Sun Company's investment scenario: They placed 60,000 in an investment at 12% compounded quarterly for five years. At maturity, with a computer replacement cost of 100,000, how much additional money will be needed?

Prepare for the CPCU 540 Exam using study tools and multiple-choice questions. Each question includes detailed explanations to ensure you grasp key concepts. Excel in your exam!

Multiple Choice

Sun Company's investment scenario: They placed 60,000 in an investment at 12% compounded quarterly for five years. At maturity, with a computer replacement cost of 100,000, how much additional money will be needed?

The test is about comparing the investment’s future value to a known future cost to see if extra funds are needed. First, find what the investment will be worth at maturity: the quarterly rate is 12%/4 = 3%, over 5 years (20 quarters). Future value = 60,000 × (1.03)^20 ≈ 60,000 × 1.8061 ≈ 108,366. The computer replacement cost at maturity is 100,000. Since 108,366 exceeds 100,000, no additional money is needed. In fact, there would be about 8,366 surplus. If there were a shortfall, you’d compute 100,000 − FV, but here the answer is 0.

The test is about comparing the investment’s future value to a known future cost to see if extra funds are needed. First, find what the investment will be worth at maturity: the quarterly rate is 12%/4 = 3%, over 5 years (20 quarters). Future value = 60,000 × (1.03)^20 ≈ 60,000 × 1.8061 ≈ 108,366.

The computer replacement cost at maturity is 100,000. Since 108,366 exceeds 100,000, no additional money is needed. In fact, there would be about 8,366 surplus. If there were a shortfall, you’d compute 100,000 − FV, but here the answer is 0.

More practice questions