UGBA 103
Quiz #1: Individual Decision Making
There are SEVEN questions in this quiz. Please complete all parts. For your
reference, the present value of a T period annuity, with a per period discount
rate of r and payments equal to C, that are growing at rate g is
" T #
C 1+g
PV = 1− .
r−g 1+r
YOUR Name GSI’s Name
1. You are considering purchasing a new truck that will cost you $34,000.
The dealer offers you 1.9% APR financing for 48 months (with payments
made at the end of the month). Assuming you finance the entire $34,000
and finance through the dealer, what will your monthly payments be?
Solution: First we need the monthly interest rate = APR/k = .019/12
= .001583 or .1583%. Using the annuity formula: 34000 = P M T ×
1 1
( 0.001583 ) × (1 − (1.001583)48 ).So PMT = $736.15
2. The interest on James Taggart’s credit card balances are compounded
daily at an effective annual rate of 14.91%. What is the APR on his credit
card?
R 365
Solution: You are told that (1 + 0.01491) = 1 + AP
365 . Thus, the APR
1
on his credit card is ((1 + 0.1491) 365 − 1) × 365 = 0.139006
3. Suppose you deposit $500 in an account at the end of each of the next five
years. If the account earns 4% annually, how much will be in the account
at the end of ten years?
The present value is
500 1
PV = 1−
0.04 1.045
At the end of 10 years, this is worth: P V (1.04)10 . Thus, PV = 2225.91
and FV = 3294.89
4. Food For Less (FFL), a grocery store, is considering offering one hour
photo developing in their store. The firm expects that sales from the
new one hour machine will be $150,000 per year. FFL currently offers
overnight film processing with annual sales of $100,000. While many of
the one hour photo sales will be to new customers, FFL estimates that
60% of their current overnight photo customers will switch and use the
one hour service.
(a) What is the level of incremental sales associated with introducing the
new one hour photo service?
Quiz #1: Individual Decision Making
There are SEVEN questions in this quiz. Please complete all parts. For your
reference, the present value of a T period annuity, with a per period discount
rate of r and payments equal to C, that are growing at rate g is
" T #
C 1+g
PV = 1− .
r−g 1+r
YOUR Name GSI’s Name
1. You are considering purchasing a new truck that will cost you $34,000.
The dealer offers you 1.9% APR financing for 48 months (with payments
made at the end of the month). Assuming you finance the entire $34,000
and finance through the dealer, what will your monthly payments be?
Solution: First we need the monthly interest rate = APR/k = .019/12
= .001583 or .1583%. Using the annuity formula: 34000 = P M T ×
1 1
( 0.001583 ) × (1 − (1.001583)48 ).So PMT = $736.15
2. The interest on James Taggart’s credit card balances are compounded
daily at an effective annual rate of 14.91%. What is the APR on his credit
card?
R 365
Solution: You are told that (1 + 0.01491) = 1 + AP
365 . Thus, the APR
1
on his credit card is ((1 + 0.1491) 365 − 1) × 365 = 0.139006
3. Suppose you deposit $500 in an account at the end of each of the next five
years. If the account earns 4% annually, how much will be in the account
at the end of ten years?
The present value is
500 1
PV = 1−
0.04 1.045
At the end of 10 years, this is worth: P V (1.04)10 . Thus, PV = 2225.91
and FV = 3294.89
4. Food For Less (FFL), a grocery store, is considering offering one hour
photo developing in their store. The firm expects that sales from the
new one hour machine will be $150,000 per year. FFL currently offers
overnight film processing with annual sales of $100,000. While many of
the one hour photo sales will be to new customers, FFL estimates that
60% of their current overnight photo customers will switch and use the
one hour service.
(a) What is the level of incremental sales associated with introducing the
new one hour photo service?
