1. In purchasing a new computer, you agree to pay $250 today and the remaining balance of $400 in one year. If the relevant interest rate is 3 percent, what is the net present value of the total purchase price? A. $638.35 B. $630.15 C. $626.00 D. $619.95 2. Suppose that you are enrolled in a retirement plan in your job, and you are given the choice of receiving either a one-time payment on the day of retirement or an annual payment amount to be received every year for the rest of your life. The lifetime annual payment is called an annuity, but you can view it as a perpetuity. Which of the following changes would make it more likely for you to choose the one-time payment? A. The amount offered for the one-time payment is reduced. B. The amount offered for the annuity is increased. C. You choose a lower relevant interest rate to discount the annuity payments. D. You choose a higher relevant interest rate to discount the annuity payments. 3. You have accepted an economics consulting project that will pay you on a contract basis. The contract offers you $25,000 to be paid today and $35,000 to be paid when the work is complete at the end of one year. You are not in need of much money up front, and you would rather have higher total compensation. You propose a counteroffer of $10,000 today and a larger final payment at the end of one year. If the relevant interest rate is 4 percent, what would the final payment be if the present value of the alternative contract is the same as that of the original contract? A. $62,347 B. $59,092 C. $56,483 D. $53,916 E. $50,600 4. You and a friend have developed a small machine that can easily clean carpeted stairs. You assign the following probabilities to the number of units you will sell in the first two years of operation. 25% probability of 100,000 units 25% probability of 130,000 units 50% probability of 150,000 units Assume the profit from these units will be received in two years, and the relevant interest rate is 4 percent. If your profit margin is $7 per unit, what is the expected present discounted value of your profit to be received in two years? A. $907,500 B. $879,292 C. $857,526 D. $834,601 E. $813,733 5. A drug company is considering investing $80 million today to bring a blood-pressure medication to the market. There is an 80% probability that the pill will sell at a high price and generate $7 million per year of profit forever. There is a 20% probability that the pill will sell at a low price and generate $3 million per year of profit forever. The relevant interest rate is 4%. What is the net present expected value of the investment? Keep in mind that you need to subtract today's investment expenditure from expected earnings. A. $86.4 million B. $75.0 million C. $67.1 million D. $60.4 million. E. $52.9 million 6. What is true for a person with a utility of wealth function given as U(W) = W.5? A. The person is risk-neutral. B. The person is risk-loving. C. The person would be willing to pay more than the actuarially fair premium for full insurance against a loss. D. The maximum amount the person would pay for full insurance against a loss would be the actuarially fair premium. E. The person would prefer to make an uncertain investment with an expected profit of $10,000 rather than having $10,000 for sure
