1. What is the difference between simple interest and compound interest?
Simple Interest only calculates the interest on the principal in each period. Compound interest calculates the future value of money in which interest is calculated on the cumulative principal and interest earned up to that point.
2. What is the future value of $10,000 for an interest rate of 16% and 1 annual period of compounding? for an annual interest rate of 16% and 2 semiannual periods of compounding? for an annual interest rate of 16% and 4 quarterly periods of compounding?
The future value of $10,000 with an interest rate of 16% and 1 annual period of compounding is $11,600.00. The future value of $10,000 with an interest rate of 16% and 2 semiannual periods compounding is $11,664.00. The future value of $10,000 with an interest rate of 16% and 4 quarterly periods compounding is $11,698.59.
3. Define an annuity.
A series of equal cash flows made or received ...view middle of the document...
7. What is the relationship between the present value of single dollar payment formula and the present value of an ordinary annuity formula for the same number of years and same discount rate? Assume a discount rate of 10% and n value of 5 periods. (Be sure to support your explanation with an example.)
The relationship is that both formulas are similar. At a discount rate of 10% value of 5 periods would result in almost the same amount.
8. What is the present value of a $2,000 per year ordinary annuity at a discount rate of 5% for 10 years?
The present value is $3,212.
9. Columbus Clinic expects to receive $20,000 five years from now. As part of another contract, the clinic must make a payment of $30,000 on a loan six years from now. The clinic wants to set aside an amount today that, combined with the money received, will cover its obligation of $30,000. Assume that the clinic’s cost of capital is 7%. To the nearest hundred dollars, how much money does the clinic need to set aside today?
The clinic needs to step aside $26,000.
10. You will receive a $100,000 inheritance in 20 years. Your investments earn 6% per year, compounded annually. What is the present value of your inheritance?
The present value of your inheritance is $ 320,713.55.
11. If a nurse deposits $1,000 today in a bank account and the interest is compounded annually at 12%, what will be the value of this investment:
a) five years from now? $ 1,762.34
b) ten years from now? $ 3,105.85
c) fifteen years from now? $ 5,473.57
d) twenty years from now? $ 9,646.29
12. As the CFO of a home health agency, you need to determine the present value of a $5,000 investment received at the end of year ten, if the discount rate were:
a) 5%? 3,069.57
b) 10%? 1,927.72
c) 15%? 1,235.92
d) 20%? 807.53
13. If a hospital were to receive $4,000 per year in payments at the end of each year for the next 12 years from an uninsured patient who underwent an expensive operation, what would be the current value of these collection payments:
a) at a 4% rate of return? $2,322
b) at a 14% rate of return? $3,210
c) If the funds were received at the beginning of the year, what would be the current value of these collection payments for each of the two returns? $2,700 and $ 3,575