Econ 134A
Test 1, Form A
John Hartman
July 8, 2014
Instructions:
YOU WILL TURN IN YOUR SCANTRON AND THE PROBLEMS PAGE. MAKE SURE ALL
WORK AND ANSWERS ARE PROVIDED ON THESE.
You have 80 minutes to complete this test, unless you arrive late. Late arrival will lower the time
available to you, and you must finish at the same time as all other students.
Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant
authorities on this issue.
You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a
communication device. You are NOT allowed to have a calculator that stores formulas, buttons that
automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to
have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these
requirements, you will be assumed to be cheating.
Unless otherwise specified, you can assume the following:
 Negative internal rates of return are not possible.
 Equivalent annual cost problems are in real dollars.
You are allowed to turn in your test early if there are at least 10 minutes remaining. As a courtesy to your
classmates, you will not be allowed to leave during the final 10 minutes of the test.
Your test should have 12 multiple choice questions (24 points) and 2 problems (14 points). The maximum
possible point total is 24 points. If your test is incomplete, it is your responsibility to notify a proctor to
get a new test.
Grading:
For your reference, an example of a well-labeled graph is below:
Filling in scantron correctly, putting name, perm #, and
section day/time on problems page,
& having photo ID
___/1
(automatic unless something is incorrect)
Multiple choice portion
_____/24
Problems
_____/14
Total score
_____/39
MULTIPLE CHOICE: Answer the following questions on your scantron. Each correct answer is worth 2
points. All incorrect or blank answers are worth 0 points. If there is an answer that does not exactly
match the correct answer, choose the closest answer.
1. If a piece of real estate has a rate of return of 18% this year and inflation this year is 5%, then the
annual real rate of return is _______.
A. 12.4%
B. 13%
C. 17.95%
D. 23%
E. 23.9%
2. Lainey will receive $500 every 2 years, starting 5 years from now. Her stated annual interest rate is
10%, compounded yearly. What is the present value of these payments?
A. $2400
B. $2200
C. $2000
D. $1800
E. $1600
3. Maddie invests $1,000 in a project today, and receives $450 one year from now and $500 two years
from now. The profitability index of this project is 1.1, and Maddie receives the third and final positive
cash flow three years from today. How much will this cash flow be if her effective annual interest rate is
5%?
A. $50
B. $120
C. $135
D. $220
E. $250
4. Sunny is paying Samuel $10,000 today and she needs to figure out how much she will receive 5 years
from now. Samuel has promised to give Sunny the same real payment 5 years from now. In other words,
Sunny’s payment in 5 years will only adjust for inflation. If inflation over the next two years is 4%, and
8% after that, how much will Sunny receive?
A. $12,200
B. $12,600
C. $13,100
D. $13,600
E. $14,700
5. Tahlia deposits $1,000 into an account at an effective annual interest rate of 7.2%. How many years
until the $1,000 grows to $32,000?
A. 45
B. 50
C. 60
D. 120
E. 450
For the next two questions, assume that today is July 8, 2014. You invest $100,000 today. Find the future
values on the following dates, given the stated nominal annual interest rates and frequency of
compounding.
6. January 8, 2015, 12% interest rate, compounded monthly
A. $105,950 B. $106,000 C. $106,050 D. $106,100
E. $106,150
7. July 8, 2022, 8.5%, compounded continuously
A. $198,000 B. $196,000 C. $194,000
E. $190,000
D. $192,000
8. Brian invests in a project today and will receive multiple positive cash flows in the future. At an
effective annual interest rate of 14%, the project has a negative net present value (NPV). What can we
conclude if the effective annual interest rate is 12%?
A. The project must have a negative NPV
B. The project must have a NPV that is negative or zero
C. The project must have a positive NPV
D. The project must have a NPV that is positive or zero
E. The project could have a NPV that is positive, negative, or zero
9. Wally Wallace has won the Wonderful Lottery. The Wonderful Lottery pays out its prize in 5 payments
as follows:
 $5,000 two years, four years, and six years from today (3 payments)
 Payments made 8 and 10 years from today: Each of these payments is 21% higher than the
previous payment (2 payments)
What is the total present value of these payments if the effective annual interest rate is 10%?
A. Infinite
B. $21,000
C. $19,000
D. $16,000
E. $14,500
For the next three questions, use the following information: Henning is ready to buy a new van. In order
to do so, he will need to take out a loan today of $40,000. He will pay back the loan over 40 months. The
stated annual interest rate being charged to Henning is 10.8%, compounded monthly.
10. If the loan is amortized such that the amount of principal reduced each month is constant, how
much is the first payment?
A. $1400
B. $1300
C. $1200
D. $1100
E. $1000
11. If the loan is amortized such that all payments are constant, how much is the first payment?
A. $1400
B. $1300
C. $1200
D. $1100
E. $1000
12. If the loan is amortized such that the amount of principal reduced each month is constant, how
much is the last payment?
A. $1400
B. $1300
C. $1200
D. $1100
E. $1000
Name__________________________________ Perm #_______________________________
For the following problems, you will need to write out the solution. You must show all work to
receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least
four significant digits to each answer or you may not receive full credit for a correct solution. Show
all work in order to receive credit. You will receive partial credit for incorrect solutions in some
instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and
correct solution.
13. (6 points) Cab will receive $X every 6 months, starting 9 months from today, forever. His stated
annual interest rate is 7%, compounded continuously. Find X if the present value of all payments is
$10,000.
14. The Jivanator 3000 machine has a purchase price of $5000, and lasts for 8 years. The machine also
requires a single maintenance payment of $2000 five years from today. The effective annual interest rate
for this problem is 19%.
(a) (4 points) What is the equivalent annual cost of this machine?
(b) (4 points) If someone rented the machine and made 8 equal annual payments such that the present
value of the payments is the same as the present value of the cost of owning and maintaining the machine
over the next 8 years, how much would each payment have to be? Assume the first payment is made
today.