Satisfactory Essays

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AK/ADMS 3530.03 Finance Final Exam
Winter 2007
Solutions
Type A Exam
Numerical questions (2 points each)
1. (Q. 5 in B) What is the present value of the following payment stream, discounted at 8 percent annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3?
A) $5,022.11 B) $5,144.03 C) $5,423.87 D) $5,520.00
Answer A
PV = [pic] = $925.93 + $1,714.68 + $2,381.50 = $5,022.11
2. (Q. 6 in B) What is the present value of a four-year annuity of $100 per year that begins two years from today if the discount rate is 9 percent?
A) $297.22 B) $323.86 C) $356.85*…show more content…*

A) $2.00 B) $2.20 C) $4.00 D) $6.00 Answer A [pic] 15% = [pic] Dividend = $2. 9. (Q. 13 in B) Because of its age, your car costs $4,000 annually in maintenance expense. You could replace it with a newer vehicle costing $8,000. Both vehicles would be expected to last four more years. If your opportunity cost is 8 percent, what would be the maximum annual maintenance expense on the newer vehicle to still justify its purchase? A) $1,250 B) $1,585 C) $2,000 D) $2,415 Answer B $8,000 = Annuity [pic] = Annuity [3.3121] = $2,415.39 When combined with the annuitized cost of the vehicle, any annual expense over $1,584.61 would place the total annual expense of the new vehicle over $4,000. 10. (Q. 14 in B) The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is: A) 0.139 B) 0.320 C) 0.500 D) 0.861 Answer A PV = $15,000 [pic] = $15,000 [3.0373] = $45,560 and NPV = $45,560 - $40,000 = $5,560. Profitability index = $5,560 / $40,000 = 0.139. 11. (Q. 15 in B) What is the minimum number of years that an investment costing $500,000 must return

A) $2.00 B) $2.20 C) $4.00 D) $6.00 Answer A [pic] 15% = [pic] Dividend = $2. 9. (Q. 13 in B) Because of its age, your car costs $4,000 annually in maintenance expense. You could replace it with a newer vehicle costing $8,000. Both vehicles would be expected to last four more years. If your opportunity cost is 8 percent, what would be the maximum annual maintenance expense on the newer vehicle to still justify its purchase? A) $1,250 B) $1,585 C) $2,000 D) $2,415 Answer B $8,000 = Annuity [pic] = Annuity [3.3121] = $2,415.39 When combined with the annuitized cost of the vehicle, any annual expense over $1,584.61 would place the total annual expense of the new vehicle over $4,000. 10. (Q. 14 in B) The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is: A) 0.139 B) 0.320 C) 0.500 D) 0.861 Answer A PV = $15,000 [pic] = $15,000 [3.0373] = $45,560 and NPV = $45,560 - $40,000 = $5,560. Profitability index = $5,560 / $40,000 = 0.139. 11. (Q. 15 in B) What is the minimum number of years that an investment costing $500,000 must return

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