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Exam 3: Interest and Equivalence

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Question 1

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If Sonja invested $10,000 in a good mutual fund that pays an average return of 10%, the investment will be worth $16,110 five years from now.

A) True
B) False

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Question 2

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Interest paid on a loan is analogous to rent paid on an apartment.

A) True
B) False

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Question 3

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One thousand dollars invested grew to be $3,000 six years hence. If the interest was compounded yearly, the interest rate on this investment was 20%.

When there are different repayment plans available to repay a loan, the plans are all equivalent as long as the interest rates are different as each payment plan results in a different total repayment.

Don Krump wants to triple his investment in 6 years. An investment firm offers him an attractive interest rate. If the interest is compounded monthly, determine the nominal interest for this investment.

Sue borrowed $1,000 from Tom and paid him back very generously with a $2,000 check when she won a lottery after 8 years. The compound interest rate on this loan is 16.67%.

Tom Watson promises to deposit a sum of $100,000 for his granddaughter's college education 18 years from now. If he invests $20,000 today, what should be return on investment he should get to be able keep up the promise? Assume interest is compounded yearly.

A sum of $500,000 will be invested by a firm two years from now. If money is worth 12%, what will be the worth of this investment 10 years from now?

It is customary in engineering economic analysis to assume that the stated interest rate is for a one-year period.

To double an investment at an interest rate of 10% compounded annually, it will take exactly 5 years.

Since cash flows like receipts and disbursements occur at different time periods, for evaluation of alternative, the cash flows can be added and subtracted ignoring the time vale of money.

Global Investment Corporation is exploring multiple investment opportunities to invest about $20 M. Four investment opportunities are being carefully evaluated. If the company is interested in maximizing the return on investment, which one is offers the best opportunity?

An amount $4,000 is invested today and another $10,000 invested four years from now. If both of them earn a simple interest of 10%, the interest accrued at the end of 5 years is $1,400

Jane and Joe made two investments of $25,000 and $40,000 with different investors that yielded a combined rate of return of 10% compounded for 6 years. If the rate return on the first investment was 9%, what is the rate of return the couple obtained on the second investment?

For the cash flows shown table below, evaluate the unknown value, X for an interest rate of 6% compounded annually. $\begin{array} { | l | l | l | l | l | } \hline \text { Year } & 0 & 1 & 2 & 6 \\\hline \text { Cash Flow in } \$ & 20,000 & - 5,000 & - 10,000 & \mathbf { X } \\\hline\end{array}$

Sam, a friend of Pam, made a similar investment of $20,000 at a much later date when he turned 35. Now that he is also 50, what is his investment worth if his investment also an earned an interest rate of 6.5% compounded semi-annually.

Pam, when she turned 25, made an investment of $20,000 at an interest rate of 6.5% compounded semi-annually. Now that she is 50 years old, how much is the investment worth now.