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ASU FINANCE 300 Test #3

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 1.     You are interested in investing $10,000, a gift from your grandparents, for the next four years in a mutual fund that will earn you an annual interest rate of 8 percent?

 2.     Ning Gao is planning to buy a house in five years. She is looking to invest $25,000 today in an index mutual fund that will provide her a return of 12 percent annually. How much will she have at the end of five years?

 3.     Wes Ottey wants to buy a condo in six years. He is looking to invest $75,000 today in a stock expected to earn a return of 18.3 percent annually. How much will he have at the end of six years?

4.     Your brother has asked you to help him with choosing an investment. He has $5,000 to invest today for a period of two years. You identify a bank CD that pays an interest rate of 4.25 percent with interest being paid quarterly. What will the value of the investment be in two years? 

5.     Your mother is trying to choose one of the following bank CDs to deposit $10,000. Calculate the return for each of the following and advise your mother which one will have the highest future value if she plans to invest for three years. 3.5% compounded daily; 3.25% compounded monthly; 3.4% compounded quarterly; 3.75% compounded annually.

6.     Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond?

7.     Regatta, Inc., has six-year bonds outstanding that pay an 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the bonds be priced at today? Assume annual coupon payments.

8.     Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330 and $907,125 over the next four years. What is the payback period for this project?

9.     Carmen Electronics purchased new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million per year over the next seven years. What is the payback period for this project? If the company’s acceptance period is five years, will this project be accepted?

10. Explain (in words) the Payback Period method and include its good points and drawbacks. Compare it to the Net Present Value method and explain why that method is a superior capital budgeting method compared to the Payback Period method

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