AK/ADMS 3530.03 Finance Midterm Exam
February 17, 2008
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.
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
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
First, his goal is $1,000,000 – $10,000(1.08)
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