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Unformatted text preview: FNAN 301, Summer C 2010, final, solutions Conceptual: annuity vs. perpetuity 1. Vanity Flowers Corporation just bought a new computer and must decide between two payment plans that are identical in every way except that plan A is a standard (also known as ordinary) annuity with fixed payments and plan B is a fixed perpetuity with constant payments. Both plans have the same positive discount rate and would require Vanity Flowers to make its first monthly payment, which would be positive and identical for both plans, in exactly one month from today. If Vanity Flowers wants the plan that would minimize the magnitude of the present value of the cash flows associated with its payments to the computer firm and even the tiniest fraction of a cent is relevant, then which of the following assertions is true? In other words, which assertion is true if Vanity Flowers wants the “cheaper” plan? A. Vanity Flowers should choose plan A B. Vanity Flowers should choose plan B C. Vanity Flowers should be indifferent between plan A and plan B D. Without knowing the exact amount that would be paid monthly to the computer firm and/or the exact level of the discount rate, it is not clear whether Vanity Flowers should choose plan A, choose plan B, or be indifferent between the two plans E. None of the above assertions is correct 1. Vanity Flowers Corporation just bought a new computer and must decide between two payment plans that are identical in every way except that plan A is a fixed perpetuity with constant payments and plan B is a standard (also known as ordinary) annuity with fixed payments. Both plans have the same positive discount rate and would require Vanity Flowers to make its first monthly payment, which would be positive and identical for both plans, in exactly one month from today. If Vanity Flowers wants the plan that would minimize the magnitude of the present value of the cash flows associated with its payments to the computer firm and even the tiniest fraction of a cent is relevant, then which of the following assertions is true? In other words, which assertion is true if Vanity Flowers wants the “cheaper” plan? A. Vanity Flowers should choose plan A B. Vanity Flowers should choose plan B C. Vanity Flowers should be indifferent between plan A and plan B D. Without knowing the exact amount that would be paid monthly to the computer firm and/or the exact level of the discount rate, it is not clear whether Vanity Flowers should choose plan A, choose plan B, or be indifferent between the two plans E. None of the above assertions is correct 1 FNAN 301, Summer C 2010, final, solutions Quantitative: present value of an annuity and present value of a single cash flow in 1 month 2. What is the value of an investment that pays investors $8,160 in 2 months and also pays investors an additional $3,000 a month for 8 months if the expected return is an APR of 24% per year compounded monthly and the first $3,000 monthly payment is received by investors in exactly one month from today?exactly one month from today?...
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 Spring '09
 MURRAY
 Time Value Of Money, Annuity, Net Present Value, Perpetuity, Red Cow bond

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