1. (10 points) Annie lives in San Diego and is considering moving to take a new job in northern California. There are three work periods (years) remaining for Annie. Annie will earn $20,000 per year in each of the three periods (years) in San Diego and will earn $22,000 in each of the three periods (years) in northern California. Suppose the annual discount rate of 10 percent and, other than the earnings, there are no differences between the jobs or preference on where Annie lives.

a. Assume there are no costs to moving. Should Annie move to northern California or stay in San Diego? (Hint: Compare the present value of each alternative).

b. Now suppose that Annie would incurs some costs to move. What is the highest cost of moving that Annie is willing to incur and still move to northern California?

2. (6) You own an ice cream shop and are considering purchasing a fleet of new ice cream trucks to distribute your product. You expect the trucks to generate $100,000 in new sales per year for three years, at which time you can sell the fleet for $250,000. The interest rate is 7 percent. The trucks costs $475,000 paid up front (in the present). Explain how you would calculate the net present value of this investment to determine if it is a good investment.

3. (4 points) An investment in a company pays a guaranteed annual return in dividends (return) of $200 indefinitely (i.e., forever, into perpetuity). Suppose the interest is 5 percent. How much would an investor be willing to pay for this dividend? (Calculate the present value of the investment.)