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Financial Questions With Solutions

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Mahmoud salah
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24 views3 pages

Financial Questions With Solutions

Uploaded by

Mahmoud salah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Financial Questions with Detailed Solutions

Question 1
A company that sells high-purity laboratory chemicals is considering investing in new
equipment that will reduce cardboard costs by better matching the size of the products to
be shipped to the size of the shipping container. If the new equipment will cost $220,000 to
purchase and install, how much must the company save each year for 3 years in order to
justify the investment, if the interest rate is 10% per year?
Options:
1. $66,891
2. $12,783
3. $78,642
4. $88,464

Solution:
We use the Present Value of an Annuity formula:
P = C * ((1 - (1 + r)^-n) / r), where:
- P is the initial investment ($220,000),
- C is the annual savings,
- r is the interest rate (10% or 0.10),
- n is the number of years (3).

Rearrange to solve for C:


C = P * (r / (1 - (1 + r)^-n))

After calculation, the correct answer is: $88,464.

Question 2
If a company sets aside $2,000,000 now into a contingency fund, how much will the
company have in 5 years, if it does not use any of the money and the account grows at a rate
of 12% per year?
Options:
1. $270,688
2. $128,756.5
3. $352,468.3
4. $3,524,683

Solution:
We use the Future Value formula:
FV = PV * (1 + r)^n, where:
- PV is the initial investment ($2,000,000),
- r is the interest rate (12% or 0.12),
- n is the number of years (5).

After calculation, the correct answer is: $3,524,683.

Question 3
At an interest rate of 10% per year, the equivalent amount of $20,000 one year ago is
closest to:
Options:
1. $18,181
2. $9,091
3. $11,000
4. $12,000

Solution:
We use the Present Value formula:
PV = FV / (1 + r), where:
- FV is $20,000,
- r is the interest rate (10% or 0.10).

After calculation, the correct answer is: $18,181.

Question 4
A family that won a $300,000 prize on America’s Funniest Home Videos decided to put one-
half of the money in a college fund for their child who was responsible for the prize. If the
fund earned interest at 6% per year, how much was in the account 14 years after it was
started?
Options:
1. $251,741
2. $113,045
3. $339,135
4. $371,250

Solution:
We use the Future Value formula:
FV = PV * (1 + r)^n, where:
- PV is $150,000 (half of $300,000),
- r is the interest rate (6% or 0.06),
- n is the number of years (14).

After calculation, the correct answer is: $339,135.

Question 5
As a principal in the consulting firm where you have worked for 20 years, you have
accumulated 5000 shares of company stock. One year ago, each share of stock was worth
$40. The company has offered to buy back your shares for $225,000. At what interest rate
would the firm’s offer be equivalent to the worth of the stock last year?
Options:
1. 12.5%
2. 15%
3. 10%
4. 11%

Solution:
To find the interest rate, we use the Future Value formula:
FV = PV * (1 + r), where:
- FV is $225,000,
- PV is $200,000 (5000 shares * $40 each).

Solving for r:
r = (FV / PV) - 1

After calculation, the correct answer is: 12.5%.

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