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# quiz1 - A 3 10(c \$2,700(d \$3,000 3 Suppose that you can...

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Econ 134a Summer 2007 Quiz 1 Name: 1. Consider a payment of \$1 million in ten years. If the interest rate declines from 10% to 8%, what happens to the present value of that payment? (a) Increases - By the present value equation, as r increases, the denomi- nator increases and PV decreases. (b) Decreases (c) No change, since the payment has not changed (d) Not enough information 2. Given a discount rate of 10%, calculate the (approximate) present value of an annuity which pays \$1,000 per year for 3 years, with the first payment due in exactly 1 year. (a) \$2,250 (b) \$2,500 - Use the annuity formula to solve
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Unformatted text preview: A 3 . 10 (c) \$2,700 (d) \$3,000 3. Suppose that you can borrow and lend at 5%. You plan to spend \$35,000 this year, and your employer is oﬀering to restructure your salary to best ﬁt your needs. Which of the following options should you take? (a) \$35,000 this year and \$85,000 next year (b) \$50,000 this year and \$70,000 next year (c) \$100,000 this year and \$20,000 next year - Highest PV (d) Doesn’t matter, since you can borrow and lend at the same rate Helpful formulae: • Net Present Value = C + ∑ T t =1 C t (1+ r ) t • Annuity: PV = C r ‡ 1-1 (1+ r ) t ·...
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