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Feedback — Assignment 1 Help

Thank you. Your submission for this quiz was received.

You submitted this Assignment on Sun 9 Feb 2014 3:32 AM PST. You got a
score of 95.00 out of 100.00.

Please read all questions and instructions carefully. Note that you only need to enter answers
in terms of numbers and without any symbols (including $, %, commas, etc.). Enter all
monetary answers to the nearest dollar (no decimal/cents) and all interest rates to the nearest
on hundredth of a percent (two decimal places). Read the syllabus for examples. The points
for each question are listed in parentheses at the start of the question, and the total points for
the entire assignment add up to 100.

Question 1
(5 points) $100 today is worth the SAME as $100 tomorrow.

Your Answer Score Explanation

True

False  5.00 Correct. You understand time value

Total 5.00 / 5.00

Question Explanation

We have assumed that time value of money is positive.

Question 2
(5 points) At an interest rate of 10% it is better to have $100 today than $120 in 2 years.

Your Answer Score Explanation

True  5.00 Correct; it is compounding!

False

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Total 5.00 / 5.00

Question Explanation

All about compounding!

Question 3
(5 points) Shawn wants to buy a new telescope. He estimates that it will take him one year to
save the money and that the telescope will cost $200. At an interest rate of 6%, how much
does Shawn need to set aside today to purchase the telescope in one year? (Enter just the
number without the $ sign or a comma)

You entered:

189

Your Answer Score Explanation

189  5.00 Correct, You know it has to be less than $200.

Total 5.00 / 5.00

Question Explanation

Simple PV calculation.

Question 4
(10 points) Johnny and Darren both earn $100 working on their respective neighbors' big farms.
Johnny puts his $100 in the piggy bank that his parents gave him to encourage him to save.
Darren puts his money in a savings account his parents set up for him. The savings account
pays 3% interest. They both take their money out after 5 years. How much more money does
Darren have than Johnny?

Your Score Explanation

16  10.00 Correct. You know how to calculate FV and intuitively know that the
interest has to be only slightly more than $15 because the interest
rate is low.

10
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10

19

Total 10.00
/
10.00

Question Explanation

A simple future value calculation. You should see that Darren will earn at least $15 even
without compounding.

Question 5
(10 points) Your dad invested $25 for you 70 years ago in a fund and you have not withdrawn
any money since. If the fund has averaged a return of 8 percent over the last 70 years, what is
the current value of that investment? (Round to the nearest whole dollar; enter just the number

without the $ sign or a comma)

You entered:

5465

Your Answer Score Explanation

5465  10.00 Correct. You know how to accurately calculate FV.

Total 10.00 / 10.00

Question Explanation

Simple FV calculation. The amount has to be at least $165 even if you ignore compounding
because so many years have passed.

Question 6
(10 points) Bridgette’s grandparents opened a savings account for her and placed $500 in the

account. The account pays 3.5% interest. Bridgette wants to be a singer and she has her heart
set on a new karaoke machine. The machine costs $150. How much less will the account be

worth in 8 years if she buys the karaoke machine now versus leaving the account untouched?

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(Enter just the number without the $ sign or a comma; round to the nearest whole dollar.)

You entered:

198

Your Score Explanation

198  10.00 Correct. You know that it has to be more than $150, and
actually by at least $42.

Total 10.00 /
10.00

Question Explanation

Again a simple FV calculation, but need to read the question carefully to save time and
calculate it only once.

Question 7
(10 points) Joe is getting ready to buy a car. He has $20,000 in investments earning 4.9%
annually. The car also costs $20,000. If he doesn’t pay cash for the car, Joe can get a loan at

2.9% interest for 5 years. The loan is structured so that Joe pays one balloon payment at the
end of 5 years. The balloon payment includes the principal plus all interest accrued over 5

years. If Joe takes the loan will he have enough money available from his investments to make
the balloon payment? How much will he be short/have to spare?

Your Answer Score Explanation

No; 2082

Yes; 2331  10.00 Correct decision and correct calculation.

Yes; 5404

No; 5404

Yes; 2082

No; 2331

Total 10.00 / 10.00

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Question Explanation

How to properly calculate the difference in two future values.

Question 8
(15 points) Juan has $100,000 to invest and he has narrowed down his decision to two
investments. Option A returns 60% annually for 4 years, but the maximum investment he can

make is $10,000. Option B returns 12% annually for 4 years and would require the entire
$100,000. Which option produces the best result for Juan and what is the benefit over the

lesser option? Assume that the $90,000 not invested in Option A would be placed in a safe

deposit box earning no interest.

Your Answer Score Explanation

Option A; 19373

Option B; 1816

Option A; 9532

Option B; 9532

Option B; 19373

Option A; 1816  10.00 Wrong decision, correct calculation, Be careful.

Total 10.00 / 15.00

Question Explanation

Slightly more involved, again multi-step future value problem.

Question 9
(15 points) Rondo is in the market for a new car. He has narrowed his search down to 2

models. Model A costs $32,000 and Model B costs $28,000. With both cars he plans to pay
cash and own them for 4 years before trading in for a new car. His research indicates that the

trade in value for Model A after 4 years is 60% of the initial purchase price, while the trade in

value for Model B is 45%. The interest rate is 5%. For simplicity assume that operating and
maintenance costs for the models are identical. Which model is the better decision and how

much "cheaper" is it than the alternative?

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Your Answer Score Explanation

Model B;
1207

Model A;
4000

Model B;
1430

Model A;  15.00 Right decision, and right calculation based on net

Model A;
1257

Model B;
4000

Total 15.00 /
15.00

Question 10
(15 points) College tuition has been rising at a rate of 7% per year. Currently the average tuition

of a state college is $9,500/year. Andrea’s son Trevor will begin college in 12 years. Andrea’s
portfolio is making 5% annually. How much does Andrea need to have set aside today/now to
pay for 4 years of college for Trevor? (Note:Tuition will continue to change annually and
Andrea’s portfolio balance will continue to accrue interest while Trevor is in school. Also, tuition

is due at the beginning of each year.)

Your Score Explanation

75400

58905

87432

 15.00 Correct. There are many ways to do this. But, given your current
49035 knowledge, it is best to do FVs of each tuition and then PVs of the

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same and simply add them up.

Total 15.00
/
15.00

Question Explanation

This is a multi-step calculation; and the most involved one. It should have more than 15
points, but then you could easily get less than 70% on the assignment if you got this wrong.

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