Midterm #1 – Winter 2017 – Econ 134A (9 am)

Feb. 3, 2017

Test Form A

Name (Please Print) : ______

Seat:______

By signing below, I acknowledge that I have checked photo identification to the people to my immediate left and right, and that the name matches what is listed on the test and scantron. (Students do not need to go across an aisle to check identification.) If a student does not have a photo identification, I will report it to the instructor before the test starts.

I am also aware that I need to bubble in the form letter and my name and perm number on my scantron, and include my name, perm number, and section time on the open response sheet. I am aware that failure to do any of these or not having a photo identification will result in a loss of one point on this test.

Finally, by signing below, I acknowledge that this test will count as part of my course grade. If I fail to turn in the test, a score of zero will be entered.

Name (Please Print):______

Signature______

Econ 134A (9 am lecture)John Hartman

Test 1, Form AFeb. 3, 2017

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 3 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. Boomer has just signed a contract that will pay him $20,000 today, with subsequent payments made yearly starting one year from today. Each of these payments will be 10% higher than the previous payment, and the final payment will be made 12 years from today. What is the present value of all of the payments if his effective annual interest rate is 10%?

A. $240,000B. $250,000C. $260,000D. $270,000E. $280,000

2. Loretta will invest $8,000 today into an investment that will pay out $500 every year forever, starting one year from today. Her stated annual interest rate is 6%, compounded monthly. What is the profitability index of this investment?

A. 0.95B. 1.0C. 1.05D. 1.2E. 1.3

3. A stated annual interest rate of 9.6%, compounded monthly, is equivalent to a stated annual interest rate of ______, compounded continuously.

A. 9.56%B. 9.58%C. 9.60%D. 9.62%E. 9.64%

4. Ariel deposits $6,000 into an account at an effective annual interest rate of 6%. How many years until the $6,000 grows to $96,000? Assume that Ariel does not make deposits or withdrawals after the initial deposit.

A. 36B. 48C. 60D. 200E. 1000

5. Brianna invests in a project today and will receive multiple positive cash flows in the future. At an effective annual interest rate of 6%, the project has a negative net present value (NPV). What can we conclude if the effective annual interest rate is 8%?

A. The project must have a negative NPV

B. The project must have a NPV that is zero

C. The project must have a positive NPV

D. There cannot be any determination of the sign of the NPV

E. None of the above

Name______Perm #______Day/time 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. (5 points) Joseph will buy a $1,000,000 house today. He will make a 20% deposit, and borrow the remaining amount in the form of a mortgage. He will repay the loan with 420 equal monthly payments, starting one month from today. After the 420 payments, the loan will be completely paid off. How much must each payment be if the effective annual interest rate for this loan is 14%?

7. (4 points) Jimbo will receive $X every 8 months, starting 10 months from today. He will receive these payments forever. His stated annual interest is 6%, compounded every two months. Find X if the present value of all of the payments is $75,000.

8. (4 points) Kristal is about to buy a $10,000 machine for her business today. The machine lasts forever, but requires an annual maintenance cost of $500 forever (every year starting one year from today). If her effective annual interest rate is 7%, what is the equivalent annual cost of owning this machine (assuming that it is owned forever)?

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