Question 1:
A. Suppose you find a two-year investment that pays 16% per year. If you invest $480. How much will you have at the end of the two years? Now calculate what is the simple interest amount and compound interest amount in total earnings.
B. You would like to buy a new car. You have $55,000, but the car costs $70,500. If you can earn 7%, how much do you have to invest today to buy the car in two years? Do you have enough? Assume the price will stay the same.
Question 2:
A. What is payback period method, briefly explain? What is the payback criterion decision rule?
B. Swan fashions imposes a payback period method to its below international investment projects. If company has following two projects. According to payback, which project should be accepted, and which should be rejected?
| Year |
Cash flow (A) |
Cash flow (B) |
| 0 |
($85,000) |
($225,000) |
| 1 |
$43,000 |
$39,000 |
| 2 |
$46,000 |
$42,000 |
| 3 |
$29,000 |
$45,000 |
| 4 |
$10,000 |
$280,000 |