FIN 2100 Ch 8-13 Practice Questions
and All Correct Answers.
In a written dispute, the written terms of a signed sales agreement will prevail. True or false -
Answer True
You should always find your cheapest source of financing for a car prior to actually visiting the
car dealership to shop for cars. True or false - Answer True
Service warranty contracts are generally considered good deals. True or false. - Answer False
What does PITI stand for and which of the four items are escrowed? - Answer Principal,
interest, taxes and insurance. taxes and insurance are escrowed.
Real estate commissions are generally paid by the buyer true or false - Answer false
Warranty - Answer A written guarantee from the manufacturer or distributor that specifies
the conditions under which the product can be returned, replaced or repaired.
Express warranty - Answer Usually in written form is created by the seller or manufacturer
and has two forms; full warranty and limited warranty
Full warranty - Answer A defective product can be fixed or replaced during a reasonable
amount of time
Limited warranty - Answer Covers only certain aspects of the product, such as parts or
requires the buyer to incur parts of costs for shipping or repair.
Implied warranty - Answer Covers a products intended use or other basic understandings
that are not in writing.
Service contracts - Answer An agreement between a business and consumer to cover the
repair costs of a product. Usually called extended warranty, but its not a warranty.
Mediation - Answer Involves the use of a 3rd party to settle grievances. The mediator tries to
resolve a conflict between consumer and business through discussion and negotiation. Non
binding process.
, Arbitration - Answer Settlement of a difference by 3rd party that is law binding.
You currently are spending $50/year renting a pressure washer to clean your house. The cost of
a new pressure washer is $300. If you bought the pressure washer, how many years would it
take to obtain full payback on your original investment relative to renting (use a simple payback
calculation).
Note: Payback is a useful, but simplistic way to evaluate a purchasing decision that does not
consider the time value of money. A quick payback implies a better deal, while a slower payback
is not as good. But what if the pressure washer had to be replaced every 3 years at a cost of
$300 each time? Buying would not be a better deal than renting. - Answer 6
Your favorite cereal (standard 18 oz box) is sold for $3.78 at your local grocery. The local
wholesale club packages two giant 22 oz. boxes of the same cereal (which must be bought
together) for $9.68. The wholesaler list a per package cost of $4.84 rather than list a per ounce
cost (this is a common tactic used to confuse consumers). Which is the better buy on a per
ounce basis? - Answer The grocery store's price is 21 cents per ounce, 1 cent better
You have been given a choice of paying $19,000 for a new GM car with a $3,000 cash rebate
(net cost of $16,000 which you finance separately), or zero percent financing for 48 months with
no cash rebate. What is the implicit rate of interest in this deal? - Answer 8.69%
You are considering the purchase of a hybrid Honda Civic. Assume that you drive 12,000 per
year, and will keep the auto for 10 years, at which time the car will have zero trade-in value.
Assume the cost of gas is $2.49/gallon. The "normal" model gets 34 miles per gallon, while the
"hybrid" model gets 50 miles per gallon. The hybrid model cost $21,850 while the normal model
costs $18,260. All other operating costs are the same. You can invest your money at a 6%
interest rate (i.e. use a 6% discount rate). Given these assumptions, is it a good economic
decision to purchase the hybrid? Hint: Calculate the annual gas cost for each car then take the
difference (or savings) per year. Next calculate the PV of the annual savings (END MODE) and
compare the gas cost savings in today's dollars to the cost difference for the two vehicles. You
could also do a NPV analysis, with the car cost difference being used for cash out time - Answer
No, don't buy the hybrid. The PV of the savings is $2,070 which is less than the cost difference.
You need a greater savings to economically justify the purchase of this hybrid (i.e. the NPV is
negative).
You subscribe to XM Radio and pay $12 at the end of each month (which equates to $144 per
year). You plan to keep this service for the next five years. Assume you have plenty of cash in
your emergency reserve fund, which is in a bank account earning 4% interest per annum. XM
Radio offers you a deal whereby you can prepay two years worth of service for $230, payable
today. Given these assumptions, - Answer You are better off to prepay XM for the next two
years.
Assume you own an SUV that gets 15 miles to the gallon. Also assume you drive 12,000 miles
per year, and pay $4.00/gallon for gas. How much would you save per year in gas if you owned a
vehicle that achieved 30 miles per gallon compared to the SUV? - Answer $1600
and All Correct Answers.
In a written dispute, the written terms of a signed sales agreement will prevail. True or false -
Answer True
You should always find your cheapest source of financing for a car prior to actually visiting the
car dealership to shop for cars. True or false - Answer True
Service warranty contracts are generally considered good deals. True or false. - Answer False
What does PITI stand for and which of the four items are escrowed? - Answer Principal,
interest, taxes and insurance. taxes and insurance are escrowed.
Real estate commissions are generally paid by the buyer true or false - Answer false
Warranty - Answer A written guarantee from the manufacturer or distributor that specifies
the conditions under which the product can be returned, replaced or repaired.
Express warranty - Answer Usually in written form is created by the seller or manufacturer
and has two forms; full warranty and limited warranty
Full warranty - Answer A defective product can be fixed or replaced during a reasonable
amount of time
Limited warranty - Answer Covers only certain aspects of the product, such as parts or
requires the buyer to incur parts of costs for shipping or repair.
Implied warranty - Answer Covers a products intended use or other basic understandings
that are not in writing.
Service contracts - Answer An agreement between a business and consumer to cover the
repair costs of a product. Usually called extended warranty, but its not a warranty.
Mediation - Answer Involves the use of a 3rd party to settle grievances. The mediator tries to
resolve a conflict between consumer and business through discussion and negotiation. Non
binding process.
, Arbitration - Answer Settlement of a difference by 3rd party that is law binding.
You currently are spending $50/year renting a pressure washer to clean your house. The cost of
a new pressure washer is $300. If you bought the pressure washer, how many years would it
take to obtain full payback on your original investment relative to renting (use a simple payback
calculation).
Note: Payback is a useful, but simplistic way to evaluate a purchasing decision that does not
consider the time value of money. A quick payback implies a better deal, while a slower payback
is not as good. But what if the pressure washer had to be replaced every 3 years at a cost of
$300 each time? Buying would not be a better deal than renting. - Answer 6
Your favorite cereal (standard 18 oz box) is sold for $3.78 at your local grocery. The local
wholesale club packages two giant 22 oz. boxes of the same cereal (which must be bought
together) for $9.68. The wholesaler list a per package cost of $4.84 rather than list a per ounce
cost (this is a common tactic used to confuse consumers). Which is the better buy on a per
ounce basis? - Answer The grocery store's price is 21 cents per ounce, 1 cent better
You have been given a choice of paying $19,000 for a new GM car with a $3,000 cash rebate
(net cost of $16,000 which you finance separately), or zero percent financing for 48 months with
no cash rebate. What is the implicit rate of interest in this deal? - Answer 8.69%
You are considering the purchase of a hybrid Honda Civic. Assume that you drive 12,000 per
year, and will keep the auto for 10 years, at which time the car will have zero trade-in value.
Assume the cost of gas is $2.49/gallon. The "normal" model gets 34 miles per gallon, while the
"hybrid" model gets 50 miles per gallon. The hybrid model cost $21,850 while the normal model
costs $18,260. All other operating costs are the same. You can invest your money at a 6%
interest rate (i.e. use a 6% discount rate). Given these assumptions, is it a good economic
decision to purchase the hybrid? Hint: Calculate the annual gas cost for each car then take the
difference (or savings) per year. Next calculate the PV of the annual savings (END MODE) and
compare the gas cost savings in today's dollars to the cost difference for the two vehicles. You
could also do a NPV analysis, with the car cost difference being used for cash out time - Answer
No, don't buy the hybrid. The PV of the savings is $2,070 which is less than the cost difference.
You need a greater savings to economically justify the purchase of this hybrid (i.e. the NPV is
negative).
You subscribe to XM Radio and pay $12 at the end of each month (which equates to $144 per
year). You plan to keep this service for the next five years. Assume you have plenty of cash in
your emergency reserve fund, which is in a bank account earning 4% interest per annum. XM
Radio offers you a deal whereby you can prepay two years worth of service for $230, payable
today. Given these assumptions, - Answer You are better off to prepay XM for the next two
years.
Assume you own an SUV that gets 15 miles to the gallon. Also assume you drive 12,000 miles
per year, and pay $4.00/gallon for gas. How much would you save per year in gas if you owned a
vehicle that achieved 30 miles per gallon compared to the SUV? - Answer $1600
