# 330 ALL

You retire at age 60 and expect to live another 27 years. On the day you retire, you have $464,900 in your retirement savings account. You are conservative and expect to earn 4.5% on your money during your retirement. How much can you withdraw from your retirement savings each month if you plan to die on the day you spend your last penny?

$2,481.27

A farmer is taking out a 30-year loan of $35,000 with equal principal annual payments and an interest rate of 10%. Inflation rate is expected to be 3% per year. What is the interest payment in the 6th year?

$2,916

Suppose that the inflation rate is 2.5% and the real terminal value of an investment is expected to be $20,000 in 2 years. Calculate the nominal terminal value of the investment at the end of year 2.

$21,013

If you wished to withdraw $40,000 in 5 years to buy a Mercedes, how much money would you need to deposit today in Citizens Savings Bank if they pay 12 percent interest (compounded monthly)?

$22,018

A farmer is taking out a 20-year loan of $30,000 with equal principal annual payments and an interest rate of 12%. Growth rate of farm returns are expected to be 4% per year. What is the loan balance in the 5th year?

$22,500

How much money would you have in your bank account in 9 years if $500 is deposited quarterly at the end of each quarter over the next 9 years? Suppose that savings account pays 7% compounded quarterly.

$24,783.06

A bank has agreed to lend you $53,000 for a home loan. The loan will be fully amortized over 39 years at 13.50%, with .44 points. The loan payments will be monthly. The closing cost is estimated to be $3,894 and you plan to refinance the mortgage in 8 years. Calculate the prepaid interest.

$251.44

If you could buy a bond now and five years later sell it for $40,000, what would you be willing to buy it for, assuming an 8% discount rate and no other cash flows?

$27,223

Assume you borrow $25,000 at 8% per year interest compounded annually. You pay nothing until the end of 10 years at which time the principal and interest is due. How much interest is paid?

$28,973

If you can earn 12% on your money, how much should you pay today for an investment that promises to pay $3,360 in one year?

$3,000.00

What is the present value of $5,000 that is to be received 6 years from today and interest rates are 8% compounded annually?

$3,151

Assume that the marginal tax rate is 20%. Assume further that IRS will allow the investor to depreciate the investment using straight-line over 15 years. If the initial cost of an investment is $50,000, What is the annual depreciation expense for tax purposes

$3,333.33

Suppose that a $9,800/ acre loan is expected to be fully amortized at 22% over 5 years. Calculate the amount of loan payment per period.

$3,422

A bank has agreed to lend you $610,900 for a home loan. The loan will be fully amortized over 60 years at 10.59%, with .56 points. The loan payments will be monthly. The closing cost is estimated to be $3,712. Calculate the prepaid interest.

$3,461.21

Suppose you deposit $2,500 today in a savings account at 3.5% interest compounded annually. Assuming no withdrawal, how much would you have at the end of 10 years?

$3,526

A rancher purchased a new trailer for $10,000. The bank is willing to loan him $6,000. The terminal value of this investment is $3,500. There is a marginal tax rate of 15%, a growth rate of 4%, and a discount rate of 12%. What is the after-tax terminal value of this investment?

$3,575

Suppose that net returns are $400 per acre and expected rates of return are 11%, then the estimated land value per acre is:

$3,636.36

Cindy's dead beat brother in law owes her $5,000 which he has promised to pay today. He was not able to pay it and the best she has been able to get out of him is a promise to pay $1,000 per year for the next 5 years, with no interest. The first payment will be made 1 year from now. What is the present value of the 5 payments to Cindy assuming that she would invest the money at 10% if she had it now?

$3,790

Eddard and Robert made their annual tractor loan payment to Iron Bank on 10/31/95. The principal balance of the loan after the payment was $22,500. The interest rate on the loan is currently 8%. Estimate the accrued interest balance of this loan on 12/31/95.

$300

Assume that the real net return of an investment is $250 per acre with a growth rate of 5% each year and an inflation rate of 3%. What is the real net return in the 5th year?

$319.07

Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both Martha and Stewart will receive payments for five years. At an 8% discount rate, what is the difference in the present value of these two sets of payments?

$32.88

How much is an oil well worth today if it will pay royalties of $20,000 per year at the end of the next 10 years and will be sold for $200,000 at the end of the 10th year? Assume that the interest rate is 10% compounded semiannually.

$324,622

A farmer is taking out a 10-year loan of $25,000 with fully amortized monthly payments with an interest rate 12%. Inflation rate is expected to be 4% per year. What is the per period payment?

$358.68

Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day of each year. They both earn a 9% rate of return. What is the difference in their savings account balances at the end of thirty years?

$36,803.03

An investor wants to do capital budgeting for his new investment project. He has the following information: IRS will allow the investor to depreciate the investment using straight-line over 10 years. The marginal tax rate will be 20% over the next 5 years & it will be 10% from the 6th to the 10th year. The investor expects that the terminal value for the investment is $40,000 at the end of 4 years.(a 4-year project) What is the after-tax terminal value of this investment if the initial cost is $60,000?

$39,200

an investor wants to do capital budgeting for his new investment project. He has the following information: IRS will allow the investor to depreciate the investment using straight-line over 10 years. The marginal tax rate will be 20% over the next 5 years & it will be 10% from the 6th to the 10th year. The investor expects that the terminal value for the investment is $40,000 at the end of 4 years.(a 4-year project) What is the after-tax terminal value of this investment if the initial cost is $60,000?

$39,200

Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35%?

$39,942.42

A farmer is taking out a 30-year loan of $35,000 with equal principal annual payments and an interest rate of 10%. Inflation rate is expected to be 3% per year. What is the total payment in the 6th year?

$4,083

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 13.60%. One annuity pays $3,600 on the first day of each year for 35 years. How much does the second investment pay each year for 35 years if it pays at the end of each year?

$4,089.60

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 14.30%. One annuity pays $3,600 on the first day of each year for 16 years. How much does the second investment pay each year for 16 years if it pays at the end of each year?

$4,114.80

Cindy's dead beat brother in law owes her $5,000 which he has promised to pay today. He was not able to pay it and the best she has been able to get out of him is a promise to pay $1,000 per year for the next 5 years, with no interest. What would be the present value of the payments if dead beat would make each payment 1 year earlier?

$4,169

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 11.60%. One annuity pays $3,900 on the first day of each year for 18 years. How much does the second investment pay each year for 18 years if it pays at the end of each year?

$4,352.40

How much money would you have in your bank account in 4 years if $500 is deposited semiannually at the end of each semiannual for next 4 years? Suppose that savings account pays 5% compounded semiannually.

$4,368.06

How much money would you have in your bank account in 4 years if $500 is deposited semiannually at the end of each semiannual over the next 4 years? Suppose that savings account pays 5% compounded semiannually.

$4,368.06

A farmer is taking out a 20-year loan of $30,000 with equal principal annual payments and an interest rate of 12%. Growth rate of farm returns are expected to be 4% per year. What is the total payment in the 5th year?

$4,380

Suppose that the marginal tax rate is 15%. If a farmer decides to purchase a new tractor, it will increase the operating receipts $6,800 per year but it will cost $1,100 a year for maintenance. Before the purchase, the current operating expenses are $1,200. What is the annual after-tax net return generated by this investment for each year?

$4,560

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 14.30%. One annuity pays $4,000 on the first day of each year for 10 years. How much does the second investment pay each year for 10 years if it pays at the end of each year?

$4,572.00

An investment with a net present value of -$40,000 will have a life of 15 years. There is a real discount rate of 8.5%, a growth rate of 3%, and a marginal tax rate of 15%. What is the annuity equivalent?

$4,816

A bank has agreed to lend you $53,000 for a home loan. The loan will be fully amortized over 39 years at 13.50%, with .44 points. The loan payments will be monthly. The closing cost is estimated to be $3,894 and you plan to refinance the mortgage in 8 years. Calculate the loan principal.

$57,145.44

A rancher borrowed money to purchase a new trailer 2 years ago. The annual payment is $8,700, the interest rate is 8% and there are 10 years left on the loan. How much does the rancher still owe on the loan?

$58,377.71

Suppose you wish to withdraw $80,000 in four years to buy a Mercedes. How much money would you need to deposit today in the Aggie First National Bank if the bank pays eight-percent interest, compounded annually?

$58,802

Suppose you are considering the purchase of an investment. The Cash Revenues for this investment is $10,000 and the Cash Expenses in $3,000. Given the marginal tax rate is 23%, what is the after-tax net returns?

$6,090

Suppose that the initial cost of an investment is $50,000, the present value of tax saving from depreciation is $2,500, and the present value after tax terminal value is $40,000. It is expected that an investment will increase yield and thus operating receipts by $20,000 per year but it will cost $4,000 a year to pay for electricity, maintenance, and additional labor. There is a pretax discount rate of 10% while the marginal tax rate over the next five years is 25%. What is the break-even price of operating receipt?

$6,481

Suppose that a student plans to borrow money for an education at TAMU. For five years, he will borrow $8,000 at the end of each year. While in school, the bank will only charge 6.5% interest. On Graduation, at the end of five years, the student agrees to pay the loan off over 10 years at 7% interest. Payments will start at the end of six years; interest starts accruing at 10% at the end of five years. Calculate the annual loan payments.

$6,485.17

Pasture land in King's Landing is selling for $3,000 per acre. If the value increases 4% per year, what will the value be in 20 years?

$6,573

Suppose you owe a creditor $10,000 due in a single payment in 5 years. How much should your creditor be willing to accept now if he can earn 8% on his money?

$6,806

A bank has agreed to lend you $610,900 for a home loan. The loan will be fully amortized over 60 years at 10.59%, with .56 points. The loan payments will be monthly. The closing cost is estimated to be $3,712. Calculate the loan principal.

$618,073.21

Gary doesn't have enough money to invest now to provide the $10,000 honeymoon in 10 years. He wants to know how much he would need to deposit each year for the next 10 years to accumulate the $10,000, assuming he makes the first deposit one year from now and interest at 10% is compounded annually.

$627

Suppose that the inflation rate is 5% and the real terminal value of an investment is expected to be $50,000 in 5 years. Calculate the nominal terminal value of the investment at the end of year 5.

$63,814

If the real land price is $600 in year three and the inflation rate is 3%. The marginal tax rate is 6% and the growth rate is 2%. Calculate the nominal terminal value for the third year?

$655.63

Assume that the marginal tax rate is 20%. Assume further that IRS will allow the investor to depreciate the investment using straight-line over 15 years. If the initial cost of an investment is $50,000, What is the tax saving value for each year?

$666.67

When you retire, you want to have a million dollars saved. If you plan to retire in 30 years, and you can receive 8% interest monthly on a savings account, what is the fixed amount you have to save each year?

$671

You are selling a tractor for $8,000. The buyer can pay $2,000 per year for six years. If you require an 8% interest rate, would you accept the offer?

$7,154; Decline the offer

Suppose that the initial cost of an investment is $35,000, the present value of tax saving from depreciation is $1,500, and the present value after tax terminal value is $25,000. It is expected that an investment will increase yield and thus operating receipts by $20,000 per year but it will cost $4,000 a year to pay for electricity, maintenance, and additional labor. There is a pretax discount rate of 10% while the marginal tax rate over the next four years is 25%. What is the break-even price of operating receipt?

$7,390

Jaime and Tyrion purchased a new combine for $56,000. Assume a 7-year useful life and no salvage value. Calculate the depreciation for Year 7 using the double-declining balance.

$7,437

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 9.50%. One annuity pays $6,800 on the first day of each year for 22 years. How much does the second investment pay each year for 22 years if it pays at the end of each year?

$7,446.00

Suppose you buy a tractor for $60,000 and sell it for $6,000 in 10 years. What is the annualized cost (capital recovery) if interest rates are 6.5%?

$7,901.65

Suppose you are considering the purchase of a new Tundra truck for $45,000. You are required to put $5,000 down and need to finance $40,000. It can be financed over five years. Calculate the monthly debt payments if the annual interest rate is 3% compounded monthly and the payments are uniform (equal monthly payments including principal and interest).

$718.75

A farmer borrowed money to purchase a combine 4 years ago. The annual loan payment is $28,000, the interest rate is 8% and there is 3 years left on the loan. How much money does the farmer still owe on the loan?

$72,158.72

If land was purchased for $600 per acre and the real price of land increases at 4% each year. The marginal tax rate is 8% and the inflation rate is 3%. The land will be sold in five years. What will the real land price be at the time of the sale?

$729.99

A farmer is considering the purchase of additional farmland. Given the present value of after-tax net return of $32.55, a marginal tax rate of 16%, a terminal value of $679.85, and an after-tax discount rate of 19.80%. This farmer is planning on selling the land in 14 years. What is the maximum price this farmer should be willing to pay for an acre of land?

$79.10

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 8.60%. One annuity pays $7,600 on the first day of each year for 18 years. How much does the second investment pay each year for 18 years if it pays at the end of each year?

$8,253.60

When you retire, you want to have a million dollars saved. If you plan to retire in 40 years, and you can receive 5% interest annually on a savings account, what is the fixed amount you have to save each year?

$8,278

Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9%, how much can Todd afford to borrow to buy a car?

$8,499.13

Terry's father loaned her $15,000 for college expenses. Terry agreed to repay the $15,000 in a lump sum 5 years after graduation. No interest was to be charged. Terry, who is now a senior, has the prospects of marrying a rather wealthy man and wishes to repay the loan on graduation day. Assuming that father can invest the money at 12% interest, how much should he be willing to accept on graduation day rather than waiting 5 years for his money?

$8,511

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 6.80%. One annuity pays $8,200 on the first day of each year for 29 years. How much does the second investment pay each year for 29 years if it pays at the end of each year?

$8,757.60

Jon Snow has deposited $7,000 in a guaranteed investment account with a promised rate of 6% compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a horse after graduation from Winterfell. How much of a down payment will he be able to make?

$8,837.34

You are selling a tractor for $8,000. The buyer can pay $2,500 per year for six years. If you require an 8% interest rate compounded monthly, would you accept the offer?

$8,908; Accept the offer.

You are selling a tractor for $10,000. The buyer can pay $3,000 now, $2,500 next year, $1,500 in two years, and $3,000 in three years. If you require an 8% interest rate, what is the present value of cash inflows and would you accept the offer?

$8,982 ; Decline the offer

How much money would you have in your bank account in 15 years if $600 is deposited semiannually at the end of each semiannual for next 15 years? Suppose that savings account pays 18% compounded semiannually.

$81,784.52

Suppose that the inflation rate is 4% and the real terminal value of an investment is expected to be $70,000 in 4 years. Calculate the nominal terminal value of the investment at the end of year 4.

$81,890

Suppose that a $3,900/ acre loan is expected to be fully amortized at 25% over 15 years. Calculate the amount of loan payment per period.

$1,010

Assume that the real net return in the fourth year is $100 with a growth rate of 4%, inflation rate of 3%, and a tax rate of 6%. What is the nominal net return in the fourth year?

$112.55

A five-year project, if undertaken, will require an initial investment of $500,000. The discount rate is 5% and The expected end-of-year cash flows are:

$117,145

If you took out a $10,000 loan (education loan) today from Citizens' Savings Bank at 12 percent (compounded annually) and don't have to pay it back for 20 years, how much more interest would you pay if interest is compounded monthly (part C) rather than compounded annually (part A)?

$12,462

Suppose you buy a tractor for $50,000 and sell it for $4,000 in 5 years. What is the annualized cost (capital recovery) if interest rates are 10%

$12,534.68

Suppose you buy a tractor for $50,000 and sell it for $4,000 in 5 years. What is the annualized cost (capital recovery) if interest rates are 10%?

$12,534.68

You have just struck oil in the middle of your hay field. An oil company has offered to pay you a perpetual annuity of $12,500 per year for the rights. What is the value of the offer, assuming a 10% discount rate?

$125,000

Assume that the nominal after-tax net return for year 1: $45, year 2: $47, year 3: $49. The after tax risk adjusted discount rate is 6%, the growth rate is 3%, and the inflation rate is 4%. What is the present value of the after-tax net return?

$125.42

How much money will be in a savings account in 4 years if $100 is deposited today and it earns 6% compounded annually?

$126.24

How much money will be in a savings account in 4 years if $100 is deposited today and it earns 6% compounded semiannually?

$126.67

Suppose a parcel of land promises to return $200 per year per acre. What is the capitalized value of the land if interest rates are 1.5%

$13,333.33

What is the present value of an investment that offers payments of $6,000 at the end of year 1; $4,000 at the end of year 2; and $2,000 at the end of year 3 if money can be invested at 9 percent?

$13,489

A farmer purchased a module builder for $50,000. The bank is willing to loan him $37,000. The terminal value of this investment is $15,000. There is a marginal tax rate of 25%, a growth rate of 2%, and a discount rate of 10%. What is the after tax terminal value of this investment?

$14,500

Suppose that a $100/ acre loan is expected to be fully amortized at 15% over 35 years. Calculate the amount of loan payment per period.

$15

Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9%, what is the current value of the lease?

$15,947.61

Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%. Given these assumptions, what is this employee benefit worth to you today?

$16,430.54

George is thinking about early retirement. Suppose he deposits $100,000 now at 11% interest. How much could he withdraw each year for the next 10 years if the first withdrawal was made one year from now, the account continues to earn interest at 11% compounded annually, and the account is to be entirely depleted at the end of 10 years?

$16,980

Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have earned over a five-year period if the interest had compounded annually?

$16.65

Assume that the nominal after-tax net return for year 1: $62, year 2: $65, year 3: $68. The after tax risk adjusted discount rate is 10%, the growth rate is 3%, and the inflation rate is 4%. What is the present value of the after-tax net return?

$161.17

Suppose you buy a tractor for $80,000 and sell it for $4,500 in 5 years. What is the annualized cost (capital recovery) if interest rates are 5.5%?

$17,927.82

Calculate the present value of a retirement fund if you put $2,000 in your savings account at the beginning of each of the next 50 years? Assume that your savings account pays 12% compounded annually.

$18,602.08

What is the present value of a payment of $21,000 three years from now if the effective annual interest rate is 4%?

$18,669

Suppose that the initial cost of an investment is $75,000, the present value of tax saving from depreciation is $2,000, and the present value after tax terminal value is $30,000. It is expected that an investment will increase yield and thus operating receipts by $15,000 per year but it will cost $5,000 a year to pay for electricity, maintenance, and additional labor. There is a pretax discount rate of 12% while the marginal tax rate over the next 5 years is 20%. What is the break-even price of operating receipt?

$19,059

Suppose you have been hired by Aggie-Business. They are willing to pay you a signing bonus of $2,000 per year starting in one year for each of the next seven years (7-year annuity) or a lump-sum bonus today of $11,000. Suppose you take the $11,000 today and put this money in a bank account paying 6% interest. Calculate how much money you have in your bank account at the end of 10 years.

$19,699

Suppose you have the opportunity to purchase a 7-year annuity that pays you $2,000 per year starting in one year for each of the next seven years and you can purchase the annuity for $11,000. Suppose you take the $11,000 today and put this money in a bank account paying 6% interest. Calculate how much money you have in your bank account at the end of 10 years.

$19,699

A combine with a cost of $150,000 has a depreciable life of 15 years. There is a marginal tax rate of 20%, an interest rate of 8%, and a pretax discount rate of 10%. What is the tax savings form depreciation?

$2,000

Twenty years ago, your grandfather deposited $800 in a savings account earning 5% annually, with interest compounded on quarterly basis. What is the savings account worth today? What would the savings account be worth if interest were compounded monthly?

$2,161 and $2,170

If a business takes out a $10,000, 7 year, 12% loan, the annual payment is:

$2,191.17

A bank has agreed to lend you $53,000 for a home loan. The loan will be fully amortized over 39 years at 13.50%, with .44 points. The loan payments will be monthly. The closing cost is estimated to be $3,894 and you plan to refinance the mortgage in 8 years. Calculate the APR.

14.6372%

If a farmer is granted a loan with a contractual rate of 16% and semiannual payments will be made for 3 years fully amortized. What is the effective rate?

16.64%

Suppose that you are considering the purchase of a bond that matures in 12 years. The bond has a par value of $1,000, it pays a coupon of 10 percent (annually), and the coupon is paid semiannually (10s). Calculate the Net Present Value and the yield on this bond investment if the current market rate on this bond is 7%, you expect the market rate to be 4% in 5 years, you plan to sell the bond in five years, and your required rate of return on this investment is 8% (4% semiannually). What is the NPV? (hint: use the purchase price in question 6, and the sell price in question 7)

$86

You just won the lottery! As your prize you will receive $1,200 a month for 100 months. If you can earn 8% on your money, what is this prize worth to you today?

$87,380.23

Suppose you can put your money in a savings account that pays 5%, compounded annually. How much money would you have in your savings account in 50 years if you invested $800 today?

$9,174

You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first day of each year. What is the value of this annuity today at a 7% discount rate?

$90,182.79

You are to receive $75 per year indefinitely. The market rate of interest for these types of payments is 8%. The price you would pay for this stream is:

$937.50.

The purchase price on a piece of land is $650. The marginal tax rate is 8% and the nominal terminal value is $967. There is an inflation rate of 4% and a growth rate of 3%What is the nominal after-tax terminal value?

$941.64

If you took out a $10,000 loan (education loan) today from Citizens' Savings Bank at 12 percent (compounded annually) and don't have to pay it back for 20 years, how much money would you owe the bank in 20 years?

$96,463

Given that there is a quarterly actuarial interest rate of 5.12% What is the annual percentage rate?

20.47%

The purchase price on a piece of land is $700. The marginal tax rate is 6% and the nominal terminal value is $983. There is an inflation rate of 4% and a growth rate of 2%. What is the nominal after-tax terminal value?

$966.02

A farmer is taking out a 20-year loan of $30,000 with fully amortized quarterly payments and an interest rate of 12%. Growth rate of farm returns are expected to be 4% per year. What is the per period payment?

$993.35

If it is given that the loan amount is $130.00, the percent stock requirement is .02, and the credit fee is $18.76. (i) Calculate the loan principal. (ii) Calculate the required stock purchase.

(i) $151.79 (ii) $3.04

If a farmer is granted a loan with a contractual rate of 20% and monthly payments will be made for 5 years fully amortized. What is the effective rate?

21.94%

How many years would it take before you had $484,012 in your bank account if you deposited $40,000 today in a bank that pays 12% interest annually?

22

Given that the total farm assets is 278.48 and the total farm debt is 48.8, what is the value of the equity capital?

229.68

Given that there is a monthly actuarial interest rate of 1.93%. What is the annual percentage rate?

23.19%

Five years ago you incurred a 10 year term loan that required annual payments of $1,150 per year. You have made four payments in previous years and the fifth payment is due today. The note holder proposes that you buy back this note today for $4,359. At what rate of interest would you be indifferent (hint: calculate the yield on the loan based on the bank's price of the note)?

23.2%

Suppose that the firm CherryBlossom has an orchard they are willing to sell today. The net annual returns to the orchard are expected to be $50,000 per year for the next 20 years. At the end of 20 years, it is expected that the land will sell for $30,000. Calculate the Market Value of the orchard if the market rate of return on comparable investments is 16%.

297,983

Given the following information: required rate of return = 13% after-tax, risk free discount rate = 12.8% marginal tax rate = 20% r=[rbt +PREM](1-m) What is the risk premium?

3%

Given the following information: required rate of return = 13% after-tax, risk free discount rate = 12.8% marginal tax rate = 20% r=[rbt +PREM](1-m) What is the risk premium?

3%

You just paid $350,000 for a policy that will pay you and your heirs $12,000 a year forever. What rate of return are you earning on this policy?

3.43%

What is the Yield of an investment that costs $85, and promises to pay $120 in one year?

41.18%

A bank has agreed to lend you $53,000 for a home loan. The loan will be fully amortized over 39 years at 13.50%, with .44 points. The loan payments will be monthly. The closing cost is estimated to be $3,894 and you plan to refinance the mortgage in 8 years. Calculate the actuarial rate.

1.2198%

A bank has agreed to lend you $627,000 for a home loan. The loan will be fully amortized over 25 years at 15.49%, with .41 points. The loan payments will be monthly. The closing cost is estimated to be $2,237 and you plan to refinance the mortgage in 5 years. Calculate the actuarial rate

1.3287%

If a farmer is granted a loan for $3,000, with a 6 years of fully amortized monthly payments of $75. What is actuarial rate?

1.82%

If you had $15,421 to deposit today in Citizens Savings Bank at 10 percent (compounded annually), how many years would you have to wait before you could pay $40,000 in cash for a new Mercedes?

10 years

If you had $24,836.85 to deposit today in Citizens Savings Bank and wanted to pay $40,000 cash for a new Mercedes in 5 years, what annual interest rate (compounded annually) would the bank have to pay?

10%

About how many years will it take for $100,000 placed in a bank account at 7% interest rate compounded annually to double? (Answer = 10.24 years)

10.24 years

Suppose that the marginal tax rate is 25%, before-tax nominal discount rate of 16%, risk premium of 3%, and an expected inflation rate of 5%. What is the real discount rate?

10.5%

A farmer is considering the purchase of additional land to expand operations. The marginal tax rate is 15% and He requires at least an 11% pre-tax, risk free return on capital and a 2.5% risk premium on projects on comparable risk. What is the after-tax, risk adjusted discount rate? r=[rbt +PREM](1-m)

11.48%

given the following information: required rate of return = 11%; risk premium = 2.5% marginal tax rate = 15% r=[rbt +PREM](1-m) What is the after-tax, risk adjusted discount rate?

11.48%

Typically, how long is the normal course of business for current assets?

12 months

If a farmer is granted a loan that will be paid over 2 years of fully amortized monthly payments and there is a contractual rate of 12%. What is the APR?

12%

If a farmer is granted a loan that will be paid over 3 years of fully amortized quarterly payments and there is a contractual rate of 12%. What is the APR?

12%

If a farmer is granted a loan that will be paid over 4 years of fully amortized semiannual payments and there is a contractual rate of 12%. What is the APR?

12%

What interest rate would a bank have to pay on a $10,000 deposit if you wanted to withdraw $96,463 from your bank account in 20 years? Assuming interest is compounded yearly.

12%

What interest rate would a bank have to pay on a $10,000 deposit if you wanted to withdraw $96,463 from your bank account in 20 years? Assuming that interest is compounded yearly.

12%

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for three years, and the cost of capital is 9%?

126,565.00

Assume that the marginal tax rate is 9%. Assume further that IRS will allow the investor to depreciate the investment using straight-line over 12 years. If the initial cost of an investment is $63,000, What is the tax saving value for each year?

472.5

What interest rate would a bank have to pay on a $30,000 deposit if you wanted to withdraw $79,599 from your bank account in 20 years?

5%

Suppose you are considering the purchase of an investment. The Net Returns for this investment is $5,000. Given the marginal tax rate is 28%, what is the pre-tax net returns?

5,000

If a farmer is given a loan for $2,500, with 5 years of fully amortized quarterly payments of $250. What is the actuarial rate?

7.75%

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what is the total present value of the bond's coupon payments?

815.56

What is the approximate annual interest rate compounded annually if your money will double in 8 years if it is put in a savings account?

9%

Suppose that you are considering the purchase of a bond that matures in 12 years. The bond has a par value of $1,000, it pays a coupon of 10 percent (annually), and the coupon is paid semiannually (10s). Calculate the Net Present Value and the yield on this bond investment if the current market rate on this bond is 7%, you expect the market rate to be 4% in 5 years, you plan to sell the bond in five years, and your required rate of return on this investment is 8% (4% semiannually). What is the annual Yield? (hint: use the purchase price in question 6, the sell price in question 7, and the NPV from question 8)

9.6%

The capital budgeting process involves

All of the above (identifying potential investments, analyzing the set of investment opportunities, and identifying those that will create shareholder value,implementing and monitoring the selected investment projects)

____________ : An actuarial representation of the total financing cost of credit expressed as a percent per annum.

Annual percentage rate (APR)

A farmer plans on selling the land in 5 years. He thinks the real land value will be $100 in 5 years. Suppose that the marginal tax rate is 39% and the inflation rate is 5%.

B D

The ____________ is a systematic listing of all that the business owns (assets) and all that it owes (liabilities) at a specific point in time.

Balance Sheet

Suppose you have $1,000 to invest for 1 years. Bank A is willing to pay 8% simple interest and Bank B is willing to pay 8% compounded monthly. Which bank pays the highest total interest? What is the value of the interest earned by the investor?

Bank B, $82.99

A rancher is considering the option to lease new equipment. Inflation is assumed to be zero. Assume that the lease payment is constant through the lease agreement. Assume that the lease payments would be made at the beginning of the year and the lease ends at the end of the 8th year. This lessor will pay for repairs and maintenance. The operating expenses for this tractor will be $5,525 with a marginal tax rate of 15% and an after tax discount rate of 9%.

C A

Suppose a farmer is considering the purchase of additional farmland. It is believed that the operating revenue per acre of land per year will be $222 and operating expenses will be $186 in present dollars. The inflation rate is expected to be 4% Assume that the marginal tax rate is 19% and that this farmer requires at least an 8% pre-tax, risk free return on capital.

C B A

Collecting relevant information is important in capital budgeting. Which of the following is least important?

CASH EXPEN

Which of the followings are significant tools of financial management?

Cash Flows/ Information Flows/ Strategic Management/ Capital Budgeting

_________________ facilitates tax management by allowing farmers to shift sales and expenditures from one year to another in response to swings in farm income and to defer tax obligations to later years.

Cash-basis accounting

Currently, among lenders, ______________ have the largest market share of total farm debt.

Commercial banks

If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compounded interest at 7.5% for three years which one will pay more and by how much?

Compound interest by $22.97

_____ is the interest rate stated by the lender on the note: 8%, 10%, 12%, and so forth.

Contractual Rate

A discount rate must account for the followings:

Cost of capital, Return on alternative investments, Risk, and Taxes

Service fees, prepaid interest, fees for credit reports, compensating balances, and stock requirements are the only possible non-interest costs to consider when comparing loans.

F

Suppose an investment has a life of 3 years, an after-tax discount rate of 10%, and an after-tax terminal value of $60,800. The present value of the after-tax terminal value is $60,800.

F

Suppose an investment has a life of 4 years, an after-tax discount rate of 12%, and net returns of $15,000 per year. The present value of the after-tax net returns is $60,000.

F

Suppose an investment has a life of 5 years, an after-tax discount rate of 12%, and an after-tax terminal value of $75,000. The present value of the after-tax terminal value is $132,176.

F

The APR is calculated before the actuarial rate.

F

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital.

F

The Net Cash Flow is calculated as the after-tax net returns minus the annual depreciation multiplied by the marginal tax rate.

F

The after-tax discount rate is the before tax discount rate multiplied by the marginal tax rate.

F

The correct Internal Rate of Return is found when the Net Present Value is equal to 1.

F

The effective rate is calculated before the APR.

F

The interest payment is always lower for a fully amortized loan vs. an equal principal loan.

F

The maximum bid price of land can be found by setting the NPV equal to one and solving for cost.

F

The present value of the after-tax savings from depreciation is obtained by discounting the annual tax savings from depreciation using the marginal tax rate as the discount rate.

F

The principal payment for a fully amortized loan is more than an equal principal loan at the beginning but later is less, ceteris paribus.

F

The terminal value that should be used in calculating depreciation for capital budgeting is the sale price of the investment.

F

The total loan payment is constant over time for equal principal loans.

F

The total loan payment is decreasing for fully amortized loans.

F

When comparing loans based on liquidity the repayment schedule is the only factor that is important.

F

When comparing loans based on the least cost when the conversion periods are the same, one can compare the effective rates.

F

When using straight-line depreciation to calculate depreciation for tax purposes, you should divide the cost basis by the planned life of the investment.

F

With a fully amortized loan the interest payment stays constant over the life of the loan.

F

Capital Leases are a short-term lease in which the rental charge is calculated on a time basis. The lessor owns the asset and performs nearly all of the functions of ownership, including maintenance. The lessee pays the direct costs, such as fuel and labor.

False

Discount Method is a method of computing interest, with which, the interest is calculated on the original amount of the loan for its full period, and this amount, plus any other loan costs, is subtracted from the amount of the loan at the end.

False

Operating Lease is a long-term contractual arrangement in which the lessee acquires control of an asset in return for rental payments to the lessor.

False

The actuarial interest rate is the interest rate stated on a bank promissory note.

False

The actuarial rate is the rate that accounts for the compounding effects over the number of conversion periods.

False

The book value of an investment is the present value of the remaining payments discounted by the market rate.

False

When comparing loans based on the least cost when the conversion periods are different, one can compare the actuarial or annual percentage rate of the loans.

False

When finding the prepaid interest the points are divided by the loan principal.

False

Financial _____ is the ability of an investment to satisfy the financing terms and performance criteria agreed upon by the borrower and the lender.

Feasibility

There are 2 primary taxes, which are:

Federal Income Tax and Self-employment Tax

What does GAAP stand for?

Generally Accepted Accounting Principles

Which of the following is not a characteristic of farmland?

High Ownership Turnover

As of 2015, farms were taxed at 14 percent for income up to $42,000; at 17 percent for income ranging from $42,000 to $80,000; at 32 percent for taxable income $80,000 to $93,000; at 34 percent for income from $93,000 to $208,000, and so on. Suppose that you have revenues of $236,200 and operating expense of $63,100. How much tax is paid on the total taxable income?

43,734

Project X and Project Y are two mutually exclusive projects. Project X requires an initial outlay of $37,990 and generates a net cash flow of $14,050 per year for six years. Project Y requires an initial outlay of $51,950, and will generate cash flows of $15,450 per year for eight years. Which project should be chosen? (Assume that the discount rate for both projects is 10 percent).

PROJECT X

____________ investors must be compensated for taking risks.

Risk-averse

____________ investors care only about their expected gains or losses.

Risk-neutral

Unlike using IRR, selecting projects according to their NPV will always lead to a correct accept reject decision.

T

When calculating IRR with a trial and error process, discount rates should be raised when NPV is positive.

T

When comparing loans based on the least cost one must choose the loan with the least cost. However, it is not important to account for the time value of money.

T

When comparing loans based on the least cost when the conversion periods are the same, one can compare the actuarial or annual percentage rate.

T

When finding an annuity equivalent of a capitam investment and inflation is assumed to be zero, we use the formula Ae= NPV/[USPVr%,N].

T

Which of the following is true about the NPV and IRR techniques?

The NPV and IRR techniques explicitly consider the cost of capital and the time value of money.

Should a firm invest in projects with NPV = $0?

The firm is indifferent between accepting or rejecting projects with zero NPVs

Suppose you can buy a mechanical post hole digger for $500. It is projected that the digger will save you $150 a year over the next four years (end of year). If your required rate of return is 6%, should you buy the digger?

Yes, since NPV = $19.77 > 0.

You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 8. 75%, which offer should you accept and why?

You should accept the $189,000 today because it has the higher net present value.

You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why?

You should accept the payments because they are worth $56,451.91 today.

Simple Rate-of-return (SRR) is the rate-of-return expresses the ____ profits generated each year by an investment as a percent of either the original or the average investment over the investment's expected life.

average

In the _______________ , the value of property to the "average" or "typical" manager is estimated under average production and price conditions.

capitalization approach

Budgeting Methods are methods used to evaluate the future directions of a firm. For agricultural firms, emphasis is typically placed on enterprise budgets, ______ budgets, and capital budgets.

cash flow

The NPV method focuses on:

cash flows.

The stated rate of interest is 10%. Which form of compounding will give the highest effective rate of interest?

continuous compounding

Leveraged Lease is an extension of capital leasing whose main feature is the formal involvement of a lender in providing _____ to finance the lessor's purchase of the leased asset.

debt capital

Net Present Value is the ____ present value of cash inflows and cash outflows associated with an investment.

difference between

Discounting cash flows involves:

discounting all expected future cash flows to reflect the time value of money.

The process of finding present values from future payments is often referred to as _________. It is the opposite of the ______________ process used to determine future values.

discounting, compounding

Access to ___________ is limited in Agriculture.

equity capital

The sum of the probabilities of all possible events of an outcome is ___________.

exactly equal to one

A pro-forma income statement compiles the net effect of revenue, expenses, nonfarm adjustments, and taxes.

false

A risk-efficient set is constructed by selecting investments or combinations of investments that provide maximum risk for alternative levels of expected profits.

false

Accrued interest means that each time interest is paid, it is added to the principal and thereafter also earns interest.

false

An increase in debt-to-asset and interest expense-to-gross income ratios are a result of capital asset values and gross revenues increasing at a faster rate than debt and costs of debt.

false

An investment should always be considered profitable if the total cash inflows are greater than the total cash outflows.

false

An options contract is a contract for the sale of a good at some point in the future at a specified price

false

An options contract is a contract for the sale of a good at some point in the future at a specified price.

false

Assets with lower liquidity often have lower profitability.

false

Assuming that an annual interest rate is 6%, an investor would be indifferent between $500 today and $12,000 in 55 years from today.

false

Both interest and principal amounts can be deducted from taxable income

false

Ceteris paribus, an annuity that pays at the end of each period has the same future value as that of another annuity that pays at the beginning of each period.

false

Ceteris paribus, an increase in interest rates increases investment spending.

false

Depreciation charges reflect the funds that need to be set aside and accumulated from gross revenue in order to replace the depreciation asset. It is considered as a cash transaction.

false

Fundamental analysis is a security analysis methodology for forecasting the pattern of prices by using the study of past market data.

false

If two projects with positive NPVs are independent, the one with the higher NPV should be chosen.

false

If you have already purchased bonds, you want interest rates (market rates) on bonds to increase, holding everything else constant.

false

In general, greater expected profits require less risk when making financial decisions.

false

In the context of profitability, an investment is acceptable if the Internal Rate of Return is greater than zero.

false

NPV is the abbreviation for "Net Present Value," which is simply the net present value of a series of positive and negative cash flows, excluding the cash flow at time zero.

false

Nominal cash flows can be discounted by either a nominal discount rate or a real discount rate. However, real cash flows must be discounted by a real discount rate only.

false

Principal payments on a fully amortized loan stay constant over the life of the loan.

false

Risk Aversion means the subjective tendency of investors to seek out unnecessary risk

false

Secure markets mean that stock prices have adjusted for all information available and there are no sure bargains.

false

Simplified present value models cannot be utilized when the payments series is uniform or exhibits constant growth.

false

Sole-proprietor family-oriented farms are still common in the agricultural sector. Many of these operations separate business-related assets and liabilities from personal accounts.

false

Stocks that have a high positive correlation provide a diversified portfolio with lower risk than a diversified portfolio with stocks that have a negative correlation, holding everything else constant.

false

Technical analysis is a security analysis methodology aiming to determine a security's value by focusing on underlying factors that affect a company's actual business.

false

The Net Cash Flow is calculated as Cash Revenues minus Cash Expenses plus the marginal tax rate times the taxable income.

false

The Net Present Value represents the investment profit over a zero rate of return on capital.

false

The book value of a contract is the present value of the remaining payments of a contract discounted at the market rate.

false

The cash flow budget must not be formulated on a historical basis to provide an accounting check.

false

The expected value is found by summing the values of all events

false

The managerial accounting reports are internally based records that often are tailored to the characteristics of general farm businesses.

false

The maturity of debt securities traded in the money market is more than 1 year.

false

The present value of an annuity can be calculated by adding each sum of money in the annuity.

false

The pro forma income statement projects profitability, and also indicates liquidity or loan repayability.

false

The process of finding present values is called discounting because the present payments are discounted to a lower future value to account for the time value of money.

false

The total claims of creditors and owners can exceed the total value of assets.

false

Yield is calculated as the discount rate that makes the future value of cash inflows equal to the present value of cash outflows.

false

Yield is calculated as the discount rate that makes the present value of cash inflows greater than the present value of cash outflows.

false

The coefficient of variation is calculated by dividing the expected value by the standard deviation. It is used to compare investments with different expected values and levels of dispersion.

fasle

Strategic Management Process has six interrelated steps: defining and developing a firm's mission; ______; assessing the firm and evaluating the environment; building strategy; implementing strategy; evaluating performance and implementing any corrective actions.

formulating objectives

Modified Internal Rate-of-return (MIRR) is the rate of interest that equates the present value of all outflows with the ____ value of all inflows.

future

"Pro forma" refers to setting up accounting information in advance.

true

A project should be accepted if the IRR is greater than the cost of capital.

true

A projected cash flow statement can be used to determine if an investment is financially feasible

true

A simple interest means that only the original principal earns interest over the life of the transaction.

true

Cash flows stated in real dollars over time can be converted to nominal dollars.

true

Ceteris paribus, an increase in the exchange rate, that is, the price of buying foreign currency in terms of domestic currency, leads to an increase in net exports.

true

Constant-growth Series indicates the payment series experience a constant rate of growth.

true

Discounting to determine present values is precisely the inverse of compounding to determine future values.

true

Efficient markets mean that stock prices have adjusted for all information available and there are no sure bargains.

true

Farm land is considered as a non-depreciable asset.

true

Financial management involves the acquisition and use of financial resources by economics units and the protection of the units' equity capital from business and financial risk.

true

Highly nonliquid assets cannot be readily converted to cash without a substantial loss in value to the firm.

true

If the discount rate is lower than the cost of capital the investment would not recover the cost of capital.

true

In the context of profitability, an investment is acceptable if the Net Present Value is zero or greater.

true

In the context of profitability, an investment is not acceptable if the discount rate is greater than the Internal Rate of Return.

true

Information Flows are information about past, present, and expected business performance comes in part from a financial accounting system that reports the firm's profitability, liquidity, and solvency positions.

true

Land is an asset that does not depreciate.

true

Liquidity refers to the ability to generate cash to meet demands as they occur and to provide both anticipated and unanticipated events. The firm's need for liquidity is closely tied to its risk position; the occurrence of risks is one need for liquidity.

true

Net Revenue is equal to operating revenue minus operating expense.

true

Real Prices are the prices that reflect today's purchasing power at a specific point in time.

true

Risk is often measured as the standard deviation of returns while profits are measured as the expected values of returns.

true

Stock investors are in a residual position in regards to claims on income and assets.

true

The 150% declining balance method is used in depreciating for most classes of depreciable farm and ranch assets.

true

The Market Value of any contract is the present value of the remaining payments discounted at the market rate.

true

The Net Present Value represents the investment profit over the required return on capital.

true

The bond market trades debt securities with maturities more than 1 year.

true

The book value of a contract is the present value of the remaining payments of a contract discounted at the contractual rate

true

The book value of an investment is the present value of the remaining payments discounted by the contract rate.

true

The cash flow budget is a projection of all the cash transactions relating to the business that occur during the accounting period, usually one year.

true

The conversion period is the period of time that principal accrues interest before interest is added to the principal

true

The initial focus of FFSC was to develop recommended guidelines and standards for farm financial reporting for use by internal managers and by external audiences such as lenders and investors.

true

The length of the payment series and the level of interest rates interact to produce greater effects on present and future values as the payment series is longer and interest rates are greater.

true

The planning horizons for agricultural firms typically extend over a long period of time. With long planning horizons, the level and timing of profits will influence the present wealth of the firm. The profitability goal is often expressed as discounted present values of projected earnings.

true

The present value of an annuity can be calculated by finding the present value of each sum of money in the annuity and adding the respective present values together.

true

The price of bond and the interest rate are inversely related.

true

The standard deviation is the amount of dispersion or variation about the expected value.

true

The terminal value that should be used in calculating depreciation for capital budgeting is zero

true

The uniform series future value factor [USFVr,N] is based on end of period cash flows.

true

There is an inverse relationship between bond prices and interest rates

true

When finding the after-tax net return it is important to discount with the after-tax discount rate

true

ncome taxes due on the closing balance sheet should come directly from that year's income statement.

true

_________ reflects the level of preference attached to a good or service.

utility

Returns to Assets is a measure of profitability used before interest is paid to a firm's lenders and before any withdraws or retained earnings are claimed by the firm's owners. The return of assets is measured by projecting the expected payment floe for the investment without deducting any charges for interest or loan repayments. Payments then are discounted to a present value, using a ____ of the firm's debt and equity capital as the discount rate.

weighted average cost

Five years ago you incurred a 10 year term loan that required annual payments of $1,150 per year. You have made four payments in previous years and the fifth payment is due today. The note holder proposes that you buy back this note today for $4,359. Would it pay you to borrow the money at the bank at 13% interest rate and buy back this note, in other words, should you buy the loan back)? (hint: calculate the market value of the loan and compare with the price for which the bank is willing to sell you the note)?

yes

Suppose an investor is considering four investments, and has made forecasts of returns and probabilities for each investment. The discrete probability distributions of the profit rates are represented in the following table. State of the Economy Probability of Occurence Hogs Beef Cattle Stocks Mutual Funds Optimistic 0.20 0.15 0.18 0.30 0.10 Most Likely 0.50 0.07 0.08 0.15 0.05 Pessimistic 0.30 -0.05 -0.08 -0.20 -0.01 Find the standard deviation for each expansion alternative.

Hogs: 0.072, Beef Cattle: 0.094, Stocks: 0.189, Mutual Funds: 0.039

Which of the following is not a role that a financial manager should play in a modern enterprise?

Holding a meeting with the board of directors on a weekly basis.

The internal rate of return (IRR): I. rule states that a typical investment project with an IRR that is less than the required rate should be accepted. II. is the rate generated solely by the cash flows of an investment. III. is the rate that causes the net present value of a project to exactly equal zero. IV. can effectively be used to analyze all investment scenarios.

II and III only

The total loan payment is constant for fully amortized loans

T

Suppose that an after-tax risk-adjusted discount rate is 4.18%. The inflation rate is expected to be 5.00%. What is the real discount rate?

-0.78%

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 18.20%. One annuity pays $1,000 on the first day of each year for 11 years. How much does the second investment pay each year for 11 years if it pays at the end of each year?

$1,182.00

You are considering buying a special livestock trailer for $12,000. It can be financed over three years, with no down payment and equal quarterly payments due at the end of each quarter, including principal and interest at an annual rate of 12% (compounded quarterly). What would be the quarterly payments?

$1,206

Suppose that you are considering the purchase of a bond that matures in 12 years. The bond has a par value of $1,000, it pays a coupon of 10 percent (annually), and the coupon is paid semiannually (10s). Calculate the market value (price) of the bond today if the bond's market rate (yield) is 7%.

$1,241

The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $25 million be paid to the president upon the completion of her first ten years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 6.5% on these funds. How much must the company set aside each year for this purpose?

$1,852,617.25

What is the real price of an orange in 10 years if the nominal price is $1.50, and the inflation rate is 4%?

$1.01

What is the present value of an investment that offers one payment of $13,488.60 at the end of year 3 if money can be invested at 9 percent?

$10,416

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 13.80%. One annuity pays $9,200 on the first day of each year for 24 years. How much does the second investment pay each year for 24 years if it pays at the end of each year

$10,469.60

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 13.80%. One annuity pays $9,200 on the first day of each year for 24 years. How much does the second investment pay each year for 24 years if it pays at the end of each year?

$10,469.60

How much money would you have in your bank account in 9 years if $900 is deposited at the end of the year for each of the next 9 years? Suppose that savings account pays 7% compounded annually.

$10,780.19

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 11.80%. One annuity pays $9,700 on the first day of each year for 31 years. How much does the second investment pay each year for 31 years if it pays at the end of each year?

$10,844.60

If you took out a $10,000 loan (education loan) today from Citizens' Savings Bank at 12 percent (compounded annually) and don't have to pay it back for 20 years, how much money would you owe the bank if the interest was compounded monthly?

$108,926

Suppose you have been hired by Aggie-Business. They are willing to pay you a signing bonus of $2,000 per year starting in one year for each of the next seven years (7-year annuity) or a lump-sum bonus today of $11,000. Suppose you can invest your money at 6%, calculate the Market Value of the annuity and indicate if you should take the lump-sum bonus or the 7-year annuity?

$11,165; accept the annuity

Bill has just graduated from TAMU and is tired of living in a cramped apartment. However, by reducing housing costs while at college he managed to save enough for an $8,000 down payment on a new house he is planning to purchase now that costs $45,000. Unfortunately, Bill didn't major in business management and wants you to calculate what the payments will be, assuming that monthly payments start 1 month from now and the mortgage carries a 14% stated rate with a 30 year maturity. Calculate the monthly payment.

$438

If you borrow $25,000 (at 8% interest) and pay only the interest at the end of each year, what is the total amount of principal and interest (simply add it up) over 10 years counting the $25,000 principal which must be repaid at the end of the 10th year?

$45,000

Today you earn a salary of $28,500. What will be your annual salary fifteen years from now if you earn annual raises of 3. 5%?

$47,747.44

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 13.30%. One annuity pays $4,500 on the first day of each year for 8 years. How much does the second investment pay each year for 8 years if it pays at the end of each year?

$5,098.50

Five years ago you incurred a 10 year term loan that required annual payments of $1,150 per year. You have made four payments in previous years and the fifth payment is due today. The note holder proposes that you buy back this note today for $4,359. What is the market value of the loan? (hint: calculate the market value of the loan and compare with the price for which the bank is willing to sell you the note)?

$5,195

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 17.70%. One annuity pays $4,500 on the first day of each year for 31 years. How much does the second investment pay each year for 31 years if it pays at the end of each year?

$5,296.50

You are comparing two annuities with equal present values. The applicable discount rate is 7.5%. One annuity pays $5,000 on the first day of each year for twenty years. How much does the second annuity pay each year for twenty years if it pays at the end of each year?

$5,375

You are comparing two investments with equal annuity payments and the same future values. The applicable discount rate is 9.50%. One annuity pays $5,000 on the first day of each year for 18 years. How much does the second investment pay each year for 18 years if it pays at the end of each year?

$5,475.00

An investment has a purchase price of $35,000. The bank is willing to loan this farmer $27,000. The terminal value of this investment is $5,000. There is a marginal tax rate of 20%, a growth rate of 3%, and a discount rate of 10%. What is the after tax terminal value of this investment?

$5,600

Suppose that the marginal tax rate is 15%. If a farmer decides to purchase a new tractor, it will increase the operating receipts $6,800 per year but it will cost $1,100 a year for maintenance. Before the purchase, the current operating expenses are $1,200. What is the annual pre-tax net return generated by this investment for each year?

$5,700

A bank has agreed to lend you $524,000 for a home loan. The loan will be fully amortized over 40 years at 5.33%, with .58 points. The loan payments will be monthly. The closing cost is estimated to be $2,579 and you plan to refinance the mortgage in 6 years. Calculate the book value at the end of the 6th year.

$502,718.62

A bank has agreed to lend you $524,000 for a home loan. The loan will be fully amortized over 40 years at 5.33%, with .58 points. The loan payments will be monthly. The closing cost is estimated to be $2,579 and you plan to refinance the mortgage in 6 years.' Calculate the loan principal.

$529,650.98

Assume you borrow $25,000 at 8% per year interest compounded annually. You pay nothing until the end of 10 years at which time the principal and interest is due. What will be the total amount of repayment (principal and interest) at the end of the 10th year? In this problem you only make one payment; it is at the end of the 10th year.

$53,973.12

You want to have $10,000 saved ten years from now. How much less do you have to deposit today to reach this goal if you can earn 6% rather than 5% on your savings?

$555.18

A bank has agreed to lend you $53,000 for a home loan. The loan will be fully amortized over 39 years at 13.50%, with .44 points. The loan payments will be monthly. The closing cost is estimated to be $3,894 and you plan to refinance the mortgage in 8 years. Calculate the book value at the end of the 8th year.

$56,556.08

A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement: New Outback MAX Guidance System Outback MAX™ with Outback ConnX™ — introducing the next generation Outback Guidance® system that redefines simplicity in precision farming. Outback MAX leads the way with simplicity in design and operation, a powerful mapping engine, excellent screen clarity, seamless connectivity, and a rugged design that can operate in rough environments—features that are critical to achieving the benefits of precision farming. What makes MAX the smart choice for you and your business? • Compatible with eDriveX™ with eTurns™ - taking advantage of the most precise and feature rich automated steering available. • Has excellent screen clarity and rugged design that can operate in rough environments • Provides a powerful mapping engine that stacks imagery and data layers • Delivers seamless connectivity via the Outback ConnX data management system to deliver real-time data access and management. The farmer believes that the guidance system will add the value of improved farming, more uniform treatments, less driver skill needed and extended hours of operation. He believes improved yields and reduction in operating costs will increase his profits by $1,000 per year. He plans to keep the Guidance system for 10 years. At the end of 10 years he believes he can sell it for $500.

(1) $5,811 (2) $1,012; Acceptable (3) 16.7%; Acceptable (4) 13.4%

Suppose that today you purchase a bond that matures in 30 years for $800.00. The bond has a par value of $1,000, and pays a coupon of eight percent semiannually (8s where 8% is an annual rate). (i) If you plan to sell the bond at the end of ten years and you expect that the bond will have a market rate of four percent when you sell it, what is the market value when you sale it? a. $1,547 b.$1,543 c. $544 d. $1,087 (ii) If you plan to sell the bond at the end of ten years and you expect that the bond will have a market rate of four percent when you sell it, calculate the annual yield on this ten-year investment. a. 7.2% b. 22.8% c. 11.4% d. 14.5%

(1) a (2) d

Suppose Aggie International has hired you and are willing to pay you a signing bonus. They give will give you $10,000 today or one of two other options. (i) They are willing to pay you a bonus of $1,500 per year at the beginning of the year for eight years (eight annual payments). The first bonus payment will be given today. Calculate the present value of the bonus if the discount rate is 6%. a. $9,315 b. $9,874 c. $8,274 d. $14,846 ENTER RESPONSE HERE: [a] (ii) They are willing to pay you a bonus of $17,000 as a lump sum payment at the end of the 10th year. Calculate the present value of the bonus if the discount rate is 6%. a. $9,315 b. $9,874 c. $9,493 d. $17,000 ENTER RESPONSE HERE: [b] (iii) If you have opportunities to invest your money at six percent, which of the following should you accept? a. The lump sum today b. The $1,500 annuity c. The lump sum in 10 years d. Don't take the job ENTER RESPONSE HERE: [c] (iv) Calculate how much you would have in your savings account in ten years if you choose the $1,500 annuity and you put the annual bonus payment in a savings account drawing 6% compounded annually. a. $17,908 b. $12,590 c. $17,000 d. $17,682 ENTER RESPONSE HERE: [d]

(1) b (2) c (3) a (4) d

Calculating annual Depreciation for capital budgeting using straight-line depreciation, one should use the following formula:

(Cost Basis)/Depreciable Life

Given the following information: Nominal Initial Cost = $30,000 Nominal Before-tax Net Return = $8,000 Marginal Tax Rate = 10% Required rate of return = 10% Real Terminal Value = $0 Investment Life = 5 years Suppose that IRS will allow the investor to depreciate the investment using straight-line over 15 years and the inflation rate is 4%. (i) What is the nominal terminal value? (ii) What is the annual depreciation expense? (iii) What is the nominal after-tax terminal value?

(i) $0 (ii) $2,000 (iii) $2,000

Suppose Jim plans to borrow money for an education at TAMU. Jim will need to borrow $20,000 at the end of each year for the next 5 years (total=100,000). He qualifies for government loans with reduced interest rate while he is in school. He has a special arrangement with AggieBank to lend him the money at a subsidized rate of 2% over 5 years without having to make a payment until the end of the 5th year. However, at the end of the fifth year, Jim agrees to pay off the loan by borrowing from Longhorn bank with 15 annual payments and the payments will be uniform (i) Calculate how much money Jim has to borrow at the end of 5 years to pay off the loan with AggieBank. (ii) Calculate the annual payment Jim must pay to the Longhorn Bank if the first payment if the first payment is due at the end of the sixth year. (iii) Calculate the yield on this investment if the price of the investment is $30,000 and state if this investment is acceptable if the required rate of return is 15%

(i) $104,081 (ii) $12,160 (iii) $82,396

A farmer is planning on investing in land with real net returns of $11.11 per acre and assuming these real returns will increase by 5.49% each year. The marginal tax rate is 19.56% and the inflation rate is 3.37%. This farmer is going to sell this piece of land in 3 years. (i) Calculate the real net return at the end of year 2. (ii) Calculate the nominal net return at the end of year 3. (iii) Calculate the after-tax nominal net return at the end of year 3.

(i) $12.37 (ii) $14.41 (iii) $11.59

As of 2015, farms were taxed at 12 percent for income up to $48,000; at 23 percent for income ranging from $48,000 to $71,000; at 32 percent for taxable income $71,000 to $89,000; at 35 percent for income from $89,000 to $189,000, and so on. Suppose that you have revenues of $218,800 and operating expense of $65,000. (i) What is the amount of the taxable income? (ii) How much tax is paid on the first $48,000 of the taxable income? (iii) How much tax is paid on the first $71,000 of the taxable income? (iv) How much tax is paid on the total taxable income? (v) What is the average tax rate? (vi) What is the marginal tax rate?

(i) $153,800 (ii) $5,760 (iii) $11,050 (iv) $39,490 (v) 25.68% (vi) 35%

Suppose a rancher wants to borrow $163,835.00 to buy a tract of land. The BCS bank will make a 26-year loan fully amortized at 10.84% (annual payments). A $476.00 loan fee and stock purchase is required. The borrower stock requirement is the lesser of $1,000 or 4.00% of loan amount. (i) Calculate the loan principal. (ii) Calculate the required stock purchase. (iii) Calculate the annual loan payments.

(i) $165,311.00 (ii) $1,000.00 (iii) $19,251.61

A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount is $250,000. The loan will be fully amortized in 3 years at 14%. Marginal tax rate is 15%. (i) What is the loan balance at the end of 1st year? (ii) What is the loan balance at the end of 2nd year?

(i) $177,317.13 (ii) $94,458.66

Given the following information : Nominal Initial Cost = $25,000 Nominal Before-tax Net Return = $5,000 Marginal Tax Rate = 15% Required rate of return = 10% Real Terminal Value = $0 Investment Life = 8 years Suppose that IRS will allow the investor to depreciate the investment using straight-line over 10 years and the inflation rate is 4%. (i) What is the annual depreciation expense? (ii) What are the tax savings from depreciation?

(i) $2,500 (ii) $375

A farmer is planning on investing in land with real net returns of $29.44 per acre and assuming these real returns will increase by 2.21% each year. The marginal tax rate is 15.63% and the inflation rate is 4.54%. This farmer is going to sell this piece of land in 3 years. (i) Calculate the real net return at the end of year 2. (ii) Calculate the nominal net return at the end of year 3. (iii) Calculate the after-tax nominal net return at the end of year 3.

(i) $30.76 (ii) $35.91 (iii) $30.30

Suppose that a rancher planned to borrow $3,300 from the bank and repay the loan at the end of the year. The interest rate at the bank is 10.24% compounded semiannually. (i) Calculate the amount of interest paid to the bank. (ii) Calculate the effective interest rate at the bank.

(i) $346.74 (ii) 10.51%

A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement: New Outback MAX Guidance System Outback MAX™ with Outback ConnX™ — introducing the next generation Outback Guidance® system that redefines simplicity in precision farming. The farmer believes that the guidance system that can be purchased for $5,000 will improve corn production by 200 bushels per year. He plans to keep the Guidance system for 10 years. At the end of 10 years he believes he can sell it for $500. The farm's accountant has done some preliminary work. The marginal tax rate is 30%, the pre-tax risk adjusted discount rate is 12% and inflation is assumed to be zero. The account calculates the present value of the tax savings from depreciation to be $1,100.55, and the present value of the after-tax terminal value to be $156.23. The price of corn is expected to be $4.50/bushel over the 10 years. (i) Calculate the additional after-tax net returns from corn production if the farmer purchases the guidance system. (ii) Calculate the after-tax risk adjusted discount rate. (iii) Calculate the present value of the additional after-tax net returns from corn production if the farmer purchases the guidance system. (iv) Calculate the NPV of the guidance system. (v) Calculate the break-even improvement in corn production (yield) if the farmer purchases the guidance system. (vi) What would the guidance system cost if the farmer decided to wait 10 years to purchase it? Assume that inflation is 4% and the price of guidance systems increase at the rate of inflation, holding everything else constant.

(i) $630 (ii) 8.4% (iii) $4,152 (iv) $409 (v) $180 (vi) $7,401

Suppose Rock Prodigal Jones graduates from TAMU and gets a job. Suppose that he has $1,200 in disposable income that he can use to make house and car payments after all other living expenses and this is the way it will be until retirement. Rock decides to buy a new car and he will make a $400/month car payment (assume that this will be his car payment until he retires). He and his wife decide to borrow $120,000 to buy a house. The bank will lend them the $120,000 for 40 years at 6% annual interest rate using a fully amortized loan. Rock will pay back the loan with monthly payments. Rock will invest his monthly disposable income ($1,200 - car payment - house payment) in a mutual fund that promises to pay 8% annually. (Assume that Rock will put this amount in the mutual fund until he retires) (i) Calculate how much money Rock has to pay monthly on his house loan. (ii) How much money can Rock put in the mutual fund monthly after paying the car and house payment? (iii) How much will Rock have in his mutual fund at the end of 40 years when Rock plans to retire? Assume the car payment of $400/month is for 40 years. (iv) Suppose that after retirement in 40 years, Rock plans to live another 20 years. Rock will use the money he has in the mutual fund to buy a monthly annuity. That is he will give an investor the money in his mutual fund and in turn the investor will promise to pay Rock a fixed monthly amount of principal and interest. How much money will he have to live on each month assuming that the interest rate for the annuity is 5% annually? (hint: Remember that the annuity is monthly so you need to use a monthly rate)

(i) $660 (ii) $140 (iii) $487,833 (iv) $3,219

Ramsay is considering the purchase of 310 acres of land for $2,230.72 per acre in Galveston. A bank will loan Ramsay $2,000 per acre of land and the loan will be fully amortized over 22 years at 15% (annual payments). The outstanding balance of loan will be paid at the end of the third year. Assume that the marginal tax rate is 18%. Suppose that the following information is given: Net Cash Flow before debt in Year 1= $254.00 Net Cash Flow before debt in Year 2= $169.00 Net Cash Flow before debt in Year 3= $2,403.00 (i) How much down payment is needed? (ii) Calculate the amount of loan payment per acre per period. (iii) Calculate the per acre tax savings from paying the interest in Year 2. (iv) How much money needs to be generated from other parts of the business to cover the cash deficit in the 1st year, so that the investment is financially feasible? (v) How much money needs to be generated from other parts of the business to cover the cash deficit in the 2nd year, so that the investment is financially feasible?

(i) $71,523 (ii) $314 (iii) $64 (iv) $2,024 (v) $25,172

Suppose Aggie International has hired you and are willing to pay you a signing bonus. They give will give you $10,000 today or one of two other options. (i) They are willing to pay you a bonus of $1,500 per year at the beginning of the year for eight years (eight annual payments). The first bonus payment will be given today. Calculate the present value of the bonus if the discount rate is 6%. (ii) They are willing to pay you a bonus of $17,000 as a lump sum payment at the end of the 10th year. Calculate the present value of the bonus if the discount rate is 6%. (iii) If you have opportunities to invest your money at six percent, which of the following should you accept? (iv) Calculate how much you would have in your savings account in ten years if you choose the $1,500 annuity and you put the annual bonus payment in a savings account drawing 6% compounded annually.

(i) $9,874 (ii) $9,493 (iii) The lump sum today (iv) $17,682

A farmer is considering the option to lease a new module builder. Inflation is assumed to be zero. Assume that the lease payment is constant through the lease agreement. Assume that the lease payments would be made at the beginning of the year and the lease ends at the end of the 12th year. This lessor will pay for repairs and maintenance. The operating expenses for this tractor will be $3,500 with a marginal tax rate of 20% and an after tax discount rate of 7%. (i) Calculate the net present value of the lease investment. (ii) Calculate the annuity equivalent of this lease arrangement.

(i) -$23,796 (ii) -$4,299

A rancher is considering the option to lease new equipment. Inflation is assumed to be zero. Assume that the lease payment is constant through the lease agreement. Assume that the lease payments would be made at the beginning of the year and the lease ends at the end of the 8th year. This lessor will pay for repairs and maintenance. The operating expenses for this tractor will be $5,525 with a marginal tax rate of 15% and an after tax discount rate of 9%. (i) Calculate the net present value of the lease arrangement investment. (ii) Calculate the annuity equivalent of this lease arrangement.

(i) -$28,332.25 (ii) -$5,119

A farmer is considering the purchase of a sprinkler system. He can choose to buy system A or system B. Sprinkler A and B provide the same service so revenues can be ignored. The sprinkler system A costs $37,000, has a before-tax net return of -$5,900, has a life of 7 years, and a terminal value of $12,600. Sprinkler system B costs $24,500, has a before-tax net return of -$7,000, has a life of 6 years, and a terminal value of $9,500. Suppose that the pre-tax rate of return is 12%, the marginal tax rate is 21%, and the IRS allows him to depreciate the sprinkler systems (A and B) over 10 years using the straight-line method. The inflation rate is assumed to be 0. i) What is the NPV of sprinkler system A? (ii) What is the NPV of sprinkler system B? (iii) What is the annuity equivalent of sprinkler system A? (iv) What is the annuity equivalent of sprinkler system B? (v) Which sprinkler system should he choose?

(i) -$49,720.32 (ii) -$41,127.01 (iii) -$10,038.62 (iv) -$9,299.62 (v) B

A farmer is considering the purchase of a forklift. He can choose between a new and used forklift. The new and used forklifts provide the same service so revenues can be ignored. The new forklift costs $69,300, a before-tax net return of -$7,300, life of 13 years, and a terminal value of $28,200. The used forklift costs $14,700, a before-tax net return of -$6,200, life of 10 years, and a terminal value of 49,900. Suppose that the pre-tax rate of return is 10%, the marginal tax rate is 22%, and the IRS allows him to depreciate the new and used forklift over 8 years using the straight-line method. Inflation rate is assumed to be 0. (i) What is the NPV of the new forklift? (ii) What is the NPV of the used forklift? (iii) What is the annuity equivalent of the new forklift? (iv) What is the annuity equivalent of the used forklift? (v) Which forklift truck should this farmer choose?

(i) -$94,877.68 (ii) -$41,445.34 (iii) -$11,872.38 (iv) -$6,120.97 (v) B

Suppose a farmer requires a pre-tax rate of return of 20%, has a marginal tax rate of 15%, assigns a 4% risk premium to his new investments, and expects inflation to be 5% per year over the next 15 years. This farmer calculates the NPV of his new investment to be -$40,000 based on an investment life of 13 years. (i) Calculate the real discount rate. (ii) Calculate the real annuity equivalent.

(i) 14.67% (ii) $7,059

A farmer is given a loan amount of $905.77 with a contractual rate of 15.45%. The loan will be fully amortized with annual payments over the next 16 years. (i) Calculate the actuarial rate. (ii) Calculate the APR. (iii) Calculate the effective interest rate.

(i) 15.45% (ii) 15.45% (iii) 15.45%

A farmer is given a loan amount of $1,553.62 with a contractual rate of 4.73%. The loan will be fully amortized with annual payments over the next 9 years. (i) Calculate the actuarial rate. (ii) Calculate the APR. (iii) Calculate the effective interest rate.

(i) 4.73% (ii) 4.73% (iii) 4.73%

A farmer needs to borrow $2,000. The local PCA will make a 3-year loan fully amortized at 12% with semiannual payments. A $15 dollar loan fee and stock purchase is required. There is a 3% stock requirement.(i) What is the actuarial rate? (ii) What is the APR? (iii) What is the effective rate?

(i) 7.22% (ii) 14.44% (iii) 12.36%

Suppose a farmer requires a pre-tax rate of return of 12%, has a marginal tax rate of 20%, assigns a 3% risk premium to his new investments, and expects inflation to be 4% per year over the next 12 years. This farmer calculates the NPV of his new investment to be -$35,000 based on an investment life of 12 years. (i) Calculate the real discount rate. (ii) Calculate the real annuity equivalent.

(i) 7.69% (ii) $4,570

Future Semiconductors is evaluating a new etching tool. The equipment costs $1.0m and will generate after-tax cash inflows of $0.4m per year for six years. Assume the firm has a 15% cost of capital. What's the NPV of the investment?

0.51m

Goals are expressed as a goal or utility function containing three elements. What are the three elements? (1) Profitability (2) Revenue (3) Liquidity (4) Credibility (5) Risk (6) Time

1, 3, and 5

Suppose land promises to return $120 per year per acre. What is the capitalized value of the land if interest rates are 9%?

1,333

A bank has agreed to lend you $127,800 for a home loan. The loan will be fully amortized over 57 years at 12.98%, with .13 points. The loan payments will be monthly. The closing cost is estimated to be $2,168. Calculate the actuarial rate.

1.1015%

Suppose you are considering the purchase of a special livestock trailer for $15,000. It can be financed over five years with no down payment. Calculate the monthly interest rates (yield) if the monthly payments are $350.00

1.18%

Suppose that the marginal tax rate is 15%. If a farmer decides to purchase a new tractor, it will increase the operating receipts $8,000 per year but it will cost $2,000 a year for maintenance. What is the annual pre-tax net return generated by this investment for each yeaR

6,000

Suppose that an after-tax risk-adjusted discount rate is 8.95%. The inflation rate is expected to be 2.00%. What is the real discount rate?

6.81%

A farmer is considering the purchase of 340 acres of land for $2,159.38 per acre. A bank will loan this farmer $1,970.00 per acre of land and the loan will be fully amortized over 9 years at 6% (annual payments). The outstanding balance of the loan will be paid at the end of the third year. Assume that the marginal tax rate is 21%. Suppose that the following information is given: Net cash flow before debt in Year 1= $178.00 Net cash flow before debt in Year 2= $203.00 Net cash flow before debt in Year 3= $2,282.00

A A A D C

A farmer has recently bought a land for $700.00 and planned on selling the land in 3 years. The real price of land is expected to increase at 4% each year. Suppose that the inflation rate is 11% and the marginal tax rate is 12%.

A A D

If it is given that the loan amount is $320, the percent stock requirement is .08, and the credit fee is 10.81.

A B

A farmer is considering the purchase or lease of a truck. He can buy a new truck or lease a new truck. He believes that each truck will provide the same service but the costs are different. He has provided the following information. Inflation is assumed to be zero. Assume that the lease payment is constant throughout the lease agreement. Assume that the lease payment would be made at the beginning of the year and the lease ends at the end of the 6th year. The lessor will pay repairs and maintenance. Also assume that this farmer could claim the tax deduction due to the lease payment when it is paid. The new truck has a price of $35,300, a before-tax net return of -$8,300, an investment life of 6 years, and a terminal value of $17,100. If he was to lease the tractor the operating expenses for this tractor will be $3,500. Suppose that the pre-tax rate of return is 11%, the marginal tax rate is 22%, and the IRS allows him to depreciate the tractor over 10 years using the straight-line method.

A B C B B

A rancher is considering the purchase of additional land to expand operations. He can operate an additional 250 acres with present labor and machinery. The land is selling for $550 per acre. This rancher believes that the operating revenue per acre of land will be $450 and operating expenses will be $400 in present dollars. He expects the inflation rate will be 4%. The rancher will sell the land in 3 years and he anticipates that land prices will increase at the rate of inflation from the base of $550 per acre. A bank will loan him $400 per acre of land and the loan will be fully amortized over 15 years at 12% (annual payments). The outstanding balance of the loan will be paid at the end of the third year. Assume that the marginal tax rate is 15% and that he requires at least a 8% pre-tax, risk-free return on capital and a 2% risk premium on projects of comparable risk.

A C B C

Suppose a farmer is considering the purchase of additional farmland. It is believed that the operating revenue per acre of land per year will be $798 and operating expenses will be $716 in present dollars. The inflation rate is expected to be 5% Assume that the marginal tax rate is 18% and that this farmer requires at least an 8% pre-tax, risk free return on capital.

A D D

What is SWOT an acronym for?

A firm's strength, weakness, opportunities, and threats

You have just won the Texas Lottery which provides four alternative methods and amounts of payments. You can choose to receive: A1 = $64,000 per year for 10 years with payments to be received at the end of each year; A2 = $240,000 now and then $240,000 at the beginning of the sixth year; A3 = $380,000 now; or A4 = $990,000 ten years from now. Find the present value of each of the four alternatives and rank these four alternatives from first choice to last choice if you have an investment opportunity paying 13% annually.

A3, A2, A1, A4

You have just won the Texas Lottery which provides four alternative methods and amounts of payments. You can choose to receive: A1 = $64,000 per year for 10 years with payments to be received at the end of each year; A2 = $240,000 now and then $240,000 at the beginning of the sixth year; A3 = $380,000 now; or A4 = $990,000 ten years from now Rank these alternatives if your only investment opportunity earns 6%.

A4, A1, A2, A3

Risk Aversion means the subjective tendency of investors to seek out unnecessary risk.

F

Remaining-Balance Method is a method of computing interest, with which, interest is calculated by multiplying the principal outstanding by the effective rate for the period in question.

F

A farmer is given a loan amount of $905.77 with a contractual rate of 15.45%. The loan will be fully amortized with annual payments over the next 16 years.

D B B

A rancher is planning to borrow $5,200 for a year. Bank A has an interest rate of 15.58% compounded quarterly. While Bank B has an interest rate of 20.27% compounded semiannually.

D C B A A

Which item is included in a mission statement?

Definition of the business

_____ is the rate that accounts for the compounding effects over the number of conversion periods.

Effective Rate

"Maintenance and Replacement," "Bond Selection," and "Income Generating" are categories of alternative investments.

F

A leveraged Lease is a form of leasing that combines the hiring of labor services with the use of the tangible asset.

F

An investment is unacceptable if IRR is greater than required rate of return.

F

Annual Depreciation (D) is multiplied by (1-marginal tax rate) to get the tax savings from depreciation.

F

Both interest and principal amounts can be deducted from taxable income.

F

Capital Budgeting is the process of planning asset expenditures whose returns are expected to extend within one year.

F

Capital Lease (sometimes called Finance Lease) is a long-term contractual arrangement in which the lessee does not acquire control of an asset.

F

If capital is restricted, internally or externally, all investments with the NPV>0 can be accepted.

F

If the net present value is positive then you have made an unacceptable investment.

F

Incremental cash flows are taxed at one's average tax rate.

F

Interest payments on a fully amortized loan increase over the life of the loan.

F

Interest payments on a fully amortized loan stay constant over the life of the loan.

F

It is important to remember in a lease the buyer will take the ownership of the asset and the seller will lose ownership completely.

F

Lessee is the owner of an asset who permits another party to use the asset under a lease

F

Loan Payments do not include a real return and inflation premium

F

Net returns to land have an inflation premium and are expected to increase at the rate of inflation.

F

Nominal cash flows can be discounted by either a nominal discount rate or a real discount rate.

F

One of the capital budgeting methods is the Component Method. In this method, we calculate net cash flow for each period & then calculate the NPV for the investment.

F

Payback Period is the time span needed to make an appropriate decision for the first period (the amount of time an organization will look into the future when preparing a strategic plan).

F

Planning Horizon is the length of time required for an investment to pay itself out or to recover the initial outlay of funds.

F

Real cash flows can be discounted by either a nominal discount rate or a real discount rate. However, nominal cash flows must be discounted by a nominal discount rate only.

F

Risk Premium only depends on an individual's risk/return preference.

F

Which is not included in the major institutional sources of loan funds for U.S. agriculture?

Investment banks

What is the correct order of steps to compare loan alternatives?

Layout cash flows, Calculate the Actuarial Rate, Calculate the APR, and Calculate the Effective Rate

______________ is the sum of principal payment and interest payment.

Loan payment per period

What does MARCS stand for?

Modified Accelerated Cost Recovery System

Value of farmland can be influenced by the following special factors except:

Monetary factors

The preferred technique for evaluating most capital investments is

Net Present Value

Does it make any sense to compare the total (undiscounted) principal and interest on the loans from questions 5 & 6? Should you prefer the loan with the smallest total payment?

No, because the time value of money was ignored in question 6.

Although local businesspersons, such as lenders, real estate agents, professional managers, extension personnel, lawyers, and farmers, may have good, timely impressions of the land market, but their information is largely based on opinions, observations, and judgments.

T

Annual Depreciation (D) is multiplied by the marginal tax rate to get the tax savings from depreciation.

T

Because of its durability and immobility, land has special treatment in institutional arrangements such as taxation, leasing, and government programs.

T

Certainty-equivalent is defined by the certain amount of cash return that gives the same utility as a risky amount of cash return.

T

Choice of discount rate is an individual decision.

T

External capital rationing means that there is a limit to how much capital a farmer can obtain from external sources to invest in his business.

T

If a loan is fully amortized it will have unequal periodic payments including principal and interest.

T

If the net present value is negative then you have made an unacceptable investment.

T

If the net present value is positive then you have made an acceptable investment.

T

In purchase, the buyer will take the ownership of the asset and the seller will lose the ownership.

T

In terms of accountability for taxes and financial feasibility, nominal cash flows are more accurate than real cash flows.

T

Interest can be deducted from taxable income.

T

It is best to layout cash flows using a time line

T

It is important to include non-interest costs when calculating the decision criteria to compare loans.

T

Nominal cash flows should be discounted with the nominal discount rate.

T

Real cash flows can be discounted by a real discount rate only.

T

Risk aversion is defined by the attitude toward risk in which the investor requires compensation for taking risks.

T

Risk-adjusted discount rate is the rate established by adding a risk premium to the risk-free rate when investments are known to be risky and the investor is risk averse.

T

Suppose an investment has a life of 3 years, an after-tax discount rate of 10%, and an after-tax terminal value of $60,800. The present value of the after-tax terminal value is $45,680.

T

Suppose an investment has a life of 3 years, an after-tax discount rate of 10%, and net returns of $12,800 per year. The present value of the after-tax net returns is $31,832.

T

Suppose an investment has a life of 5 years, an after-tax discount rate of 12%, and an after-tax terminal value of $75,000. The present value of the after-tax terminal value is $42,557.

T

Tax Savings from interest can be found by multiplying the marginal tax rate by the interest paid.

T

Terminal Value is the value of an investment at the end of the planning horizon.

T

The Net Cash Flow is calculated as Cash Revenues minus Cash Expenses minus the marginal tax rate times the taxable income.

T

The Tax savings from Depreciation is added to the cash flows when calculating the NPV using the component method

T

The correct Internal Rate of Return is found when the Net Present Value is equal to 0.

T

The effective rate is calculated after the APR.

T

The interest payment is always higher for a fully amortized loan vs. an equal principal loan.

T

The principal payment for fully amortized loan is less than an equal principal loan at the beginning but later is greater, ceteris paribus.

T

________ protects a purchaser or mortgage lender against losses arising from a defect in title to real estate, other than defects that have been specifically excluded

Title insurance

All of the following non-interest costs are important to consider when comparing loans: Service Fees, Prepaid Interest, Fees for Credit Reports, Compensating Balances, and Stock Requirements.

True

For mutually exclusive investments or if there is capital rationing, investments should be compared.

True

Net returns to land do not have an inflation premium but are expected to increase at the rate of inflation.

True

Remaining-Balance Method is a method of computing interest, with which, interest is calculated by multiplying the principal outstanding by the contractual rate for the period in question.

True

The APR can be the same as the effective rate.

True

The maximum bid price of land is the most one can pay for an acre of land sand still be a profitable investment.

True

The maximum bid price would allow the investor to earn the rate-of-return stipulated by the discount rate, given data about all of the other factors.

True

The money cost of borrowing is the difference between the total money that the borrower receives from the loan (sometimes different from the total loan) and the total money paid to retire the loan.

True

The principal is the loan principal minus prepaid interest that was financed.

True

The two reasons why we cannot accept all profitable investments include mutually exclusive investments and capital rationing.

True

When comparing loans based on liquidity the down payment, loan maturity, and repayment schedule are important factors.

True

A farmer is considering the option to lease a new tractor. Inflation is assumed to be zero. Assume that the lease payment is constant through the lease agreement. Assume that the lease payments would be made at the beginning of the year and the lease ends at the end of the 10th year. The lessor will pay for repairs and maintenance. The operating expenses for this tractor will be $7,500 with a marginal tax rate of 20% and an after tax discount rate of 8.5%

a. -$42,714 b. -$4,827

Jon and Robb have determined that existing storage facilities are too small and need to be expanded. They are considering two alternatives before the winter is coming: (I) remodel existing storage facilities or (II) build a new factory. The net payoffs of each alternative depend on the future state if the farm economy. The payoffs below represent the net projected profits in each state of the farm economy. Jon and Robb predict the probabilities of pessimistic, most likely, and optimistic states of the economy are 25%, 55% and 20% respectively. State of the Economy Probability of Occurrence Remodel Build Pessimistic 0.25 $20,000 -$20,000 Most Likely 0.55 40,000 20,000 Optimistic 0.20 100,000 205,000 Using the expected value, determine the more preferable alternative.

indifferent between the two options

Future Value is how much a current sum of money will be worth at a future date assuming a certain ____ rate.

interest

A/An _________ is a contract by which control over the right to use an asset is transferred from one party (the lessor) to another party (the lessee) for a specified time in return for a rental payment to cover the lessor's costs of ownership.

lease

Operating Lease are short-term rental arrangements (hourly, daily, weekly, monthly) in which the rental charge is calculated in a time basis. The ____ owns the asset and performs nearly all the functions of ownership, including maintenance. The ____ pays the direct costs, such as fuel and labor.

lessor;lessee

A/An _______________ for land is the purchase price that would yield a break-even or zero net present value for a land investment.

maximum bid price

Required Rate-of-return (RRR) is the _____ expected yield by investors requires in order selecting a particular investment.

minimum

Agricultural Sectors are sectors comprise establishments primarily engaged in growing crops, raising animals, and harvesting fish and other animals from a farm, ranch, or their ______.

natural habitats

Suppose an agricultural firm make a profit before interest and taxes. Which of the following does not have a claim on the profits?

neighbor

We always use the ___________ discount rate to calculate the NPV when using nominal cash flows.

nominal

You have a debt obligation of $60,000 at an 11% annual interest rate. The maximum annual payment you can make is $6,901.48 per year (interest and principal). How many years will it take to pay the loan off?

none of the above

The ____________ is usually a short-term rental arrangement (hourly, daily, weekly, monthly) in which the rental charge is calculated on a time basis.

operating lease

Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.

ordinary annuities; annuities due

An annuity stream where the payments occur forever is called a(n):

perpetuity.

Which of the followings is not a liability?

prepaid expenses

Discounting is the process of finding ____ values.

present

When we calculate the annuity equivalent, it is best to use a _________ discount rate.

real

Financial Risks are _____ risks associated with using debt capital.

repayment

Risk-adjusted Discount Rate is established by adding a risk premium to the ____ rate when investments are known to be risky and the investor is risk averse.

risk free

____________ investors have a high propensity to engage in risky investments.

risk-loving

The linkage between ________ and ________ is based on uncertainties about future events and decision outcomes.

risk/time

Accumulated Depreciation is

sum of depreciation claimed on tax returns

A careful, complete analysis is needed for any land control situation, in which investors consider the followings except:

the political stability of the country

The time value of money concept can be defined as:

the relationship between a dollar to be received in the future and a dollar today.

The taxable gain or loss on the terminal value of an investment is

the terminal value of the investment minus the tax basis

Suppose that you are considering the purchase of a bond that matures in 12 years. The bond has a par value of $1,000, it pays a coupon of 10 percent (annually), and the coupon is paid semiannually (10s). Calculate the Net Present Value and the yield on this bond investment if the current market rate on this bond is 7%, you expect the market rate to be 4% in 5 years, you plan to sell the bond in five years, and your required rate of return on this investment is 8% (4% semiannually). Is this an acceptable investment? (hint: use the purchase price in question 6, and the sell price in question 7, the NPV from question 8, and the annual yield from question 9)

yes