7 You loan $2,000 to a friend at 6% interest. How would you calculate the annual

Question

7 You loan $2,000 to a friend at 6% interest. How would you calculate the annual payments you should receive in each of the next 5 years if the interest rate is 6% ? There are two correct answers. (A) (B) (C) (D) (E) $2,000(FV/PV 696,5)(NPV 696, 5) $2,000(PVIA, 6905) $2,000(FV/PV, 6%,5) $2000(FV/PV, 696, 5)(A/FV, 6%, 5) $2,000(NPV, 696,51 8 What is the best decision criteria (A) NPV (B) PlI (C) IRR (D) Discounted PI (E) Flip a coin 9 You are given a choice between Plan A: $3,000 a year from now and $2,000 in two years OR Plan B: $2,000 a year from now and $3,000 in two years. The interest rate is the same in both plans (and it is a positive number). Which has the higher PV?

Explanation / Answer

7) We need to calculate the payment each year.:
Correct option B and E.

A is wrong as it provides two answers

C is wrong as it works with Pv and FV which wont yield payment

D is wrong again because it provides ambigous answers

8)

Correct option A )NPV

B is wrong as it does not account for time value of money.
C is wrong because it cannot provide absolute value of benefits
D is wrong as it wont tell how much profit is to be made
E is very wrong as it has no logic behind

9) Plan A is better as it has a greater cash flow in earlier time period. Hence it shall have a greater PV.

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