# Ak/Adms 3530.03 Finance Final Exam Winter 2007 Solutions

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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