
 Business Mathematics in Canada, 4/e F. Ernest Jerome
Additional ExercisesAnswers to the following optional exercises are available for instructors in the Instructor Centre. 4.1 – TRADE DISCOUNT A distributor offers a 16^{2/3} % cash discount to retailer purchasing a laptop computer. To improve lagging sales, the distributor offer an additional discount of 7^{1/2} %. What is the net price to the buyer if the list price is $1115?
 A calculator listed at $64.95 at a wholesaler has a trade discount of 33^{1/3} %.
 What is the dollar amount of the discount?
 What is the priced paid by the retailer?
 An electronics wholesaler sells DVD players for $400 less 20%, 6^{3/4}%. A competing wholesaler offers the same DVD player for $350 less 10%. What additional rate of discount must the competitor offer to match the other's price?
 The list price on a fishing reel is $159.95. If the net price is $100, what is the trade discount rate?
 If an article has a net price of $79.95 after trade discounts of 17^{1/2}% and 5%, what is the list price?
 What single discount rate is equivalent to series discounts of 20% and 7^{1/2}%?
 What single discount rate is equivelant to series discounts if 25%, 16^{2/3}%, and 5%?
4.2 – CASH DISCOUNT An invoice for $500 dated September 10 has payment terms of 2/15, m/30. What amount should be paid on September 22 to settle this invoice?
 A business receives an invoice for $1000 Oct. 31. The payment terms are 3/10, 1/30, m/60. If the invoice is paid in full on December 5, what amount should be remitted?
 An accounts payable clerk receives an invoice for $960 dated June 10 with payment terms 4/10, 2/30, m/60. What amount should the clerk pay on July 6 to settle the invoice?
 What is the amount of the cash discount if an invoice dated March 31 for $1500 with payment terms of 3/20, 1/30, m/60 is paid in full on April 18?
 What is the amount of the cash discount if an invoice dated April 10 for $470 with payment terms of 2/15, m/30 is paid in full on April 30?
 What total amount must be paid on Sept 10 to settle invoices dated Aug 15 for $370, Aug. 20 for $414 and Sept. 1 for $550, all with terms 1^{1/2}/10, m/30?
 A business receives these invoices all with payment terms of 4/10, ^{1/2}/30, m/60. The first invoice is dated Jan. 15 for $500, the second is dated Jan. 22 for $750.83 and the third is dated Feb. 2 for $101. If the account is to be paid in full on Feb.5 what amount should be remitted?
 An invoice dated July 15 is for $1500 with payment terms 2/10, m/ 30 was received by a business. What partial payment must be made on July 23 to reduce the outstanding balance to $1000?
 An accounts payable clerk receives an invoice for $1700 with payment terms 3/15, m/30 dated Aug. 6. What partial payment must the clerk make on Aug. 20 so that the outstanding balance after the payment is $1000?
 An invoice dated Oct. 15 for $1500 has payment terms of 3/15, m/60. In order to get a cash discount, what is the last day the invoice can be paid by?
 An invoice for $1300.65 dated Dec 2 with payment terms of 4/15, 2^{1/2}/30, m/60 is received by a business. On Dec. 28, the business remits a payment of $1000. What does this payment get credited as?
4.3 – MARKUP A computer cost a retailer $600. If the rate of markup on the computer is 33^{1/3}%, what is the retail selling price?
 The gross profit margin on a circular saw is 25%. If the retail selling price of the saw is $100, what is the cost?
 A seedoo costs a retailer $7500 less 20%. If the gross profit margin is 33^{1/3}%, what is the retail selling price?
 An MP3 player has a retail selling price of $299.99. If the gross profit margin is 17^{1/2}%, what is the cost?
 A graphing calculator for $159.95. If the rate of markup on the calculator is 16^{2/3}%, what is the cost of the calculator?
 The rate of markup on a dishwasher selling at $439.99 is 40%. What is the gross profit margin?
 A retailer buys a chesterfield for $1300 less 20% and 6^{1/2}%. If the operating expenses are $300 per chesterfield, what is the retailer's breakeven price?
 A pair of designer jeans has a list price of $85 less 22^{1/2}% and 5%. If the retailer uses the list price as the retail selling and operating expenses are 15% of list price, what is the operating profit per pair of jeans?
 A sporting goods retailer buys canvas at $350 less 10%. Their overhead is 55% or cost and their operating profit is 16^{2/3}% of cost. At what price should the canvas sell?
4.4 – MARKDOWN A store regularly sells snowblowers at $599.95. At the end of winter clearance sale, the snowblowers are priced at $475.95. What is the rate of markdown?
 A windsurfer has a regular selling price of $725.95. During a preseason sale, the price is to be reduced by 16^{2/3}%. What is the price of the windsurfer during the preseason sale?
 After a markdown of 23%, a article sells for $100. What was the regular selling price?
 Using a rate of markdown of 20%, a retailer reduces the price of an article by $10.57. What is the regular selling price of the article?
 A sailboat is regularly priced at $4999.99. To improve lagging sales, the sailboat is marked down 17^{1/2}%. What is the amount of the markdown?
4.5 – INTEGRATED APPLICATIONS A lighting store purchased a tiffany lamp for $760 less 33^{1/3}% and 10%. The regular selling price was determined using a rate of markup of 125%. During a promotional sale, the lamp was marked down 45%.
 What was the sale price?
 During the promotional sale, what was the rate of markup on the lamp?
 A hardware store buys lawnmowers for $175.99 less 33^{1/3}%. To determine the regular selling price, the hardware storeowner uses operating expenses of 50% of cost and operating profit of 25% of cost. What is the maximum rate of markdown the store can offer during an end of season sale if the store wants to sell the lawnmower at a breakeven price?
 A store, selling reproduction antique furniture buys armoires for $1300 less 20% and 5%. Overhead of 15% of cost and operating profit of 33^{1/3}% of cost are used to determine the regular selling price. Because of ill health, the storeowner decides to clear out all remaining armoires at a rate of markdown of 25%. What is the profit or loss on each armoire at the clear out price?
 A retailer pays $75.95 at a wholesaler for an article. The retail price is set using a gross profit margin of 40%. To increase traffic to his store, the retailer marks the article down 16^{2/3}% during a sale. What is the sale price?
5.2 – COST VOLUMEPROFIT AND BREAKEVEN ANALYSIS A firm sells a product for $75 per unit. The firm has fixed costs of $3000 and variable costs of $15 per unit. Capacity per period is 300 units.
 What I the contribution margin per unit?
 How many units must the firm produce and sell to break even?
 What is the breakeven point in terms of sales dollars?
 What is the breakeven point as a percent of capacity if variable costs increase by 200%
 A company sells computers for $1050. The company has fixed costs of 120000. It also has variable costs of manufacturing of $300 per unit and variable expenses of $152 per unit. Capacity per period is 1000 units.
 What is the breakeven volume?
 What is the met income at the breakeven volume?
 What is the net income when the company produces and sells 500 computers?
 How many computers must the company sell to generate a net income of $105000?
 An electronics manufacturer sells comact disc players for $350. The company has variable costs of $75 per unit and fixed costs of $55000. Capacity per period is 500 units.
 How many CD players must the electronics manufacturer sell to breakeven?
 What is the breakeven point in sales dollars if variable cost per unit increases by 33 1/3 %?
 How many units much the company sell to generate a net income of $12925?
 What is the revenue when the company is losing $9350?
 How many CD players is the company producing and selling when the net income is $4675?
 What is the net income at 60% of capacity?
 If fixed costs increased by $25025, what is the net income when 425 units are produced?
 Construct a detailed breakeven chart for a company with the following cost and revenue functions:
TC = 12000 + 450X TR = 500X  The cost function for a firm is TC=55000+ 75X
The revenue function for the same firm is TR=350X
Construct a detailed breakeven chart
5.3 – INTRODUCTION TO GRAPHICAL TECHNIQUES Graph the following equation
3x+y=6  Graph the following equation
x2y=2  The revenue function for a firm is TR=75X
The cost function for the same firm is TC=3000+15X
Construct a detailed breakeven chart showing the breakeven point, the revenue function, the cost function, and the profit and loss areas.
8.1 – BASIC CONCEPTS Calculate the periodic interest rate (i) corresponding to 10.40% compounded quarterly.
 Calculate the periodic interest rate (i) corresponding to 9.0% compunded semiannually
 Calculate the periodic interest rate (i) corresponding to 18% compounded monthly.
 Calculate the periodic interest rate (i) corresponding to 7.75% compounded annually
 Calculate the compounding frequency (m) if the nominal interest rate (i) is 12% and the periodic interest rate is 3%.
 Calculate the compounding frequency (m) if the periodic interest rate (i) is 2.50% and the nominal interest rate is (i) is 5.0%
 Calculate the compounding frequency () if the nominal interest rate () is 15% and the periodic interest rate () is 1.25
 Calculate the nominal interest rate if the periodic interest rate is 1.75% and interest is compounded quarterly.
 Calculate the nominal interest rate if the periodic interest rate is 2.0% and interest is compounded monthly
 Calculate the nominal interest rate if the periodic interest rate is 5.625% and interest is compounded annually.
8.4 – USING FINANCIAL CALCULATORS
Solve the following problems using the financial functions on a calculator
 How much must be deposited today in a bank account paying 4.5% compounded semiannually in order to have $15500 in the account 10 years from now?
 A person wants to go on a dream vacation in 4 years. At the time of departure the person will need $15000. How much must be deposited today in a bank account paying 10.5% compounded quarterly in order to have the necessary funds for the trip?
 What is the maturity value in 15 years of $10000 invested at 6% compounded monthly?
 What amount today is equivalent to $15000 eight years from now at 9% compounded annually?
 What amount 3^{1/2} years from now will be equivalent to $7597.69 at 7% compounded semiannually?
 What amount must be invested for 7 years, 9 months at 8% compounded monthly to reach a maturity value of $15000?
 If a person owes $5000 due in 5 years, what amount should the person's creditor accept as payment today using an interest rate of 9% compounded annually?
 After 8 years in a bank account, the total amount of money in the account is $15559.65. If the interest rate on the account is 6.6% compounded semiannually.
 What was the original deposit?
 How much interest was earned?
9.1 – CALCULATING THE PERIODIC INTEREST RATE, I A person opens a bank account with a deposit of $150. At the end of 3 years there is $179.34 in the account. What nominal interest rate compounded quarterly was earned on the account?
 A deposit of $1500 earned $672.45 interest over 7^{1/2} years. What nominal interest rate compounded semiannually was paid on the deposit?
 A principal of $7100 has a maturity value of $13966.77 in 10 years. If the interest rate is compounded annually, what is the nominal rate?
 A present value of $1301.69 has a future value of $2569.26 in 7 years 7 months. What is the nominal rate compounded monthly?
 At what nominal rate compounded quarterly will money double in 7 ^{1/2} years?
 At what nominal rate compounded monthly will money double in 6 years?
 At what nominal rate compounded semiannually will money triple in 9^{1/2} years?
9.3 – EFFECTIVE INTEREST RATE 10% compunded semiannually is equivalent to what effective rate?
 7.5% compounded annually is equivalent to what effective rate?
 9% compounded monthly is equivalent to what effective rate?
 9% compunded quarterly is equivalent to what effective rate?
 A deposit of $1500 grows to $4262.04 in 7 years. If the interest is compounded quarterly what is the effective rate?
 A deposit of $1300 earns $339.45 interest in over 3 year. If interest is compounded monthly, what is the effective rate?
10.1 – TERMINOLOGY An annuity with payments at the end of each month begins July1, 2002. If the annuity has a 5year term
 what is the date of the first payment?
 What is the date of the last payment?
 An ordinary annuity with quarterly payments begins Feb. 1, 2002. If the annuity has a 3year term
 what is the date of the first payment?
 what is the date of the last payment?
 how many payments will be made?
10.2 – FUTURE VALUE OF AN ORDINARY SIMPLE ANNUITY A person deposits $500 at the end of each month for 7 years. If the interest rate on the deposit account is 7% compounded monthly
 what is in the account at the end of 7 years?
 How much interest will be earned?
 R.R.S.P. contributions of $4500 are made at the end of each year for 8 years. What is in the R.R.S.P account at the end of the term if the account pays 9% compounded annually?
 What is the future value of payments of $1000 made at the end of every six months for 8 1/2 years if the interest rate is 7% compounded semiannually?
 How much interest is earned over 7 years if payments of $375 are made at the end of every 3 months and the interest rate is 11% compounded quarterly?
11.1 – CALCULATING THE PERIODIC PAYMENT A $10000 loan with payments at the end of each month for 4 years has an interest rate of 8% compounded monthly. How much are the monthly payments?
 A person wants go on a dream vacation in 5 years. At that time, the person will need $25000. How much must she deposit at the end of every quarter for the 5year time period if the interest rage on the deposit account is 6% compounded semiannually?
 A $75000 mortgage has payments at the end of each month for 25 years. If the interest rate on the mortgage is 7% compounded semiannually, what is the monthly payment?
 After his retirement, a person transfers $200000 from his R.R.S.P into his R.R.I.F. How much can be withdrawn from the R.R.I.F. at the end of every quarter for 20 years if the interest rate or the fund is 9% compounded quarterly?
 A vacation property can be purchased for $175000 with a down payment of 20%. If the balance can be paid off over 25 years at 9% compounded semiannually and payments are made at the end of each month, what will the monthly payment be?
 A debt of $150000 is due today. Both the creditor and the debtor agree to settle the debt by making payment at the end of each month for the nest 3 years. Using an interest rate of 12% compounded monthly, what should the payments be?
 A business borrows $17000 from a lender. The loan is to be repaid by payments at the end of each quarter for 15 years with the first payment deferred for 3 years. If the interest rate on the loan is 12% compounded quarterly, what is the size of the quarterly payments?
 A $15000 loan with payments at the end of each month for 6 years has an interest rate of 7% compounded quarterly. What is the cost of financing?
 A person borrows $15000 from a lender today. The loan is to be repaid by payments at the end of each month for 7 years with the first payment due 13 months from now. If the interest rate on the loan is 6% compounded monthly
 How much is the monthly payment?
 What is the cost of financing?
 What payment made at the end of every year for 18 years will accumulate to $135000 using:
 an effective rate of 10%?
 9% compounded monthly?
 The amount of an ordinary annuity with monthly payments for 10 years is $123687.75. What is the size of the monthly payments if the interest rate is 12% compounded monthly?
11.2 – CALCULATING THE NUMBER OF PAYMENTS A retiree has $110000 in their R.R.S.P. If she decides to transfer this money into an R.R.I.F. and withdraw $4000 at the end of every quarter and interest is 8.5% compounded semiannually, for how long can she make the withdrawals?
 If a person wants to accumulate $95000, for how long must the person contribute $1200 at the end of each month if the interest rate is 9% compounded monthly?
 A mortgage of $75000 is repaid by making payments of $1000 at the end of each month. If the interest rate on the mortgage is 6% compounded semiannually, how many payments will it take to pay off the mortgage?
 A contract valued at $57000 has payments of $1200 at the end of each month. If the contract has an interest rate of 12% compounded monthly, for how long must the payment be made?
 An annuity bought for $175000 provides payments of &5500 at the end of every quarter. If the interest rate on the annuity is 6% compounded monthly how many payments will be made?
 You begin saving $1500 at the end of each quarter for your retirement. If the interest rate on your savings is 9% compounded quarterly and you need $300000 for your retirement, how long before you can retire?
 A debt of $39000 is repaid by making payments of $500 at the end of each month. Using an interest rate of 12% compounded monthly, how many payments must be made?
 A person requires $40000 for a trip. He makes payments of $1800 at the end of every 6 months. Using an interest rate of 7% compounded semiannually, how many payments must he make?
 How long will it take to build up a fund of $100000 by saving $2700 at the end of every 6 months if the interest rate is 10% compounded semiannually? State your answer in
 semiannual periods
 years
11.3 – CALCULATING THE INTEREST RATE An annuity can be purchased for $150000. The annuity provides payments of $1300 at the end of each month for 20 years. What is the nominal rate paid on the annuity?
 An annuity can be purchased for $75000. The annuity provides payments of $2550 at the end of each quarter for 35 years. Calculate:
 the nominal rate
 the effective rate
 After making deposits of $7500 at the end of every six months for 12 years, a person has $125000 in her account.
 What nominal rate was paid on the account?
 What effective rate was paid on the account?
 A $16000 loan is repaid by payment of $525 at the end of every quarter for 10 years. What is the nominal interest rate on the loan?
 A $40000 loan is repaid by payment of $300 at the end of ever month for 25 years. What is the effective rate on the loan?
 After making deposits of $1300 at the end of every year for 10 years, a person has $22000 in his account. What effective rate was earned on the deposit?
 You make deposits of $750 at the end of every six months into an RRSP account. After 10 years, you have $25000 in your R.R.S.P.
 What nominal rate was paid on your R.R.S.P.?
 What effective rate was paid on your R.R.S.P?
13.1 –FUTURE VALUE OF AN ANNUITY DUE What is the future value if payments of $1500 made at the beginning of each quarter for 13 years if interest is
 8% compounded quarterly?
 8% compounded monthly?
 8% compounded annually?
 Payments of $3000 are made at the beginning of every six months into an R.R.S.P. account. What is the account after 131/2 years if the interest rate is 7% compounded semiannually?
 As an incentive to quit smoking, a person deposits the $300 per month formerly spent on smoking in an investment plan. His deposits are made at the beginning of each month and earn 12% compounded monthly. How much will he accumulate in his plan over 15 years?
 How much interest is included in the accumulated value of deposits of $75 made at the beginning of each quarter for 7 years interest is
 9% compounded monthly?
 7% compounded quarterly?
 Payments of $1500 made at the start of each year earn 7% compounded annually. What is the accumulated value in:
 8 years?
 20 years?
 How much interest is earned over 15 years if deposits of $40 are made at the start of each month and interest is 6% compounded semiannually?
13.2 – PRESENT VALUE OF AN ANNUITY DUE What is the present value if payments of $175 made at the start of each month for 10 years using an interest rate of
 8% compounded monthly?
 12% compounded semiannually
 A lease requires payments of $3000 every six months for 10 years payable in advance. If the interest rate is 10% compounded semiannually, what is the cash value on the lease?
 A retiree purchases an annuity which provides payments of $5500 at the start of every six months for 10 years. What does she pay for the annuity assuring an interest rate of:
 9% compounded monthly?
 5% compounded semiannually
 What is the purchase price of an annuity which provides payments of $2000 at the start of each month for 71/2 years using an effective rate of 9%?
 What is the present value of payments of $750 made at the start of every quarter for 10 years using:
 an effective rate of 10%?
 10% compounded annually?
 A stereo can be bought on credit by making monthly payments of $75 for 3 years. If the first payment is made on the date of sale and interest is 24% compounded monthly, what is the cash price of the stereo?
 The semiannual premium on a 10year insurance policy is $150 payable in advance. What is the cash value of 10% compounded annually?
13.3 – CALCULATING THE PERIODIC PAYMENT, NUMBER OF PAYMENTS, AND INTEREST RATE A $15000 loan with payments at the start of each month for 6 1/2 years has an interest rate of 12% compounded monthly. How much are the monthly payments?
 A debt of $12500 is due today. Both the creditor and the debtor agree to settle the debt by making payments at the start of every 3 months for the next 2 years. Using an interest rate of 10% compounded semiannually, what should the payments be?
 A $23000 loan with payments at the start of each year for 7 years has an interest rate of 10% compounded annually. What is the cost of financing?
 A business borrows $75000 from a lender. The loan is to be repaid by payments at the start of every six months for 8 years with the first payment deferred for 2 years. Using an interest rate of 9% compounded semiannually
 What is the size of the semiannual payments?
 What is the cost of financing?
 A retiree has $150000 in their R.R.S.P. The retiree decides to transfer this money into an RRIF and then make withdrawals at the start of every month for 25 years. Using an effective rate of 9%, how much will the withdrawal be?
 What payment made at the start of every six months for 10 years will have a future value of $29681.37 at
 6% compounded semiannually?
 10% compounded quarterly?
 A motor home can be purchased for $95000 with a down payment of 15%. If the balance can be paid off over 10 years at 9% compounded monthly and payments are made the start of each month what will the monthly payments be?
 If a person wants to accumulate $100000 in his R.R.S.P., for how long must he contribute $1000 at the start of each quarter using a interest rate of:
 10% compounded quarterly?
 7% compounded semiannually?
 A loan of $17500 is repaid by making payments of $3750 at the start of each year. If the effective rate on the loan is 17%, how many payments will it take to pay off the loan?
 An annuity bought for $225000 provides payments of $17000 at the start of every semiannual period. How many payments will be made if the interest rate on the annuity is:
 12% compounded monthly?
 9% compounded semiannually?
 A debt of $41000 is repaid by making payments of $600 at the start of each month. Using an interest rate of 8% compounded monthly, how many payments must be made?
 A person requires $250000 to buy a house. She makes payments of $12500 at the start of every six months. Using an interest rate of 10% compounded monthly, how many payments must she make?
 An annuity can be purchased for $275000. The annuity provides payments of $2000 at the start of each month for 25 years. What is the nominal rate paid on the annuity?
 After depositing $5000 at the start of every six months for 20 years, a person has $325000 in his account.
 What nominal rate was paid on the account?
 What effective rate was paid on the account?
 A $50000 loan is repaid by monthly payments of $950.37 for 25 years. If the payments are made at the start of each month, what is the nominal interest rate on the loan?
14.1 – LOAN AND DETAILS OF INDIVIDUAL PAYMENTS A $40000 loan at 10% compounded semiannually is repaid by payments at the end of every six months for 15 years.
 What is the semiannual payment?
 What is the interest portion of the 17th payment?
 What is the principal portion of the 21st payment?
 What is the cost of financing?
 A $100000 loan at 18% compounded monthly is repaid by $1600 payments at the end of every month for 187 months.
 What is the final payment?
 What is the cost of financing?
 What is the interest portion on the 10th payment?
 What is the principal portion of the 35th payment?
 How much interest will be paid by the 1st year?
 How much will the principal be reduced by the 10th year?
 A 25year annuity was bought for $275000. The annuity has an interest rate of 10% compounded semiannually and provides payments at the end of each month.
 How much are the monthly payments?
 How much of the 16th payment is interest?
 How much of the 287th payment is principal?
 How much interest is paid in the first 12 years?
 A $67500 loan at 18% compounded monthly is repaid by payments at the end of every quarter for 20 years.
 What is the quarterly payment?
 What is the interest portion of the 69th payment?
 What is the cost of financing?
14.2 – LOAN AMORTIZATION SCHEDULE A $6000 loan with interest at 8% compounded quarterly is repaid by payments at the end of each quarter for 2 years.
 Construct the amortization schedule for this loan?
 Calculate the total paid on the loan?
 Calculate the total interest paid over the course of the loan.
 A $10000 loan with interest at 12% compounded monthly is repaid by payments at the end of each semiannual period for 2 1/2 years.
 Construct the amortization schedule for this loan.
 How much interest will be paid over the course of the loan?
 A $10000 loan with interest at 8% compounded annually is repaid by payments of $3500 at the end of each year.
 Construct the amortization schedule for this loan.
 Calculate the total interest paid over the 4 years.
 A person purchases a $60000 car by paying 10% down and agreeing to amortize the balance over 25 years. If the payments are at the end of every quarter and the interest rate is 15% compounded monthly,
 Calculate the monthly payment.
 Construct a partial amortization schedule showing details of the 1st payment.
 Calculate the total interest paid.
 Calculate the total amount paid.
 Calculate the total principal paid.
 A person finances his home renovation by obtaining a bank loan. He borrows $63500 and agrees to repay the loan by making payments at the end of month for 20 years. The interest rate on the loan is 9% compounded monthly.
 Calculate the monthly payment.
 Construct a partial amortization schedule showing details of the 57th and 79th payments
 Calculate the total interest paid.
14.3 – MORTGAGE LOANSFUNDAMENTALS You can afford a maximum mortgage payments of $1500 per month. What is the maximum mortgage loan you can afford if the mortgage is amortized over 25 years and the interest rate is:
 6% compounded semiannually?
 7.5% compounded semiannually?
 A person feels that his budget permits a maximum monthly mortgage payment of $1750. If she applies for a mortgage at 7.25% compounded semiannually amortized over 25 years,
 What is the maximum mortgage loan available to the person?
 What is the maximum price they can pay for a home with a $850000 down payment?
 The interest rate on a $137500 mortgage is 9% compounded semiannually.
 What is the monthly payment if the mortgage is amortized over 25 years?
 What is the monthly payment if the mortgage is amortized over 15 years?
 If the mortgage is amortized over 20 years, what is the total paid?
 A $200000 mortgage amortized over 25 years has an interest rate of 8 1/2% compounded semiannually and payments at the end of each month.
 What is the monthly payment?
 How much interest is paid during the first 5 years?
 After 5 years, the mortgage is renewed at 10% compounded semiannually. What is the new monthly payment?
16.1 – COMPARING BUSINESS TO PERSONAL INVESTMENT DECISIONS A businesswoman must invest $30000 today to undertake a project. The project will provide returns of $8100 at the end of each of the next 6 years. Round all calculations to the nearest dollar and assume the cost of capital to be 12 %.
 Should the businesswoman undertake the project?
 Justify your answer in a)
 A project requires an initial investment of $50000. Returns of $10000 at the end of the first year and $61000 at the end of the fifth year can be expected. Round all calculations to the nearest dollar and use 10% compounded semiannually as the cost of capital.
 Should the project be undertaken?
 Justify your answer in a)
 A computer system can be leased for 5 years with payments of $575 per month payable in advance. The system can also be bought for $ and has a traden value in 5 years of $9000. Round all calculations to the nearest dollar and use 12% compounded monthly as the cost of capital
 Should the system be leased or bought?
 How much will be saved with the lowercost option
 A restaurant can be purchased for $100000. The restaurant can also be leased for 5 years by paying $20000 at the start of the lease along with payments of $4850 at the start of each quarter. At the end of the lease the restaurant can be purchased for $10000. Round all calculations to the nearest dollar and assume the cost of capital to be 15% compounded quarterly.
 Should the restaurant be leased?
 How much will be saved with the lowercost option?
16.2 – THE NET PRESENT VALUE OF AN INVESTMENT A contract which costs $60000 would provide returns of $10000 at the end of each of the next seven years. Round all calculations to the nearest dollar and assume the cost of capital to be 10%.
 Calculate the present value of the cash inflows.
 Calculate the present value of the cash outlays.
 Calculate the NPV.
 Should the contract be undertaken?
 Investment in new machinery would cost a company $50000 today. There would also be maintenance costs of $100 at the end of each month for 10 years. Savings in labour costs associated with the new machinery would be $825 at the end of each month for the 10 year time period. Round all calculations to the nearest dollar and assume the cost of capital to be 9% compounded monthly.
 Calculate the present value of the cash inflows.
 Calculate the present value of the cash outlays.
 Calculate the NPV.
 Should the company invest in the new machinery?
 Investment in a project would cost a venture capital firm $75000 today and $50000 in 5 years. The project would provide returns of $10300 at the end of every six months for 10 years. Round all calculations to the nearest dollar and assume the cost of capital to be 12%.
 Calculate the present value of the cash inflows.
 Calculate the present value of the cash outlays.
 Calculate the NPV.
 Should the venture capital firm invest in the project?


