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298_Midterm_Review

298_Midterm_Review - Commerce Mentor Program 298 Midterm...

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Commerce Mentor Program 298 Midterm Review Package 1. A property owner is considering whether to repaint the wooden outside walls of the house, or whether to install vinyl siding. Painting currently costs \$3,500 and would have to be done every 5 years. Future painting costs would increase with the rate of inflation which is expected to average 6 percent per year. In order to proceed with painting, some wooden boards with rot would have to be replaced at a one-time cost of \$2,000; with these repairs the wooden siding is expected to last for 25 years. Vinyl siding that can be installed over the old wooden boards (without repairs) costs \$13,000 and is maintenance free (with an expected life of 25 years). Work on the house is to be financed by withdrawing funds from a bank account where they are expected to earn an average interest of 10 percent per year. From a financial point of view, which is the preferred alternative? 2a. If a bank pays 6 percent per year interest compounded annually on a \$1,000 deposit, what will be the value of this deposit at the end of 10 years? 2b. If another bank pays 6 percent per year interest on the same \$1,000 deposit but compounds interest quarterly, what will be the value of this deposit at the end of 10 years? What is the effective annual interest rate being paid? 3. An investor deposits \$100 today and \$50, one year from today. If the value of these two deposits is \$175 two years from today, what is the annual rate of return of this investment if interest was compounded annually? 4. How many years would it take for \$200 to grow to \$360 if the interest rate was 9% compounded annually? 5. Exactly four years ago, Jill took out a \$175,000 mortgage to buy a condominium. The original

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298_Midterm_Review - Commerce Mentor Program 298 Midterm...

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