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UGBA 103 Quiz #1 Individual Decision Making
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UGBA 103Quiz #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?
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