was
$280,000. What was the Internal Rate of Return of the project?
9) (10%) An outside company has approached yours to gauge your interest in acquiring them.
Among the other company’s claims is that a $250,000 buyout would result in a doubling of your
company’s investment within 3 years. Your company’s required rate of return is 8%.
A. Verify the other company’s claim by approximating the time it would take to double your
company’s investment, using your required rate of return and the Rule of 72.
B. Calculate the time it would take to double your company’s investment using Excel’s nper
function.
10) (10%) A company’s simple interest investment for 4 months resulted in $90 of interest earned
and an annualized rate of return of 6%. What was the initial Principal amount of the
investment?
1) (10%) A manufacturer needs to borrow money to purchase a building. The purchase price of the
building is $1.5 million, and the company will put $300,000 in cash down at closing. If the
company can borrow the difference from its bank at 4.85% for 20 years, what will the monthly
principal and interest payment of the loan be? Create an amortization schedule also.
2) (10%) A company vehicle is being purchased for $55,000 and the business will put $5,000 down.
If the company takes out a 5-year loan at 4%, what will the monthly principal and interest
payment be? Create an amortization schedule.
3) (10%) As the owner of a successful and profitable company, you plan to retire in 25 years. To
fund your retirement, you will start putting $1,000 into an investment account at the end of
each month until retirement.
A. If you expect the account to average a 7% return, compounded monthly, how much money
will be in the account when you reach retirement?
B. How much money will be in the account if the $1,000 monthly contributions are made at
the beginning of each month?
4) (10%) Continuing the scenario from question 3: Assume you have chosen to invest the $1,000
monthly contributions at the end of each month. Once retired, you will adjust your investment
allocation to be more conservative and expect to average a 4% return on the account each year,
compounded monthly. While retired, you plan to draw $5,000 from the account at the end of
each month to go towards living expenses. You expect your lifespan in retirement to be 30
years.
A. How much money will you need to have at the beginning of retirement to fund the $5,000
monthly withdrawals for 30 years?
B. How many months could $5,000 be withdrawn before the account would be out of money?
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5) (10%) Calculate the monthly mortgage payment for the following two scenarios. Create an
amortization schedule for each also.
A. $200,000 loan for 15 years at 3%.
B. $400,000 loan for 30 years at 4%.
6) (10%) An executive wants to take out $50,000 from her retirement account at the beginning of
each year that she is retired. She estimates her account will earn 3% during retirement and she
will need to be able to withdraw the funds each year for 25 years. How much money will the
executive need to have in her account when she starts retirement?
7) (10%) Continuing the scenario from question 6: The executive will have deposited funds at the
beginning of each month into her retirement account for 30 years prior to retirement. The
account will have averaged a 9% return. How much money will she need to have deposited each
month to reach her retirement balance goal (from question 6)?
8) (10%) Your best employee just won the state lottery. She can either take a one-time lump sum
payout of $4,000,000 now or choose an annuity option that pays $275,000 at the beginning of
each year for 20 years. Since she plans to stay working for your company for 20 more years and
then retire, your employee is considering how much money each option would result in if put
into an account earning 3% annual interest and left untouched until retirement. Calculate the
future value of each of the two payout options.
9) (10%) An assembly plant anticipates needing to replace some of its machinery in 4 years, at a
current cost of $2 million. The company expects annual inflation of 3%. It also believes it can
earn an 8% return on its money, compounded quarterly. How much money would the company
have to put into an account at the end of each quarter to have the anticipated future cost of the
machinery available to withdraw at the end of 4 years?
10) (10%) Your company has a 401K account for the employees. The company matches the first 5%
of contributions that employees make to their accounts. One employee contributes $1,000 at
the end of each month and expects to do so for the next 20 years. Assuming an average rate of
return of 7%, compounded monthly, how much money will the employee have in the account at
the end of 20 years?