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Unformatted text preview: FNAN 301, Fall 2009, quiz 2, solutions Conceptual: annuity vs. perpetuity 1. Marcella Corp. 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 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 Marcella to make its first monthly payment, which would be positive and identical for both plans, in exactly one month from today. If Marcella 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 Marcella wants the cheaper plan? A. Marcella should choose plan A B. Marcella should choose plan B C. Marcella 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 Marcella should choose plan A, choose plan B, or be indifferent between the two plans E. None of the above assertions is correct 1. Marcella Corp. 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 fixed payments and plan B is a standard annuity with constant payments. Both plans have the same positive discount rate and would require Marcella to make its first monthly payment, which would be positive and identical for both plans, in exactly one month from today. If Marcella 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 Marcella wants the cheaper plan? A. Marcella should choose plan A B. Marcella should choose plan B C. Marcella 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 Marcella 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, Fall 2009, quiz 2, solutions Quantitative: future value of a single cash flow and payment for future value of an annuity 2. Today, Ernie invested $14,000 in a security that is expected to earn 7.4 percent per year compounded annually and that will pay investors in 12 years. Bert wants to have as much money as Ernie in 12 years from today. How much would Bert need to invest every month for 12 years if he makes equal monthly investments at the start of each month, he makes his first investment today, and he can earn 7.2 percent a year compounded monthly on his investments?investment today, and he can earn 7....
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 Spring '09
 MURRAY
 Annuity, Perpetuity

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