Mid-Term Exam Fall 2000 All questions are graded equally - A woman opened an account in a local store. In the charge account agreement, the store indicated it charges 1.5% each month on the unpaid balance. What nominal annual interest rate is being charged? What is the effective interest rate?
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- Draw a typical yield curve.
- Why has there been a recent drop in the stock price of Microsoft relative to comparable companies?
- Company A has P/E ratio of 10 with a PEG ratio of 10. Company B has a P/E ratio of 30 and a PEG ratio of 1.5. Compare these two companies.
- Iowa City will build a water treatment center. It can be built at a reduced size now for $100 million and be enlarged 20 years hence for an additional $150 million. An alternative is to construct the full-sized aqueduct now for $200 million. Both alternatives would provide the needed capacity for the 50-year analysis period. Maintenance costs are small and may be ignored. At 6% interest, which alternative should be selected, on the basis of net present value?
- Two machines are being compared with a view to purchase. Which machine should be purchased on the basis of incremental rate of return? Assume MARR is 5%, the period to be analyzed is 15 years and assume that the RoR for each alternative exceeds the MARR
A B Initial Cost 300,000 950,000 Annual benefit 125,000 190,000
Note: you need only show your working as an equation showing the shorthand form of the economic analysis (e.g. with terms in the form (P/F, i, n) ). Show your working clearly. |
