Answer: $20,000
Explanation:
Net Income is the amount from revenue that the company made over expenses. It is therefore;
= Revenue - Expenses
= 110,000 - 90,000
= $20,000
Note: Dividends are not considered in the calculation of Net Income as they are not expenses.
You can buy property today for $3 million and sell it in 5 years for $4 million. (You earn no rental income on the property.) (LO5-2) a. If the interest rate is 8%, what is the present value of the sales price? b. Is the property investment attractive to you? c. Would your answer to part (b) change if you also could earn $200,000 per-year rent on the property? The rent is paid at the end of each year.
Answer:
a) Present Value of sales = $2,722,332.78
b) Property is not attractive. NPV$ (277,667.21)
c) Property is attractive. NPV-$520,874.79
Explanation:
The present value of the property
PV = S× (1+r)^(-n)
S- Sales value
r- interest rate -8%
n- number of years
PV - present value
PV = 4,000,000× 1.08^(-5) = $2,722,332.78
b. Is the property investment attractive to you?
We calculated the PV of the investment as follows
NPV = PV of sales value - initial cost
= 2,722,332.78 - 3,000,000=$ (277,667.21)
The property investment is not attractive because it will produce a loss in capital i.e negative NPV
C
To determine we will calculate the NPV again with considering the additional rental income
PV of annual rent = 200,000 × (1-1.08^(-5))/0.08= 798,542.00
NPV = 798,542.00 + 277,667.2119 - 3,000,000 =520,874.79
The property is attractive as it produces positive NPV
SDJ, Inc., has net working capital of $3,640, current liabilities of $5,430, and inventory of $4,290. a. What is the current ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) b. What is the quick ratio? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
Answer and Explanation:
The computation is shown below:
a. For current ratio
Current ratio = Current assets ÷ current liabilities
Before that first determine the current assets
As we know that
Net working capital = Current asset - Current liability
$3,640 = Current asset - $5,430
So,
Current asset is
= $3,640 + $5,430
= $9,070
Now the current ratio is
= $9,070 ÷ $5,430
= 1.67 times
b. The quick ratio is
Quick ratio = (Current asset - Inventory) ÷ Current liability
= ($9,070 - $4,290)÷ $5,430
= $4,780 ÷ $5,430
= 0.88 times
Rick and Jose gain new market information regarding a potential entrepreneurial opportunity. Despite the fact that both of them have gained access to this new information, only one of these individuals has access to additional information suggesting that other competitors are already moving to exploit this opportunity. What is this an example of
Incomplete. Here are the options;
A. information asymmetry
B. information assurance
C. information reliability
D. information asset
E. social networking
Answer:
A. information asymmetry
Explanation:
The concept of Information asymmetry involves a situation where one party in a relationship has more or better information than the other party.
In this case, there exists a party with more (additional) information than the other, hence it is a good example of information asymmetry.
The given description most likely exemplifies the situation of:
A). Information Asymmetry
'Information Asymmtery' is characterized as the terminology that is employed to denote the transactions(holding between two parties) that involve one party(buyer or seller) possessing comparatively more or added information than the other party. In the given scenario, one party possessing extra information regarding the other competitors' hunt on this newly available opportunity would be characterized as 'Information Asymmetry.' Therefore, this correctly exemplifies the concept.
Thus, option A is the correct answer.
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On December 31, 2019, The Bates Company's revenue is $340,000 and expenses total $220,000 before consideration of the following: Accrued wages total $16,000; Accrued revenues total $46,000; Depreciation expense is $22,000; Rental revenue of $8,000 was earned; the rent from a tenant was initially recorded by Bates as unearned rent revenue; The income tax rate is 30% of income before income taxes. What is Bates' net income after consideration of the above information
Answer: $95,200
Explanation:
Net Income before tax = Revenue - Expenses
Revenue = Revenue + Accrued revenues + Rental revenue
= 340,000 + 46,000 + 8,000
= $394,000
Expenses = Expenses + Accrued wages + Depreciation expenses
= 220,000 + 16,000 + 22,000
= $258,000
Net Income before taxes = 394,000 - 258,000
= $136,000
Net Income after tax = 136,000 ( 1 - Tax rate)
= 136,000 ( 1 - 0.3)
= $95,200
What is the most effective learning theory in your opinion? Explain how does it modify one’s behavior? Support your answer with relevant examples.
Answer:
Experiential Learning Theory
Explanation:
I think that the experiential learning theory is the most effective learning theory. This learning theory projects experience as a crucial factor that promotes learning. It also explains that people learn better when they initiate their learning and not when they are forced to learn.
I think this theory is very effective as it makes the lessons learned to stick better and also cause the needed changes. For example, a teenager who is constantly reminded by his parents to avoid late night partying, but rejects the counsel, might learn better if he gets into trouble as a result of the experience. Also, a student who finds it difficult to understand a topic taught by a teacher, might get better at it when he initiates the learning himself by actively researching and studying on his own.
Which best describes the purpose served by economic models within an economic system? Models identify patterns. Models determine the business cycle. Models control change. Models define global demand.
Answer:
Models identify patterns
I took it and I got it right
The purpose served by economic models within an economic system is that Models identify patterns.
What is economic model?An economic model can be regarded as simplified description of reality, which is been designed to yield hypotheses as regards economic behavior.
It identify patterns and it is necessarily subjective in design .
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What is the term for the illegal practice of using special
knowledge about a firm for profit or gain?
Answer:
Insider trading.Explanation:
Illegal practice of using special knowledge about a firm for profit or gain is called insider trading
Explain how the economic systems of countries differ?
Explanation:
Economic systems can be defined as a system with characteristics and principles for regulating all components of an economy, such as labor, production, resources, etc.
It is different according to each country, in that each country operates through different laws and rules for controlling the economy. There are countries that operate through a more rigid economic system, where there is government control over production and market prices, and there are countries that operate in a freer economic system, where the government does not interfere so much in private property, in profitability and in price, and organizations operate according to the law of supply and demand, such as the capitalist system, for example, which is a system that is very widespread in the globalized world, where the primary objective is the accumulation of profits.
Develop a sample budget for someone aged 55-65, considering the adjusted income and expenses in this life phase.
Explanation:
55 to 65-Year-Old’s Budget
Particular Per month
Housing $554
Food $245
Healthcare $500
Pensions $350
Entertainment $118
Transportation $247
Cash $155
Other $94
Uber Beacon would be an example of which of the following?
A. core innovation.
B. innovation system.
C. process innovation.
D. transformational innovation
Answer:
Uber Beacon is an example of core innovation.
Explanation:
Uber Beacon is an example of core innovation because its a product upgrade that enable customers identify the exact car picking them up and enhance the ride experience.
Core innovation is simply studying the norm and creating a new pattern to change or integrate the existing pattern. Core innovation can be an upgrade of an existing platform or total replacement which in turns improves customers' experience. Uber Beacon is a change in pattern as it improves customers' expectations.
Which of the following is an advantage of relying on internal recruitment sources?
A) They are likely to promote diversity.
B) Using internal recruitment helps ensure employees all think alike.
C) They are generally cheaper and faster than looking outside the organization.
D) For entry-level positions,there will always be many recruits from which to select.
E) All of the choices are advantages of relying on internal recruitment sources.
Answer:
C) They are generally cheaper and faster than looking outside the organization.
Explanation:
Internal recruitment can be defined as a process used by human resources managers to fill vacant positions existing within an organization from an existing workforce or labor force.
An advantage of relying on internal recruitment sources is that they are generally cheaper and faster than looking outside the organization.
Additionally, an internal recruitment process is more advantageous than the external recruitment process because it generally provides a pool of applicants who are well-known or familiar to the organization, as well as improving loyalty among employees.
A partial listing of costs incurred at Gilhooly Corporation during September appears below: Direct materials $ 162,000 Utilities, factory $ 11,000 Administrative salaries $ 104,000 Indirect labor $ 30,000 Sales commissions $ 59,000 Depreciation of production equipment $ 51,000 Depreciation of administrative equipment $ 35,000 Direct labor $ 119,000 Advertising $ 66,000 The total of the manufacturing overhead costs listed above for September is:
Answer:
Manufacturing overhead= $96,000
Explanation:
Giving the following information:
Utilities, factory $ 11,000
Indirect labor $ 30,000
Depreciation of production equipment $ 51,000
The manufacturing overhead includes all indirect costs regarding production.
Manufacturing overhead= 11,000 + 30,000 + 51,000
Manufacturing overhead= $96,000
The DUPONT model is useful when examining bank performance because:Select one:a. The ROA equals ROE times Leverage Multiplier.b. The net margin equals the asset utilisation.c. Banks have a similar financial structure as non-finance firms.d. Banks hold a lot of debt and have a small mark up, and the DuPont illustrates this relationship.
Answer:
d. Banks hold a lot of debt and have a small mark up, and the DuPont illustrates this relationship.
Explanation:
The Dupont model is basically a more complex return on equity (ROE) analysis. It breaks down ROE using net profit, asset turnover and equity multiplier (or financial leverage) to focus on the financial performance of businesses.
ROE = profit margin x asset turnover x financial leverage
When firms have higher financial leverage, ROE will increase, but risk will also increase, resulting in higher cost of equity.
Banks tend to have a much higher financial leverage than most companies since their business is to take deposits (liabilities) and then make loans to other clients (assets). E.g. commercial banks on average have a debt to equity ratio of 2, while investment banks have a D/E ratio of 3 or more. That means that for every $1 of equity, investment banks have $3 of debt.
The Dupont analysis is useful for understanding whether a company's performance is based on its efficiency (high profit margin or asset turnover) or its financial leverage. If a high ROE is based solely on a high financial leverage, then the company is considered a risky investment.
Economic profit can be derived from calculating total revenues minus all of the firm's costs
Answer:
Economic profit can be derived from calculating total revenues minus all of the firm's costs, Economic profit can be derived from calculating total revenues minus all of the firm's costs, including its opportunity costs. are two stark realities any business firm must recognize.
Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $65,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 9 percent of your annual salary in an account that will earn 10.5 percent per year. Your salary will increase at 2 percent per year throughout your career. How much money will you have on the date of your retirement 35 years from today?
Answer:
$2,171,762
Explanation:
since there is not enough room here I used an excel spreadsheet
Kayleigh is looking over a number of material requisition slips from her employees. She has to sign off on each request after reviewing it, which she thinks is a waste of time and effort. Kayleigh believes that having the name of the employee who requested the materials should be enough. Is she correct?
Answer: B : No, approval by an individual other than the requestor establishes greater accountability over inventory.
Explanation:
The purpose of reviewing the material requisition slips is to ensure that there is greater accountability in inventory acquisition and this is why it is important that someone else apart from the person requesting approves the inventory request as it will reduce chances of fraud.
If the person requesting could also approve, there is a chance that inventory that is not needed will be ordered and then used for purposes other than to benefit the business but to benefit the person who requested it.
You’ve collected the following information about Gandalf, Inc.Sales $320,000 Net income $18,500Dividends $7,300Total debt $68,000Total equity $99,000 A. What is the sustainable growth rate for the company? B. Assuming it grows at this rate, how much new borrowing will take place in the coming year, assuming a constant debt-equity ratio? C. What growth rate could be supported with no outside financing at all?
Answer:
11.31%
Explanation:
sustainable growth rate = retention rate x return on equity
return on equity (ROE) = net income / shareholders' equity = $18,500 / $99,000 = 18.69%
retention rate = 1 - dividend payout ratio
dividend payout ratio = dividends / net income = $7,300 / $18,500 = 39.46%
retention rate = 1 - 39.46% = 60.54%
sustainable growth rate = 0.6054 x 0.1869 = 0.1131 = 11.31%
The sustainable growth rate for the company is : 11.31%
Sustainable growth rate is computed as :
= Retention rate x return on equity
Return on equity (ROE)
= Net income / shareholders' equity = $18,500 / $99,000 = 18.69%
Retention rate
= 1 - dividend payout ratio
Dividend payout ratio
= dividends / net income
= $7,300 / $18,500
= 39.46%
Retention rate
= 1 - 39.46%
= 60.54%
Sustainable growth rate
= 0.6054 x 0.1869
= 0.1131
= 11.31%
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Zipcar: Creating Value in the Marketplace Zipcar: Creating Value in the Marketplace Nearly a decade ago, the founders of Zipcar decided to bring the car-sharing experience to the United States. Since then, Zipcar has developed the gold standard by offering its members 24/7 access to thousands of cars around the world and creating a revolution in the way many think about alternate transportation. This activity is important because understanding the marketplace, especially consumers' needs and wants, is fundamental to marketing success. The goal of this exercise is to demonstrate how marketing focuses on creating value for customers, clients, partners, and society at large. Read the case of about how Zipcar creates value in the car-sharing services market and answer the questions that follow. Zipcar is a membership-based car sharing service offering automobile rental to its members in hour or day increments. Zipcar was founded in 2000 by Robin Chase and Antje Danielson, who were inspired by the success of car sharing in Europe; Avis Budget Group acquired the company in 2013. Zipcar has become the world's largest car-sharing service in over 50 North American cities, 20+ European cities, and over 100 college campuses in North America. Zipcar offers different types of membership, with plans aimed at both occasional and frequent drivers. In addition, special plans for corporations and universities are offered. In addition to monthly or annual membership fees, customers pay rental charges to use a Zipcar. Members can view vehicle accessibility and reserve a vehicle on Zipcar's website, using its mobile app, or on the telephone. "Zipsters" (as Zipcar members are called) are given a "Zipcard" that contains a wireless chip that opens their reserved vehicle; keys are stored inside the vehicle, along with a gas card members can use to fill the tank. When the Zipster is done with the car, s/he returns it to the car's home location (a reserved spot for the automobile in the member's area). Zipcar's fleet consists of automobiles from Audi, BMW, Ford, Honda, Nissan, and Toyota Ford and Toyota have partnered with Zipcar to test their new electric and hybrid options with Zipcar members. Zipcar focuses not only on creating a convenient experience for its members, but also on developing awareness about alternative transportation options. One of Zipcar's core missions is to "change the world through urban and environmental transformation." 1a. Zipcar is an example of what type of market... Zipcar is an example of what type of market orientation? Multiple Choice Ο exchange marketing Ο sales marketing Ο value-based marketing Ο production marketing Ο providence marketing
Complete Question
The complete question is shown on the first , second, third, fourth and fifth uploaded image
Answer:
1a
The correct option is C
1b
The correct option is D
1c
The correct option is C
1d
The correct option is C
Explanation:
1a. Zipcar is an example of what type of market...
Answer: value-based marketing
1b. Zipcar's goal is to have an available... Zipcar's goal is to have an available zipcar located within 10-15 minutes of its members. This is an example of what component of the marketing mix?
Answer:Place
1c Zipcar traditionally focused on marketing t... Zipcar traditionally focused on marketing toward individuals without cars as a convenient form of alternative transportation. Zipcar has now begun to also focus its marketing toward businesses and organizations to use Zipcar for their employees. This is an example of
Answer: B2B marketing
1d
1d. Which of the following statements about Zipcar illust... Which of the following statements about Zipcar illustrates how marketing can help to enrich society
Answer: One of Zipcar's core mission is to "change the world through urban and environmental transformation"
Exercise 2-6 Analyzing account entries and balances LO A1 Use the information in each of the following separate cases to calculate the unknown amount. Corentine Co. had $152,000 of accounts payable on September 30 and $132,500 on October 31. Total purchases on account during October were $281,000. Determine how much cash was paid on accounts payable during October. On September 30, Valerian Co. had a $102,500 balance in Accounts Receivable. During October, the company collected $102,890 from its credit customers. The October 31 balance in Accounts Receivable was $89,000. Determine the amount of sales on account that occurred in October. During October, Alameda Company had $102,500 of cash receipts and $103,150 of cash disbursements. The October 31 Cash balance was $18,600. Determine how much cash the company had at the close of business on September 30.
Answer:
a) Corentine Co.
Cash paid to suppliers:
Beginning balance, September 30 $152,000
Purchases $281,000
Ending balance, October 31 $132,500
Cash paid $300,500
b) Valerian Co.
Sales to customers on account:
Ending balance, October 31 $89,000
Cash collected $102,890
Beginning balance, September 30 $102,500
Sales $89,390
c) Alameda Company
Cash balance on September 30:
Cash disbursements $103,150
Balance, October 31 $18,600
Cash receipts $102,500
Balance, Sept. 30 $19,200
Explanation:
The unknown amount for each case is the difference between the opening balance, the transactions for the month of October and closing balance.
If the price of chicken feed decreases, the supply of chicken nuggets will shift
Answer:The production of chicken nuggets should increase because more feed will be bought which means the chickens could eat more, this will lead to bigger chickens with more fat, which increases the chicken nugget production because, chicken nuggets are 50% meat and the rest is fat, ground bone, blood vessels and connective tissues.
Explanation:
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5. The demand for good X is estimated to be QXd = 10,000 - 4PX + 5PY + 2M + AX where PX is the price of X, PY is the price of good Y, M is income and AX is the amount of advertising on X. Suppose the present price of good X is $50, PY = $100, M = $25,000, and AX = 1,000 units. Determine 1. a. Own price elasticity of demand b. Cross price elasticity of demand c. Income elasticity of demand d. Is good y a complement or a substitute e. Is good is normal or inferior
Answer:
We need to calculate quantity demanded of good X
Qxd = 10,000 − 4PX + 5PY + 2M + AX
Qxd = 10,000 − 4(50) + 5(100) + 2(25000) + 1000
Qxd = 10,000 - 200 + 500 + 50000 + 1000
Qxd = 61,300
a. E(P) = ∆Qx/∆Px * (Px / Qx)
E(P) = - 4 * (50 / 61,300)
{where, ∆Qx/∆Px is the price coefficient = -4}
E(P) = = - 0.003 (The absolute value is 0.003)
Demand is inelastic, because price elasticity is less than 1.
b. CPED = ∆Qx/∆Py * (Py / Qx)
CPED = 5 * (100 / 61,300)
[where, ∆Qx/∆Py is the price coefficient of good Y = 5]
CPED = 0.008
c. IED = ∆Qx/∆M * (M / Qx)
= 2 * (25,000 / 61,300)
[where, ∆Qx/∆M is the income coefficient = 2]
= 0.816
d. Good Y and X is subtitles because CPED is positive.
e. Good X is a normal good because income elasticity is positive.
Read the scenario:You are writing a research report on financial derivatives.
What should you do when performing secondary-source research? A. Search electronic databases for relevant material.
B. Conduct interviews with subject experts.
C. Go to the library, and look for books on the subject.
D. Hold focus groups.
Answer:
A. Search electronic databases for relevant material.
C. Go to the library, and look for books on the subject.
Explanation:
In a research study, a secondary source is a term that describes a form of source which is not the original source to the interpreted data. In other words, it involves already prepared data which can easily be found in places like academic books and journals
Hence, in this case, when performing secondary-source research, the following should be done amongst others:
1. Search electronic databases for relevant material.
2. Go to the library, and look for books on the subject.
This is because the aforementioned involves a place to get a secondary source and it will save time and effort.
On the other hand, Holding focus groups and conducting interviews involves primary source research
In a _____ organizational structure, project managers work full-time on projects, while team members report to both functional managers and project managers
Answer:
Strong matrix
Explanation:
Neha is writing a report comparing the profits of three fashion design houses What type of organizational method should she use? a) Importance b) Component c) Time
Answer:
b) Component
Explanation:
Since in the question it is mentioned that the neha has written a report in which the profits of three fashion design houses could be compared
So in this situation, the component organizational method could help for knowing the strategic and the operational information so that it would be easy for comparing the profits between these three fashion houses
Therefore the option b is correct
Question 2 of 10
What are two types of strategies businesses use to directly influence the
environment?
A. Social media and strategic financing
B. Social media and rebranding
C. Formal organizational structure and informal organization
D. Lobbyists and flames
Answer:social media and strategic financing
Explanation:
Apex
A painting operation is performed by a production worker at a labor cost of $1.40 per unit. A robot spray-painting machine, costing $15,000, would reduce the labor cost to $.20 per unit. If the device would be valueless at the end of 3 years, what is the minimum number of units that would have to have been painted each year to justify the purchase of the robot machine
Answer:
4,166.66 units per year
Explanation:
Break-even is defined as the production volume at which the cost incurred in the production process is equal to the revenue earned.
Production above this point will result in positive revenue for the company.
The formula for break-even is
Break-even= Fixed cost ÷ (Difference in cost of labour per unit)
Difference in labour cost is the gain from this process. When it involves sales the denominator is Sales price less variable cost.
Break-even = 15,000 ÷ (1.4 - 0.2)
Break-even = 12,500 units
Production will have to exceed 12,500 units to justify purchase of the robot for 3 years.
Units produced per year will be
12,500 ÷ 3 = 4,166.66 units per year
What is the best way to share functions across more than one project?
Answer:Place the code for the functions in a module and add that module to each project.
Explanation:
What is the amount of the non-cash Items for 2015?
a. $481 million
b. $227 million
c. $311 mllon
d. $473 million?
Answer: c. $311 mllon
Explanation:
Non-cash items are those items that go into the income statement and can either increase or decrease profits but do not have an actual cash value. In other words, they may affect the calculation of profit but they do not impact the company's cash flow.
Examples include; Depreciation and Amortization
, deferred income taxes and loss on disposal of property and equipment.
From the statements of Woodlands Inc., there seems to be only one non-cash item which is Depreciation at a value of $311 million.
The benefits of a reduction of corporate tax to the country
Answer:
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You are 20 years old and have completed your BBA and want to pursue further education but you don’t want to make money from your father. Your plan is to start working and earn enough money so that you can finance your degree on your own and get yourself enrolled in five years’ time. You estimate that the annual cost of doing an MBA 5 years from today will be PKR 400,000 and the program will be two years long. You will need the money at the beginning of your program so that you are not worried about how to clear your dues during your studies. Luckily you go for a job interview and they hire you and you start working at a salary of PKR 25,000. So you decide that 50% you will deposit in a saving account at a 10% rate with monthly compounding for your further studies and the remaining amount you will use for your daily expenses. 1. Will you be able to meet your goal at this current saving rate? 2. What percentage of your salary should you save if you want to have exactly your university expenses amount? 3. How would your answer to part 1 change if the saving account rate changed to 5%? Comment on your answer. 4. If you are given an option to invest at the 10% saving rate with monthly compounding or 10.5% semiannual compounding, which would you chose? Explain your answer.
Answer:
1. Yes, you will be able to meet your goal at this current saving rate since the Future value of the monthly savings after 5 years of PKR 967,963.40 is greater than Total MBA cost for 2 years of PKR 800,000.
2. Percentage of monthly salary to save = 41%.
3. You will still be able to meet your goal at the saving rate of 5% since the Future value of the monthly savings after 5 years of PKR 850,076.04 is greater than Total MBA cost for 2 years of PKR 800,000. Although, the Future value of the monthly savings after 5 years of PKR 967,963.40 at 10% is higher than the Future value of the monthly savings after 5 years of PKR 850,076.04 at 5% saving rate.
4. I would choose the saving rate of 10% monthly compounding. The reason is that the Future value of the monthly savings after 5 years at 10% semiannual compounding saving rate of PKR 967,963.40 is greater than the Future value of the semiannual savings after 5 years at 10.5% saving rate semiannual compounding of PKR 954,422.88 by an amount of PKR 13,540.52 (i.e. PKR 967,963.40 - PKR 954,422.88 = PKR 13,540.52).
Explanation:
Monthly salary = PKR 25,000
Monthly savings = PKR 25,000 * 50% = PKR 12,500
Annual MBA cost = PKR 400,000
Total MBA cost for 2 years = PKR 400,000 * 2 = PKR 800,000
1. Will you be able to meet your goal at this current saving rate?
To determine this, the formula for calculating the Future Value (FV) of an Ordinary Annuity is used as follows:
FV = M * {[(1 + r)^n - 1] / r} ................................. (1)
Where,
FV = Future value of the monthly savings after 5 years =?
M = Monthly savings = PKR 12,500
r = Monthly interest rate = 10% / 12 = 0.10 /12 = 0.00833333333333333
n = number of months the savings will be made = 5 year * 12 months = 60
Substituting the values into equation (1), we have:
FV = 12,500 * (((1 + 0.00833333333333333)^60 - 1) / 0.00833333333333333)
FV = 12,500 * 77.4370721734302
FV = PKR 967,963.40
Yes, you will be able to meet your goal at this current saving rate since the Future value of the monthly savings after 5 years of PKR 967,963.40 is greater than Total MBA cost for 2 years of PKR 800,000.
2. What percentage of your salary should you save if you want to have exactly your university expenses amount?
To determine this, we still make use of equation (1) in part (1) above by changing Future value of the monthly savings after 5 years (FV) to PKR 800,000 while other values remains the same and solve for Monthly savings (M) after substituting the values into equation (1) follows:
800,000 = M * (((1 + 0.00833333333333333)^60 - 1) / 0.00833333333333333)
800,000 = M * 77.4370721734302
M = 800,000 / 77.4370721734302
M = PKR 10,330.97
Percentage of salary to save = M / Monthly salary = PKR 10,330.97 / PKR 25,000 = 0.41323876409392, or 41%
3. How would your answer to part 1 change if the saving account rate changed to 5%? Comment on your answer.
We use equation (1) is part 1, retain all the other values except r which is obtained as follows:
r = Monthly interest rate = 5% / 12 = 0.05 / 12 = 0.00416666666666667
Substituting the values into equation (1), we have:
FV = 12,500 * (((1 + 0.00416666666666667)^60 - 1) / 0.00416666666666667)
FV = 12,500 * 68.0060828408433
FV = PKR 850,076.04
You will still be able to meet your goal at the saving rate of 5% since the Future value of the monthly savings after 5 years of PKR 850,076.04 is greater than Total MBA cost for 2 years of PKR 800,000. Although, the Future value of the monthly savings after 5 years of PKR 967,963.40 at 10% is higher than the Future value of the monthly savings after 5 years of PKR 850,076.04 at 5% saving rate.
4. If you are given an option to invest at the 10% saving rate with monthly compounding or 10.5% semiannual compounding, which would you chose? Explain your answer.
From part 1 above, the Future value of the monthly savings after 5 years at 10% saving rate monthly compounding is PKR 967,963.40.
To obtain the Future value of the monthly savings after 5 years at 10.5% semiannual compounding saving rate, we use equation (1) with changes in definitions to semiannual where:
FV = Future value of the semiannual savings after 5 years =?
M = Semiannual total savings = Monthly saving * 6 months = PKR 12,500 * 6 = PKR 75,000
r = Semiannual interest rate = 10.5% / 2 = 0.105 / 2 = 0.0525
n = number of semiannual the savings will be made = 5 year * 2 semiannuals = 10 semiannuals
Substituting the values into equation (1), we have:
FV = 75,000 * (((1 + 0.0525)^10 - 1) / 0.0525)
FV = 75,000 * 12.7256383972991
FV = PKR 954,422.88
Therefore, I would choose the saving rate of 10% monthly compounding.
The reason is that the Future value of the monthly savings after 5 years at 10% semiannual compounding saving rate of PKR 967,963.40 is greater than the Future value of the semiannual savings after 5 years at 10.5% saving rate semiannual compounding of PKR 954,422.88 by an amount of PKR 13,540.52 (i.e. PKR 967,963.40 - PKR 954,422.88 = PKR 13,540.52).