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Practice Problems (Chapter 5).docx

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Department
Economics
Course
ECON 311
Professor
Mathieu Le Corre
Semester
Fall

Description
Chapter 5 Practice problems with solution (Source: Test Bank) 160. Robin invested $10,000 in an account that pays 5 percent simple interest. How much more could she have earned over a 40-year period if the interest had compounded annually? A. $38,207.16 B. $38,414.14 C. $40,399.89 D. $48,414.14 E. $50,399.89 LO3: Simple vs. Compound Interest Level: Basic Type: Problems 161. Alex and Courtney are each investing $1,200 today in a savings account. Alex will earn 4 percent interest compounded annually. Courtney will earn 4 percent simple interest. After five years Alex will have ____ more than Courtney. A. $19.98 B. $20.13 C. $20.17 D. $20.21 E. $20.28 LO3: Simple vs. Compound Interest Type: Problems 162. What is the future value of $4,160 invested for eight years at 8.5 percent compounded annually? A. $6,988.80 B. $7,989.71 C. $8,122.20 D. $8,211.29 E. $8,404.12 Level: BasicValue Type: Problems 163. Today, you earn a salary of $37,800. What will your annual salary be twelve years from now if you receive annual raises of 3.6 percent? A. $55,981.03 B. $56,324.17 C. $56,907.08 D. $57,784.17 E. $58,213.46 LO1: Future Value Type: Problems 164. You own a stamp collection that is currently valued at $24,500. If the value increases by 5.5 percent annually, how much will the collection be worth when you retire 40 years from now? A. $204,113.07 B. $204,981.16 C. $205,155.45 D. $206,666.67 E. $208,576.07 LO1: Future Value Level: Basic Type: Problems 165. Your goal is to build your first home seven years from now. The home that you desire currently costs $215,900. New home prices are increasing by 4.2 percent annually. If home prices continue rising at that pace, how much will your home cost when you are ready to build seven years from now? A. $281,113.21 B. $284,109.67 C. $287,956.36 D. $292,001.06 E. $295,474.06 LO1: Future Value Type: Problems 166. Today, your grandmother gave you a gift of $25,000 to help pay for your college education. She told you that this amount was the result of a one-time investment at 8 percent interest 13 years ago. How much did your grandmother originally invest? A. $9,192.45 B. $9,225.00 C. $9,350.00 D. $9,419.25 E. $9,504.55 LO2: Present Value Level: Basic Type: Problems 167. What is the present value of $36,500 to be received five years from today if the discount rate is 6.75 percent? A. $26,330.16 B. $26,678.19 C. $26,911.47 D. $28,008.19 E. $28,123.76 Level: Basic Value Type: Problems 168. You would like to give your daughter $50,000 towards her college education sixteen years from now. How much money must you set aside today for this purpose if you can earn 7.8 percent on your funds? A. $14,775.50 B. $15,033.84 C. $15,250.00 D. $16,245.33 E. $16,909.13 LO2: Present Value Level: Basic Type: Problems 169. One year ago, you invested $5,000. Today, your investment is worth $6,178.40. What rate of interest did you earn? A. 16.23 percent B. 16.45 percent C. 22.18 percent D. 23.57 percent E. 24.09 percent LO3: Interest Rate for a Single Period Level: Basic Type: Problems 170. Thirty years ago, your father invested $6,000. Today that investment is worth $67,270.98. What is the average rate of return your father earned on this investment? A. 8.39 percent B. 8.44 percent C. 10.23 percent D. 10.34 percent E. 11.67 percent LO3: Interest Rate for Multiple Periods Level: Basic Type: Problems 171. Twenty years ago, Max invested $10,000. Thirty years ago, Julie invested $5,000. Today, both Max and Julie's investments are each worth $35,000. Which one of the following statements is correct concerning their investments? Assume that they will continue earning the same rate of return. A. Two years from now, Max's investment will be worth more than Julie's. B. Last year, Julie's investment was worth more than Max's. C. Max has earned more interest on interest than Julie. D. Julie has earned an average annual interest rate of 6.7 percent. E. Max has earned an average annual interest rate of 6.41 percent. LO3: Interest Rate for Multiple Periods Type: Problemsdiate 172. New Metals, Inc. is planning on expanding their operations when the economy strengthens in a few years. At that time they will need to purchase additional equipment. Four years ago, they set aside $300,000 in a special account for this purpose. Today, that account is worth $383,048.98. What rate of interest is New Metals earning on this money? A. 5.87 percent B. 5.92 percent C. 6.26 percent D. 6.30 percent E. 6.35 percent LO3: Interest Rate for Multiple Periods Level: Basic Type: Problems 173. Kay purchased some land costing $124,600. Today, that same land is valued at $179,400. How long has she owned this land if the price of land has been increasing at 6 percent per year? A. 5.95 years B. 6.26 years C. 6.33 years D. 6.50 years E. 6.57 years LO4: Number of Time Periods Level: Basic Type: Problems 174. When you were 26 years old, you received an inheritance of $1,500 from your grandfather. You invested that amount in Nu-Wave stock and have not touched the investment since then. Today, this investment is worth $109,533.59. Nu-Wave stock has earned an average rate of return of 11.3 percent per year over this time period. How old are you today? A. age 57 B. age 59 C. age 62 D. age 64 E. age 66 LO4: Number of Time Periods Type: Problems 175. Your goal is to have $50,000 in cash to build a new home twelve years from now. Your plan is to make one deposit today to fund this goal. How much more will you have to deposit today to fund this goal if you can only earn 4 percent on your savings rather than 5 percent? A. $3,104.11 B. $3,188.87 C. $3,218.07 D. $3,273.16 E. $3,387.98 LO3: Present Value and Rate Changes Level: Basic Type: Problems 176. Your goal is to have two separate investments that will be worth $10,000 each ten years from today. Investment A will pay 6 percent interest. Investment B will pay 6.5 percent interest. You will make a one-time deposit into each account today. What is the difference between the amount you must invest today in Investment A as compared to the amount you must invest today in Investment B if you are to reach your goal in ten years? A. $241.92 B. $245.45 C. $256.69 D. $261.08 E. $263.47 LO3: Present Value and Rate Changes Type: Problems 177. Twenty years from now, you would like to purchase a cottage located on the shores of your favourite lake. You expect that you will have $250,000 available at that time for this purchase. You could afford a home that is currently selling for ____ if the homes increase in value by 3 percent annually, but if the homes increase in value by 5 percent annually, you can only afford a home priced at _____ today. A. $127,023; $92,687 B. $138,419; $94,222 C. $138,419; $114,097 D. $144,676; $100,469 E. $144,676; $111,068 LO3: Present Value and Rate Changes Level: Intermediate Type: Problems 178. You would like to invest some money today such that your investment will be worth $100,000 fifteen years from now. Your broker gives you two options. First, you can invest at a guaranteed annual rate of 4 percent. Or, you can invest in stocks and hopefully earn an average of 7 percent per year. How much more will you have to invest today if you opt for the fixed rate rather than the stocks? A. $18,145.45 B. $18,419.02 C. $18,623.18 D. $18,904.21 E. $19,281.85 LO3: Present Value and Rate Changes Type: Problems 179. Omar has an investment valued at $12,345 today. He made a one-time investment at 6.5 percent four years ago. Leon has an investment that is also valued at $12,345 today. Leon invested four years ago at 7.5 percent. Omar originally invested _____ and Leon invested _____. A. $9,568.24; $9,199.16 B. $9,596.05; $9,243.94 C. $9,608.14; $9,267.67 D. $9,633.33; $9,304.06 E. $9,652.18; $9,389.00 LO3: Present Value and Rate Changes Level: Basic Type: Problems 180. When you retire thirty years from now, you want to have $750,000. You think you can earn an average of 9 percent on your money. To meet this goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today. How much more will you have to deposit as a lump sum if you wait for five years before making the deposit? A. $28,788.03 B. $29,414.14 C. $30,447.53 D. $36,118.09 E. $38,278.27 LO4: Present Value and Time Changes Type: Problems 181. Jeanette needs $15,000 as a down payment for a house six years from now. She earns 3.5 percent on her savings. Jeanette can either deposit one lump sum today for this purpose or she can wait a year and deposit a lump sum. How much additional money must Jeanette deposit if she waits for one year rather than making the deposit today? A. $121.03 B. $166.67 C. $307.00 D. $333.33 E. $427.09 LO4: Present Value and Time Changes Level: Basic Type: Problems 182. Theresa wants to save $10,000 so that she can surprise her husband with a vacation six years from now. She can earn 7 percent on her savings. How much more will she have to deposit if she waits one more year before investing versus if she deposits one lump sum today? A. $46
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