Econ 134AJohn Hartman
Test 1, Form AOctober 21, 2015
Instructions:
YOU WILL TURN IN YOUR SCANTRON AND THE PROBLEMS PAGE. MAKE SURE ALL WORK AND ANSWERS ARE PROVIDED ON THESE. BUBBLE IN YOUR TEST FORM, NAME, AND PERM NUMBER ON YOUR SCANTRON.
You have 40 minutes to complete this test, 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.
Cheating will not be tolerated during any test. 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.
- Equivalent annual cost problems are in real dollars.
You are allowed to turn in your test 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 test.
Your test should have 5 multiple choice questions (10 points) and 2 problems (13 points). The maximum possible point total is 24 points. If your test is incomplete, it is your responsibility to notify a proctor to get a new test.
For your reference, an example of a well-labeled graph is below:
MULTIPLE CHOICE: Answer the following 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 answer.
1. A stated annual interest rate of 12%, compounded continuously, is equivalent to a stated annual interest rate of _____%, compounded seven times per year.
(a) 12.2%(b) 12.1%(c) 12.0%(d) 11.9%(e) 11.8%
2. Christina will receive a 10-payment annuity. The first payment will be made 7 years from today, and each subsequent payment will be made yearly until all 10 payments are given to her. The first payment will be $500, and each subsequent payment will be 6% higher than the previous payment. If her effective annual discount rate is 13%, what is the total present value of all 10 payments?
(a) $1620(b) $1650(c) $1690(d) $1730(e) $1800
3. A machine requires a $1,000 purchase price today. It lasts for 5 years and has a single maintenance cost of $300 three years from today. What is the equivalent annual cost for this machine if the effective annual interest rate is 6%?
(a) $290(b) $300(c) $310(d) $320(e) $340
4. Luther will receive 3 payments. Each payment will be $100 and paid every six months. The first payment will be made six months from today. The stated annual interest rate is 18% and is compounded monthly. What is the total present value of the 3 payments?
(a) $258(b) $256(c) $254(d) $252(e) $250
5. Austin will invest $2000 today. He will receive a payment of $500 one year from today. He will receive subsequent payments annually forever, each 8% lower than the previous royalty payment. If Austin’s effective annual interest rate is 14%, what is the profitability index of this investment?
(a) 0.65(b) 1.15(c) 2.15(d) 3.15(e) 4.15
Name______Perm #______Day/time/TA of section______
For the following problems, you will need to write out the solution. You must show all work to receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least four significant digits to each answer or you may not receive full credit for a correct solution.Show all work in order to receive credit. You will 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.
6. (8 points) Missy will be receiving a $100,000 loan from the Elliott Song National Bank today. The loan will last for 20 years, but the loan has a 25-year amortization schedule. (In other words, all payments will be made over the next 20 years, but the payment schedule will be made to mimic a 25-year payback for the loan.) The effective annual interest rate is 20%. The regular payments will be made yearly, starting one year from today. How much will the balloon payment have to be 20 years from today in order to completely pay back the loan?
7. (5 points) Mary has been hired to run a Fortune 500 company. Her first task is to figure out which of two mutually exclusive businesses should be located in a prime real estate location in Los Angeles, CA. Business 1 would require $1 million to be invested today, with $150,000 in revenue generated every year, starting one year from today. Business 2 would require $2 million to be invested today, with $250,000 in revenue generated every year, starting one year from today. If the effective annual interest rate is 9%, which business should Mary decide to invest in? (Note: Assume that any money not invested in one of these projects is invested with a net present value of zero.)
NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS EXPLICITLY SPECIFIED ON THE TEST.
Perpetuity
Annuity
Growing perpetuity
Growing annuity
Quadratic formula
ax2 + bx + c = 0
Logarithmic rule
ab= c b = log c / log a