Answer sheet – Catarina Oliveira

I. True or false
Question Answer Question Answer Questio Answer
n
1 T 6 T 11 T
2 T 7 F 12 T
3 T 8 T 13 F
4 T 9 T 14 T
5 T 10 F 15 T

II. Multiple Choice

Question Answer Question Answer
1 B 6 D
2 C 7 B
3 C 8 A
4 B 9 B
5 B 10 B

III. Short Answer and Calculation question

Show your work below:
1
a) To calculate the size of the quarterly payments
PV = PMT x (1 - (1 + r)^-n) / r
PV = present value of the debt
PMT = quarterly payment
r = 8% / 4 = 2%
n = 2 years x 4 quarters per year = 8
So
$10,000 = PMT x (1 - (1 + 0.02)^-8) / 0.02
Solving for PMT
PMT = $1,194.50
the size of the quarterly payments is $1,194.50.

b) After 3 pmts, there will still be 5 payments left. Finding the FV:
FV = PMT x ((1 + r)^n - 1) / r
PMT = 1,194.50
r = 2%
n=5
FV = $1,194.50 x ((1 + 0.02)^5 - 1) / 0.02
Solving for FV
FV = $6,734.51
the outstanding balance after three payments is $6,734.51.

2
For the used machine, there is only the initial cost of $280
For the new machine
- initial cost of $600
- savings of $5 per month on fuel = $60 per year
- resale value of $300 in 10 years
PV = C x ((1 - (1 + r)^-n) / r)
where PV is the present value, C is the cash flow, r = the interest rate
n is the number of periods.
PV of the savings on fuel for 10 years
savings = 60 x ((1 - (1 + 0.03/12)^-(10 x 12)) / (0.03/12)) = $629.07
PV of resale value in 10 years:
resale = 300 / (1 + 0.03)^10 = $231.07
PV of new machine
new = 600 + savings + resale = $1460.14
The new machine is more expensive. Therefore, we would choose the used machine for a cost of
$280.