Econ 134A(1:00 lecture)John Hartman
Quiz2, Version AOctober 25, 2013
Instructions:
You have 40 minutes to complete this quiz, unless you arrive late. Late arrival will lower the time available to you, and you must finish at the same time as all other students.
Each question shows how many points it is worth. Show all work in order to receive credit. You may receive partial credit for incorrect solutions in some instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and correct solution.
Cheating will not be tolerated during any quiz. Any suspected cheating will be reported to the relevant authorities on this issue.
You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a communication device. You are NOT allowed to have a calculator that stores formulas, buttons that automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these requirements, you will be assumed to be cheating.
Unless otherwise specified, you can assume the following:
- Negative internal rates of return are not possible.
You are allowed to turn in your quiz early if there are at least 10 minutes remaining. As a courtesy to your classmates, you will not be allowed to leave during the final 10 minutes of the quiz.
Your quiz should have 8 multiple-choice questions and 1 problem (7 points). The maximum possible point total is 24 points. If your quiz is incomplete, it is your responsibility to notify a proctor to get a new quiz.
You can keep this quiz when you are done. You will need to turn in your scantron when the quiz is finished. Please note that whatever you write on this quiz will not be graded.
For your reference, an example of a well-labeled graph is below:
MULTIPLE CHOICE: Answer the following 8 questions on your scantron. Each correct answer is worth 2 points. All incorrect or blank answers are worth 0 points. If there is an answer that does not exactly match the correct answer, choose the closest or best answer.
1. Aubrey will receive $50 today. She will receive 6% more each subsequent year. The last payment she will receive will be 30 years from today. What is the total present value of all payments if the effective annual discount rate is 18%?
A. $400B. $425C. $450D. $475E. $500
2. Carrie borrows $5,000 today from the Isla Vista Monster Bank. She makes monthly payments of $100 for 48 months, starting one month from today. She makes one additional payment 50 months from today to completely pay off the loan. How much will this payment be if the stated annual interest rate is 24%, compounded monthly?
A. $4,900B. $5,000C. $5,100D. $5,200E. $5,300
3. The stated annual interest rate is 0.9%, compounded continuously. How many years will it take to double an initial deposit made today? Assume that any interest gets re-invested.
A. 111B. 100C. 85D. 80E. 77
4. Seamus invests $8,000 today. He is set to receive $2,000 per year, forever, starting six years from now. What is the profitability index for this investment if the effective annual interest rate is 20%?
A. 1.25B. 1C. 0.8D. 0.7E. 0.5
5. Maxton invests $5,000 today and will receive $500 per year forever, starting later today. What is the internal rate of return for this investment?
A. 9%B. 10%C. 11%D. 12%E. 13%
6. Suppose that in the final interview before someone receives a job offer, the interviewees get the following problem: Use the undiscounted payback period method, with the cutoff date 8 years, 4 months from now. In other words, the payback period is 8 years, 4 months. The effective annual discount rate is 14%. Which of the following offers should be picked if someone uses this method?
A. $1,000 per year forever, starting 4 years from now
B. $510 per year forever, starting today
C. $4,800 every 8 years forever, starting 8 years from now
D. $10,000 every 10 years forever, starting 10 years from now
E. A one-time payment of $4,500 today
7. Bayleigh is set to receive $25,000 per year, forever, starting 18 months from now. What is the present value of this perpetuity if her effective annual discount rate is 12.36%?
A. $191,000B. $202,000C. $214,000D. $227,000E. 241,000
8. Orlando will receive $30,000 from his grandfather in 10 years. What is the present value of this payment if his stated annual discount rate is 12%, compounded every 30 minutes?
A. $9,036B. $9,090C. $9,197D. $9,354E. $9,660
For the following problem, you will need to write out the solution ON THE MINI BLUE BOOK OF YOUR SCANTRON. You must show all work to receive credit, and your entire answer must fit in the mini blue book. There are 7 points possible for this problem. Provide at least four significant digits to each answer, if needed, or you may not receive full credit for a correct solution.
Paloma has just purchased $60,000 for construction equipment for her local business. To do so, she charged all $60,000 spent on her Vampire Express credit card, which charges 15% stated annual interest, compounded monthly. After getting home, she finds she has just been approved for a new Mummy Express credit card, which charges 12% stated annual interest, compounded monthly. The Mummy Express charges a 2% fee for any balances that are transferred. If Paloma is planning on making monthly payments of $2,000 per month to pay off the equipment, should she pay off her Vampire Express credit card, or transfer her balance to the Mummy Express card to pay off the higher balance?
Assume the following: (1) The first $2,000 payment will be one month from today on whichever credit card has a positive balance; (2) Later today, there will be only one credit card with a positive balance; (3) The only time that Paloma can transfer her balance is today.
You need to completely justify your answer to get full credit.