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quiz 1 C solutions 2011 6 fall

quiz 1 C solutions 2011 6 fall - FNAN 301 fall 2011 quiz 1...

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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
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FNAN 301, fall 2011, quiz 1, version C, solutions 2. Priya bought a new saxophone today from Music Box Corp. She will pay $400 today to Music Box, she will receive a rebate of $400 from Music Box in 2 years from today, and she will pay $2,600 to Music Box in 4 years from today. If the discount rate is 17.2 percent, then what is the present value of the cash flows associated with this transaction? Note: the correct answer is less than zero. Time 0 1 2 3 4 Cash flows -400 0 400 0 -2,600 Present value ? PV = C 0 + [C 1 /(1+r) 1 ] + [C 2 /(1+r) 2 ] + [C 3 /(1+r) 3 ] + [C 4 /(1+r) 4 ] C 0 = -400 C 1 = 0 C 2 = 400 C 3 = 0 C 4 = -2,600 r = .172 PV = -400 + [0/(1.172)] + [400/(1.172) 2 ] + [0/(1.172) 3 ] + [-2,600/(1.172) 4 ] = -400 + 0 + 291.21 + 0 + (-1,378.04) = -$1,486.83 Answers may differ slightly due to rounding 2
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FNAN 301, fall 2011, quiz 1, version C, solutions
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