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Important information about Basic Financial Analysis

You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive?

a. $1,171
b. $1,126
c. $1,082
d. $1,163
e. $1,008

Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows?

a. $ 9,851
b. $13,250
c. $11,714
d. $15,129
e. $17,353

11. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?

a. The discount rate decreases.
b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.
c. The discount rate increases.
d. Answers b and c above.
e. Answers a and b above.

Solution Preview

You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly,

planning to use it to finish your last year in college. Eighteen months later, you decide to go

to the Rocky Mountains to become a ski instructor rather than continue in school, so you close

out your account. How much money will you receive?

a. $1,171
b. $1,126
c. $1,082
d. $1,163
e. $1,008

PV = 1000
Return rate = 8% / 4 = 2%
number of periods = 18/3 = 6
By a financial calculator, we can compute
FV = 1126.2

Assume that you will ...

$2.19