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 onetime 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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 Spring '09
 FREEDMAN
 Time Value Of Money, Interest

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