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Problem Set 1

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17 views4 pages

Problem Set 1

Uploaded by

Ailsa May
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Problem set 1.

(Due 11 Nov 2024:Mon), please write your group name and session L7/L8

You will earn half of the credits by choosing correct choices.


To get the other half of the credits, you will have to correctly show your calculation in details in the space
provided.

1. First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank
pays 6 percent interest compounded annually. If you made a $4,200 deposit in each bank now, how much
more money would you earn from your Second City Bank account at the end of 8 years?
a. 520
b. 508
c. 490
d. 478

2. You are thinking of buying a miniature golf course. It is expected to generate cash flows of $50,000 per year
in years one through four and $30,000 per year in years five through eight. If you require a 10 percent rate
of return, What is the maximum amount you are willing to pay for this golf course? ($50,000 at the end of
year 1 to 4; $30,000 at the end of year 5 to 8)
a. $223,445
b. $167,943
c. $203,349
d. $328,230
3. You are contributing money to an investment account so that you can purchase a house in five years. You
plan to contribute six payments of $30,000 a year. The first payment will be made today (t = 0) and the final
payment will be made five years from now (t = 5). If you earn 11 percent in your investment account, how
much money will you have in the account five years from now (at t = 5)?

a. $194125
b. $208565
c. $216834
d. $237,386
e. $263504

4. You’re trying to choose between two different investments, both of which have up-front costs of $80,000.
Investment G returns $152,000 in 5 years. Investment H returns $211,200 in 10 years. What is the rate of
return for the two possible investments?
a. G = 13.7%, H = 10.2%
b. G = 12.5%, H = 10.5%
c. G = 11.3%, H = 13.2%
d. G = 10.6%, H = 12.4%
5. You have been depositing money at the end of each year into an account that pay 5% interest. What is the
balance in the account at the end of year three if you deposited the following amounts?
Year End of Year Deposit
1 $1000
2 $2000
3 $3000

A. 6,000.0
B. 6,202.5
C. 6,362.6
D. 6,512.6

6. Use the information for the question(s) below.(3 pts)

Market price of Alaska North Slope Crude Oil (ANS) = $71.75/bbl


Market price of West Texas Intermediate Crude Oil (WTI) = $73.06/bbl

As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of
Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78
worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for
10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl
of WTI crude, what should you do? Assume that there is no transaction cost from buy/sell oil and assume that
production costs are the same.
A) Refine your original 10,000 bbl of WTI crude oil
B) Trade 10,000 bbl of WTI crude oil for 10,150 bbl of ANS crude oil, then refine 10,150 bbl of ANS crude oil
C) Sell 10,000 bbl of WTI crude oil at $73.06/bbl and use the proceed to buy and refine ANS crude oil

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