FINANCE & BANKING CHAPTER 3



FINANCE ( CHAPTER 3

MATH APPLICATION TEST

1. Calculate the simple interest and compound interest for each of the investments using the information from the table. (15 Points)

|AMOUNT INVESTED |INTEREST |LENGTH OF INVESTMENT |COMPOUND |SIMPLE INTEREST |COMPOUND INTEREST |

| |RATE | |PERIOD | | |

|$400 |2.0% |3 Years |Annual |a.) $24.00 |f.) $24.48 |

|$20,000 |5.5% |1 Year |Quarterly |b.) $1,100.00 |g.) $1,122.89 |

|$50,000 |4.0% |2 Years |Quarterly |c.) $4,000.00 |h.) $4,143.53 |

|$300,000 |6.5% |1 Year |Quarterly |d.) $19,500.00 |i.) $19,980.47 |

|$750,000 |3.5% |3 Years |Annual |e.) $78,750.00 |j.) $81,538.41 |

1f.

(1) $400.00 * .02 = $8.00

(2) $408.00 * .02 = $8.16

(3) $416.16 * .02 = $8.32

$8.00 + $8.16 + $8.32 = $24.48

1g.

5.5% ( 4 (Quarterly) = 1.375%

(1) $20,000.00 * .01375 = $275.00

(2) $20,275.00 * .01375 = $278.78

(3) $20,553.78 * .01375 = $282.61

(4) $20,836.39 * .01375 = $286.50

$275.00 + $278.78 + $282.61 + $286.50 = $1,122.89

1h.

4% ( 4 (Quarterly) = 1%

(1) $50,000.00 * .01 = $500.00

(2) $50,500.00 * .01 = $505.00

(3) $51,005.00 * .01 = $510.05

(4) $51,515.05 * .01 = $515.15

(5) $52,030.20 * .01 = $520.30

(6) $52,550.50 * .01 = $525.50

(7) $53,076.00 * .01 = $530.76

(8) $53,606.76 * .01 = $536.07

$500.00 + $505.70 + $510.05 + $515.15 + $520.30 + $525.50 + $530.76 + $536.07 = $4,143.53

1i.

6.5% ( 4 (Quarterly) = 1.625%

(1) $300,000.00 * .01625 = $4,875.00

(2) $304,875.00 * .01625 = $4,954.21

(3) $309,829.21 * .01625 = $5,034.72

(4) $314,863.93 * .01625 = $5,116.54

$4,875.00 + $4,954.21 + $5,034.72 + $5,116.54 = $19,980.47

1j.

(1) $750,000.00 * .035 = $26,250.00

(2) $776,250.00 * .035 = $27,168.75

(3) $803,418.75 * .035 = $28,119.66

$26,250.00 + $27,168.75 + $28,119.66 = $81,538.41

2. What is the formula for calculating the future value of a loan or investment with compound interest? (1 Point)

FV = P (1 + i)n

FV = future value of the investment or loan, P = principal, i = interest rate per period of compounding, and n = number of compounding periods in the length of the loan.

3. If $200,000 is borrowed today to replace outdated equipment and the terms are 6 percent for 3 years compounded quarterly, what is the total cost of the purchase? (3 Points)

FV = P (1 + i)n

i = .015 (6% ( 4 (quarterly) = 1.5% or .015)

n = 12 (3 years * 4 (quarterly))

FV = $200,000 (1 + .015)12

FV = $200,000 (1.015)12

FV = $200,000 (1.2)

FV = $240,000

4. If $100,000 is invested today and the terms are 5 percent for 3 years compounded yearly, what is the future value of the investment? (3 Points)

FV = P (1 + i)n

i = .05 (5% or .05)

n = 3 (years)

FV = $100,000 (1 + .05)3

FV = $100,000 (1.05)3

FV = $100,000 (1.16)

FV = $116,000

5. What is the total interest earned from this transaction? Express as a formula also. (2 Points)

I = FV – P

I = $116,000 – $100,000

I = $16,000

Cash Payments = $11,500, Cash Receipts = $13,000, Gross Profit = $90,000, Total Assets = $10,500, Total Liabilities = $4,000, Total Operating Expenses = $50,000.

Given the financial information, calculate the Owner’s Equity, Net Income, and Net Cash Flow:

6. Calculate the Owner’s Equity (2 Points).

Assets = Liabilities + Owner’s Equity

Owner’s Equity = Assets – Liabilities

Owner’s Equity = $10,500 – $4,000

Owner’s Equity = $6,500

7. Calculate the Net Income (2 Points).

Net Income = Gross Profit – Total Operating Expenses

Net Income = $90,000 – $50,000

Net Income = $40,000

8. Calculate the Net Cash Flow (2 Points).

Net Cash Flow = Cash Receipts – Cash Payments

Net Cash Flow = $13,000 – $11,500

Net Cash Flow = $1,500

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