FNAN 301, fall 2011, quiz 1, version C, solutions
1. Priya owns two investments, A and B, that have a combined total value of $40,000.
Investment A is expected to pay $28,000 in 3 years from today and has an expected return of 7.1
percent per year.
Investment B is expected to pay $36,000 in T years from today and has an
expected return of 5.5 percent per year.
What is T, the number of years from today that
investment B is expected to pay $36,000?
A. A number equal to or greater than 11.50 but less than 12.50
B. A number equal to or greater than 12.50 but less than 13.50
C. A number equal to or greater than 13.50 but less than 14.50
D. A number equal to or greater than 14.50 but less than 15.50
E. A number less than 11.50 or a number greater than 15.50
To solve:
1) Find the value of investment A
2) Find the value of investment B as the combined value of both A and B minus the value of A
3) Find T, the number of years from today that investment B is expected to pay $36,000
1) Find the value of investment A
PV
0
= C
t
/ (1+r)
t
C
t
= 28,000
r = .071
t = 3
PV
0
= C
3
/ (1+r)
3
= 28,000 / (1.071)
3
= $22,792
Mode is not relevant since PMT = 0
Enter
3
7.1
0
28,000
N
I%
PV
PMT
FV
Solve for
-22,792
Investment A is worth $22,792
2) Find the value of investment B as the value of both A and B minus the value of A
Value of B = value of A and B – value of A
Value of A and B = $40,000
Value of A = $22,792
Value of B = $40,000 – $22,792 = $17,208
3) Find T, the number of years from today that investment B is expected to pay $36,000
Mode is not relevant since PMT = 0
Enter
5.5
-17,208
0
36,000
N
I%
PV
PMT
FV
Solve for
13.79
Answers may vary slightly due to rounding
C. A number equal to or greater than 13.50 but less than 14.50
1