Question 1

A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value?
A)Option A
B)Option B
C)Option C
D)The answer depends on the rate of interest, which is not specified here.

Accepted Answer

The answer of A firm has three different investment options....

Question 2

A firm has four different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $5 million at the end of one year, $10 million at the end of two years, and $15 million at the end of three years. Option C will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option D will give the firm $21 million at the end of one year, nothing at the end of two years, and $9 million at the end of three years. Which of these options has the highest present value if the rate of interest is 5 percent?
A)Option A
B)Option B
C)Option C
D)Option D

Accepted Answer

The answer of A firm has four different investment options....

Question 3

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?
A)5 percent
B)4 percent
C)3 percent
D)2 percent

Accepted Answer

The answer of Dobson Construction has an investment project that...

Question 4

A car salesperson gives you four alternative ways to pay for your car. The first is to pay $18,000 today. The second is to pay $19,000 one year from today. The third is to pay $20,300 two years from today. The fourth is to pay $21,500 three years from today. If the interest rate is 6 percent, which payment option has the lowest present value and which has the highest?
A)The first is lowest; the second is highest.
B)The second is lowest; the third is highest.
C)The third is lowest; the fourth is highest.
D)The fourth is lowest; the first is highest.

Accepted Answer

The answer of A car salesperson gives you four alternative...

Question 5

A firm has three different investment options, each costing $10 million. Option A will generate $12 million in revenue at the end of one year. Option B will generate $15 million in revenue at the end of two years. Option C will generate $18 million in revenue at the end of three years. Which option should the firm choose?
A)Option A
B)Option B
C)Option C
D)The answer depends on the rate of interest, which is not specified here.

Accepted Answer

The answer of A firm has three different investment options,...

Question 6

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?
A)7%
B)6%
C)5%
D)It is not profitable at any of these interest rates.

Accepted Answer

The answer of Halvorson Construction has an investment project that...

Question 7

Other things the same, when the interest rate rises, the present value of future revenues from investment projects
A)rises, so investment spending rises.
B)falls, so investment spending rises.
C)rises, so investment spending falls.
D)falls, so investment spending falls.

Accepted Answer

The answer of Other things the same, when the interest...

Question 8

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?
A)7 percent
B)8 percent
C)9 percent
D)10 percent

Accepted Answer

The answer of A University of Iowa basketball standout is...

Question 9

The K-Nine dog food company is considering the purchase of additional canning equipment. They expect that adding the equipment will yield $200,000 at the end of the first year and $250,000 at the end of the second year and then nothing after that. At which of the following prices and interest rates would K-Nine buy the equipment?
A)$415,000 if the interest rate is 5%
B)$419,000 if the interest rate is 4%
C)K-Nine would buy the equipment in both cases.
D)K-Nine would not buy the equipment in either case.

Accepted Answer

The answer of The K-Nine dog food company is considering...

Question 10

Black Oil Company considered building a service station in a new location. The owners and their accountants decided that this was the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the station changed. In which case do these changes both make it less likely that they will now build the station?
A)Interest rates rise and the cost of building the station rises.
B)Interest rates rise and the cost of building the station falls.
C)Interest rates fall and the cost of building the station rises.
D)Interest rates fall and the cost of building the station falls.

Accepted Answer

When interest rates and the cost of building the station both rise, it becomes more expensive to borrow money to finance the construction of the station and the overall cost of building the station increases. This decreases the potential profitability of the project, making it less likely that the company will choose to build the station.

Question 11

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project
A)is now lower than it was before, and so Hydro Grow is less likely to build the building.
B)is now lower than it was before, and so HydroGrow is more likely to build the building.
C)is now higher than it was before, and so HydroGrow is less likely to build the building.
D)is now higher than it was before, and so HydroGrow is more likely to build the building.

Accepted Answer

The present value of the returns from the investment project decreases when the interest rate increases. This means that the project is less profitable and HydroGrow is less likely to build the greenhouse.

Question 12

Sometimes On Time (SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either
A)a decrease in the price of a new jet or a decrease in the interest rate.
B)a decrease in the price of a new jet or an increase in the interest rate.
C)an increase in the price of a new jet or a decrease in the interest rate.
D)an increase in the price of a new jet or an increase in the interest rate.

Accepted Answer

If there is a decrease in the price of a new jet, it will make it more affordable for SOT Airlines to buy one. Additionally, if there is a decrease in the interest rate, it will mean that SOT will have to pay less in interest on the loan they take out to buy the jet, making it more financially feasible for them to do so. Therefore, either of these factors alone would make SOT Airlines more likely to buy a new jet, and together they would make it even more likely.

Question 13

Ronaldo's Foods considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store?
A)Interest rates rise and the cost of building the store rises.
B)Interest rates rise and the cost of building the store falls.
C)Interest rates fall and the cost of building the store rises.
D)Interest rates fall and the cost of building the store falls.

Accepted Answer

The answer of Ronaldo's Foods considered building a store in...

Question 14

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting
A)the present value of the factory rises. It's more likely the company will build the factory.
B)the present value of the factory rises. It's less likely the company will build the factory.
C)the present value of the factory falls. It's more likely the company will build the factory.
D)the present value of the factory falls. It's less likely the company will build the factory.

Accepted Answer

The answer of The You Look Marvelous! cosmetic company is...

Question 15

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,
A)the present value of the returns from the mill will fall, so Allen will be less likely to build the mill.
B)the present value of the returns from the mill will fall, so Allen will be more likely to build the mill.
C)the present value of the returns from the mill will rise, so Allen will be less likely to build the mill.
D)the present value of the returns from the mill will rise, so Allen will be more likely to build the mill.

Accepted Answer

The present value of the returns from the mill is directly related to the interest rate. As the interest rate rises, the present value of those returns falls. This means that the potential profitability of building the mill decreases, making it less likely for Allen Steel Company to pursue the project. Therefore, choice A is the correct answer.

Question 16

Happy Trails, a bicycle rental company, is considering purchasing three additional bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase to their revenues would be $140 per bicycle. At the end of the second year the increase to their revenues again would be $140 per bicycle. Thereafter, there are no increases to their revenues. At which of the following interest rates is the sum of the present values of the additional revenues closest to the price of a bicycle?
A)5 percent
B)6 percent
C)7 percent
D)8 percent

Accepted Answer

The answer of Happy Trails, a bicycle rental company, is...

Question 17

Yoyo's Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that this will give them $50,000 of additional revenue at the end of one year, $60,000 additional revenue at the end of two years, and $70,000 in additional revenue at the end of three years. If the interest rate is 5 percent, Yoyo would be willing to pay
A)$140,000, but not $150,000.
B)$150,000, but not $160,000.
C)$160,000, but not $170,000.
D)$170,000, but not $180,000.

Accepted Answer

To determine the present value of the additional revenue generated by the new warehouse, we need to discount the future cash flows back to the present using the interest rate of 5%.

Using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the discount rate, and n is the number of periods:

PV(1 year) = $50,000 / (1 + 0.05)^1 = $47,619.05
PV(2 years) = $60,000 / (1 + 0.05)^2 = $52,154.19
PV(3 years) = $70,000 / (1 + 0.05)^3 = $56,678.28

The total present value of the additional revenue is therefore:

PV = $47,619.05 + $52,154.19 + $56,678.28 = $156,451.52

Yoyo's maximum willingness to pay should be the present value of the additional revenue. Since $156,451.52 is below $160,000 and above $150,000, the best choice is C) $160,000, but not $170,000.

Question 18

Markovich Corporation is considering building a new plant. It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today. Of the interest rates below, which is the highest interest rate at which Markovich still would be willing to build the plant?
A)3 percent
B)3.5 percent
C)4 percent
D)4.5 percent

Accepted Answer

The answer of Markovich Corporation is considering building a new...

Question 19

Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?
A)Interest rates rise and truck prices rise.
B)Interest rates fall and truck prices rise.
C)Interest rates rise and truck prices fall.
D)Interest rates fall and truck prices fall.

Accepted Answer

When interest rates rise, the cost of borrowing money to buy the truck increases, making it less affordable. Similarly, when truck prices rise, the initial investment required also increases. Both these factors together make it less likely for Mixster Concrete Company to proceed with the purchase.

Question 20

Which of the following is correct if the interest rate is 6 percent?
A)$215 to be received a year from today has a present value of over $200; $420 a year from now has a present value over $400.
B)$215 to be received a year from today has a present value of over $200; $420 a year from now has a present value under $400.
C)$215 to be received a year from today has a present value of under $200; $420 a year from now has a present value over $400.
D)$215 to be received a year from today has a present value of under $200; $420 a year from now has a present value under $400.

Accepted Answer

The present value of future cash flows decreases as the interest rate increases. Therefore, $215 to be received a year from today will have a present value over $200 and $420 a year from now will have a present value under $400 if the interest rate is 6 percent.

Quiz 27: Tools of Finance

Dobson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. Among the following interest rates, which is the highest one at which Dobson would find this project profitable?

Halvorson Construction has an investment project that would cost $150,000 today and yield a one-time payoff of $167,000 in three years. What is the highest interest rate at which Halvorson would find this project profitable?

Other things the same, when the interest rate rises, the present value of future revenues from investment projects

HydroGrow is considering building a new greenhouse in which to grow tomatoes. The board meets and decides that this is the right thing to do. Before they can put their plans into action, the interest rate increases. The present value of the returns from this investment project

Sometimes On Time (SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either

The You Look Marvelous! cosmetic company is considering building a new shampoo factory. Its accountants and board of directors meet and decide that it is not a good idea to build the factory. If interest rates fall after the meeting

Allen Steel Company is considering whether to build a new mill. If the interest rate rises,

Markovich Corporation is considering building a new plant. It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today. Of the interest rates below, which is the highest interest rate at which Markovich still would be willing to build the plant?

Which of the following is correct if the interest rate is 6 percent?