1. You are borrowing $5,750 to buy a car. The terms of the loan call for monthly

Question

1. You are borrowing $5,750 to buy a car. The terms of the loan call for monthly payments for 3 years at a 4.50 percent interest compounded monthly. What is the amount of each payment?

$171.04

$149.48

$191.97

$188.35

2.

The Free Company is considering two projects. Project ! consists of building a theater on Steven Retail Center. Project 2 consists of building a sit-down restaurant on Steven Retail Center. When trying to decide whether to build the theater or the restaurant, management should rely most heavily on the analysis results from the _______ method of analysis.

profitability index (This was wrong)

net present value

payback

internal rate of return

$171.04

$149.48

$191.97

$188.35

Explanation / Answer

1) Instalment / Monthly Payment = P ( 1 + r)^n r / (1 + r)^n - 1

= 5750 ( 1 + 0.045/12)3*12 * 0.045/12 /  ( 1 + 0.045/12)3*12 - 1

= 24.67284 / 0.1442478322 = $171.04 (OPTION A)

2) Answer: D: Internal Rate of Return (IRR)

=> This is because both the theater or the restaurant has different return period so NPV or Payback period methods would not provide correct results, so we have to go with the IRR to decide between the theater or the restaurant.

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