Multiple choice

1) The price of Gas is $3.39 in December 2011 and it was $4.10 in December 2008.  What is the average inflation rate for gas over these three years?

a)  6.14%

b)  5.77% 

c)   -6.14% 

d)   -5.77%

2) If you anticipate an annual inflation rate of 3.2% in the current economy, and can make an investment in a stock that is expected to appreciate at 12.0% compounded annually. What would be your inflation-free rate of return for this investment (pick the closest answer)?

a) 8.30%

b) 8.50%

c) 9.45%

d) 6.37%

3) A proposed project that requires an investment of $13,278 (year 0) is expected to generate a series of 4 equal annual net income of $6,000 each in constant dollars. Assuming the average inflation rate of 3.5%, and the market interest rate of 10% during this inflationary period, what is the equivalent net present worth (NPW) in actual dollars for this project?

a) $5,658

b) $7,380

c) $9,390

d) $7,277

4) Convert the Actual Dollar payment of $1,850 to be made 12 years from now into Constant Dollars to be made 12 years from now (given the inflation rate f = 3.5%, inflation-free interest rate i' = 7.5% annual).

a) $777

b) $514

c) $2,214

d) $1,224