Interest Theory – Supplementary Questions
Question 1
"Now" is June 30, 1994. Three payments of 500/ each are to be received every 2 years starting 2 years from
now and deposited in the bank where they will earn interest at 7% per year. How large will be the bank account
on June 30,2002?
Question 2(a)
Money is to be invested for a child's college expenses. Annual deposits of 2000/ are made in a fund that pays
5% compounded annually. If the first deposit is made on the child's 5th birthday and the last on the child's 15th
birthday, what is the size of 4 equal withdraws on the child's 18th, 19th, 20th, and 21st birthdays that will just
deplete the account?
Question 2(b)
A couple with a new born daughter wants to save for their child’s college expenses in advance. The couple can
establish a college fund that pays 7% annual interest. Assuming that the child earns college at age 18, the
parents estimate that an amount of USD 40,000 per year will be required to support the child’s college
expenses for 4 years. Determine the equal annual amounts that the couple must save (assume that the first
deposit will be made on the child’s first birthday and the last deposit on the child’s 18th birthday. The first
withdrawal will be made at the beginning of the first year of the college, which is also the child’s 18th birthday).
Question 3
Suppose Rohan deposits 10,000 into an account that pays 8% interest compounded annually. If he withdraws
10 equal annual amounts from the account, with the first withdrawal occurring 1 year after the deposit, how
much can he withdraw each year in order to deplete the fund with the last withdrawal?
Question 4
A company is considering purchasing a new machine tool. In addition to the initial purchase and installation
costs, management is concerned about the machine’s maintenance costs, which are expected to be 1,000 at
the end of the first year of the machine’s life and increase 8% per year thereafter. The machine tool’s expected
life is 15 years. If the firm’s time value of money is 10% per year compounded annually, what is the present
worth equivalent?
Question 5
For a New Product Development Project, you are required capital of LKR 5,000,000.00. Prepare the loan
amortization plan showing the yearly loan commitment using the following criterion. (Repayment period - 8
years, Installments per year – 2, Interest charge 9% per 6 months)
Question 6
An asset was purchased 5 years ago for 52,000. It was expected to have an economic life of 8 years, at which
time its salvage value would be 4,000. If the function that the asset was serving is no longer needed, for what
price must it be sold now to recover the invested capital when i =12%.
Question 7
A short concrete canal can be constructed as part of a flood control project; the placement of a large galvanized
culvert will serve the same function. The cost of the canal, which last indefinitely, is USD 75,000; and
maintenance costs will average USD 400 per year. A culvert, which will have to be replaced every 30 years, will
cost USD 40,000 and have an annual maintenance cost of USD 700. Salvage values are negligible for both
alternatives, and the government interest rate is 6%. Which alternative has the lowest equivalent annual cost?