AK/ADMS 3530.03 Finance Midterm Exam
Winter 2008
February 17, 2008
Solutions
Type A Exam
Numerical questions (4 points each)
1. (Q. 2 in B) Janet owes her friend some money. She is given the following
alternatives of payment. If the discount rate is 6%, which of the following
alternatives of payment is best for her?
A) Pay $9,750 now.
B) $2,000 per year for 5 years, each payable at the end of the year.
C) $1,950 per year for 5 years, each payable at the beginning of the year.
D) $2,000 at the end of year 1, $5,000 at the end of year 2, $3,000 at the end of
year 3 and $1,200 at the end of year 4.
Answer B
PV (A) = $9,750; PV (B) is the PV of a 5-year annuity = $8,424.73; PV (C) is the
PV of a 5-year annuity due = $8,706.96; and PV (D) = $9,806.14. She should
choose (B) since alternative (B) has the lowest PV today.
2. (Q. 1 in B) Jeff Hanson wants to have $1,000,000 at the end of 15 years. He
has $10,000 to invest now, and his father will give him $100,000 in 5 years from
today. In addition, he is planning to invest an equal amount of
X
at the end of
every year for the next 15 years to reach his goal. If the rate of interest is 8%,
how much is
X
?
A) $25,657
B) $27,710
C) $30,249
D) $31,978
Answer B
First, his goal is $1,000,000 – $10,000(1.08)
15
– $100,000(1.08)
10
= $752,385.81.
Then, n = 15, I/Y = 8%, FV = 752,385.81, PV = 0, CPT PMT= $27,710.
3. (Q. 7 in B) Walter wants to save $5,000 nominal dollars per year (at the end of
each year) for the next 30 years for his retirement. The expected annual nominal
rate of interest is 6% for the first ten years, 7% for the next ten years and 8% for
the last ten years. The expected annual rate of inflation is 3% for the first ten
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