BA 103 - Fall 2002 - Marsh - Midterm 1

BA 103 - Fall 2002 - Marsh - Midterm 1 - Exam 1, BA 103...

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warning – questions on both sides of this piece of paper !!! Exam 1, BA 103 Wednesday 25-Sept-2002 Page 1 of 6 1. (4pts total) Short answer questions (straightforward, no tricks, just a warm-up): A (1 pt): What is the present value of a payment of $37,132 received 23 years from today if the correct discount rate is 7.17% (EAR) ? A. B (1 pt): What is the present value of receiving $150 every year, forever, starting one year from today, if the correct discount rate is 3.20% (EAR) ? B. C (1 pt): If you put $200 in the bank today, how much will you have in five years if your bank has a savings rate of 2% (APR with monthly convention) ? C. D (1 pt): Inflation is expected to be a constant 3.96% per year. Which is better: D. circle one i) receiving $ nom 500 in five years - or - ii) receiving $ real 421 in five years i ii your name: ________________________ your section - circle one: 101 102 201 202 your student id#: ________________________
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warning – questions on both sides of this piece of paper !!! Exam 1, BA 103 Wednesday 25-Sept-2002 Page 2 of 6 2. (7 pts total) You are considering a project that requires an initial investment of $50,000 today. The investment will produce 15,000 output units the first year. Output will then grow at the rate of 3% p.a. for the next two years as efficiency improves, and will then be flat for the next 3 years. After the 6 th year, the project evaporates, i.e. has a zero value. The product units will sell for $1 each in the first year, then decline at the rate of 2% per year as competition intensifies. There are no other costs. The correct, risk- adjusted discount rate is a constant over time at 8.20% (EAR). A. (2 pts) Draw the cash-flow diagram. B. (2 pts) Calculate the NPV of this investment. C. (3 pts) Suppose you can repeat this project forever in series. This means that when you receive the last cash-flow of the first project you launch the second project, when you receive the last cash flow of the second project you launch the third project, etc. What is the NPV ?
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warning – questions on both sides of this piece of paper !!! Exam 1, BA 103
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BA 103 - Fall 2002 - Marsh - Midterm 1 - Exam 1, BA 103...

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