# Economics Review Questions

This economics review questions section should be used in conjunction with the Economics Study Guide and the compound interest tables that are on this website. A good idea is to print out those two documents for easy reference.

## Review Questions

1. You have $100,000 in a mutual fund which is drawing 9% a year annually. You are planning to purchase a house for $300,000. How long must you wait if you want to purchase the house with only the mutual fund?

A) 12 years

B) 13 years

C) 9 Years

D) 11 Years

2. You are evaluating two options for purchase of equipment. The first option is to purchase the item outright for $15,000. The second option is to put $5000 down and pay the reaming off over the next 5 years at 18% per year. How much extra would option two cost?

A) $2,000

B) $6,000

C) $5,250

D) $5,000

3. You purchased some farm equipment for $150,000 that has an expected life of 7 years. At the end of the first year how much can the equipment be depreciated using the MACRS method?

A) $12,450

B) $21,450

C) $15,000

D) $30,000

4. You work for a company that produces sprockets. You boss, Mr Spacely pays a yearly operating expense of $1,500,000. If each sproket cost $0.71 and sells for $3.14 how many sprockets do you need to sell to break even?

A) 817,658

B) 1,500,000

C) 716,824

D) 617,284

## Review Answers

1. This is a Single Payment Present Worth question (it can also be a Single Payment Compound Interest). You are given the present amount, the interest and the future amount, but you are missing the period. Since the interest in annual you just need to look at the compound interest chart that is for 9%. Then look down the F/P line until you get to the first one that is over 3. Which is roughly going to be at the 13th period. So the answer would be 13 years

2. In this problem you are asked to find the amount you will pay over the next 5 years. You know that the amount that needs paying off is $10,000 and the time is 5 years or 60 months. Next you look for the charts that deal with 18% yearly interest or have an interest of 1.5%. Then you go to the capital recovery (A/P) and go down to the 60 interval mark and you have a multiplier of .0024. Now take the $10,000 and multiply it by 0.0025 and you end up with $250 per month. To find out the total cost in present dollars you multiply $250 by 60 months and you get $15,000 for a total cost of $20,000 for option 2. This is $5,000 more than option 1.

3. Since the equipment has a useful life for 7 years, we look at that column and go to the row that is for 1 year. The depreciation is 14.3%. Now multiply 14.3% by the original amount of $150,000 to get $21,450 which is how much the farm equipment has depreciated in value.

4. This is a straight forward break even analysis. First you need to calculate the total cost per year. Once you have the total cost you divide that by the profit per sprocket.

Set the cost equal to the revenue and solve for number of sprockets