Fin 100 Spring2001Midterm Questions

Fin 100 Spring2001Midterm Questions - Spring 2001 Midterm...

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Spring 2001 Midterm FNCE 100 Question 1 (20 points) Today is 1/1/2001. 25 years ago (1/1/1976), Joe’s grandfather established a trust fund for Joe. There are 2 rules for the fund. 1) Joe can withdraw the money and spend it on anything he wishes. 2) Joe can only withdraw money once every 25 years. The history of Joe’s trust fund is as follows: 1/1/1976: Joe’s grandfather contributes \$5,000 to start the fund. 1/1/1977: Hoping to further help their son, Joe’s parents make the first of 25 annual contributions of \$500 each. 1/1/2001: Joe’s parents make their final \$500 contribution; no more money is contributed. Assume the fund earns a return of 12% (EAY) on its investments. A) On 1/1/2001, how much money is in the trust fund (before any withdrawals, but after the last contribution by Joe’s parents)? B) On 1/1/2001, Joe withdraws 30% of the trust fund to buy a new Lexus. He withdraws the remaining 70% and purchases an annuity that will pay him annual installments for the next 25 years. The annuity will grow at 4% per year and the first payment will occur on 1/1/2002. What will be the amount of the first annuity payment on 1/1/2002? What will be the amount of the last annuity payment on 1/1/2026?

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Spring 2001 Midterm FNCE 100 C) Now suppose that Joe still withdraws 70% of the trust fund on 1/1/2001 to purchase an annuity. Instead of withdrawing the remaining 30% to purchase a Lexus, however, Joe withdraws just enough to buy a Toyota Corolla for \$14,000. What will the value of the fund be on 1/1/2026?
Spring 2001 Midterm FNCE 100 Question 2 (25 points) Today is 1/1/2001, and MicroCell Corporation (MC) has recently developed the lightest cellular phone in the world. In the year ending 12/31/2000, MC spent \$20 million on a test marketing campaign. MC believes this cell phone will be a huge hit, but must now decide whether or not to go ahead with production of the phone. Machines: The machinery to produce the phones costs \$100 million and can be installed immediately. It is depreciated for tax purposes by the straight-line method over 6 years. MC estimates annual production and sales will be 1 million units. The phone will be produced for 4 years, at which time a new technology will have made the phone obsolete. The machinery can be sold at the end of 4 years

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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.

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Fin 100 Spring2001Midterm Questions - Spring 2001 Midterm...

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