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Key for Quant Exam Review 1 303

# Key for Quant Exam Review 1 303 - Key for Review 1 303 1...

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Key for Review 1 303 1. Contract 1: PV = = \$2,727,272.73 + \$2,479,338.84 + \$2,253,944.40 + \$2,049,040.37 = \$9,509,596.34. Using your financial calculator, enter the following data: CF 0 = 0; CF 1-4 = 3000000; I/YR = 10; NPV = ? Solve for NPV = \$9,509,596.34. Contract 2: PV = \$1,818,181.82 + \$2,479,338.84 + \$3,005,259.20 + \$3,415,067.28 = \$10,717,847.14. Alternatively, using your financial calculator, enter the following data: CF 0 = 0; CF 1 = 2000000; CF 2 = 3000000; CF 3 = 4000000; CF 4 = 5000000; I/YR = 10; NPV = ? Solve for NPV = \$10,717,847.14. Contract 3: PV = = \$6,363,636.36 + \$826,446.28 + \$751,314.80 + \$683,013.46 = \$8,624,410.90. Alternatively, using your financial calculator, enter the following data: CF 0 = 0; CF 1 = 7000000; CF 2 = 1000000; CF 3 = 1000000; CF 4 = 1000000; I/YR = 10; NPV = ? Solve for NPV = \$8,624,410.90. Contract 2 gives the quarterback the highest present value; therefore, he should accept Contract 2. 2. Bank A: I NOM = Effective annual rate = 4%. Bank B: Effective annual rate = – 1.0 = (1.000096) 365 – 1.0 = 1.035618 – 1.0 = 0.035618 = 3.5618%. With a financial calculator, you can use the interest rate conversion feature to obtain the same answer. You would choose Bank A because its EAR is higher. 3. 0 1 2 3 4 5 6 | | | | | | | 1,500 1,500 1,500 1,500 1,500 ? FV = 10,000 With a financial calculator, get a “ballpark” estimate of the years by entering I/YR = 8, PV = 0, PMT = 1500, and FV = 10000, and then pressing the N key to find N = 5.55

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