Question 1

Suppose you borrow $1,000 at 8% for 2 years. If the interest is compounded annually, how much money will you owe at the end of those 2 years?
A) $1,080.00
B) $1,160.00
C) $1,166.40
D) $1,345.60

Accepted Answer

The amount owed can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount ($1,000), r is the annual interest rate (8% or 0.08), n is the number of times that interest is compounded per year (1, since it's annually), and t is the time the money is invested or borrowed for in years (2). Plugging in the values: A = 1000(1 + 0.08/1)^(1*2) = 1000(1.08)^2 = $1,166.40.

Question 2

Suppose you lend $2,500 at 11.5% for 3 years. If the interest is compounded annually, how much interest will you receive in those 3 years?
A) $862.50
B) $965.49
C) $3,362.50
D) $2,465.49

Accepted Answer

The interest can be calculated using the formula for compound interest: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount ($2,500), r is the annual interest rate (11.5% or 0.115), n is the number of times that interest is compounded per year (1, since it's compounded annually), and t is the time the money is invested for in years (3). Plugging in the values: A = 2500(1 + 0.115/1)^(1*3) = 2500(1.115)^3 ≈ $3,465.49. The interest earned is the final amount minus the principal: $3,465.49 - $2,500 = $965.49.

Question 3

Suppose the interest rate is 6% and compounded annually. What is the present discounted value of 6 monthly payments of $150?
A) $855.00
B) $877.50
C) $884.46
D) $900.00

Accepted Answer

The present discounted value of a series of payments can be calculated using the formula for the present value of an annuity. Given that the interest rate is 6% annually, for monthly compounding, we adjust this to a monthly rate of 0.5% (6% / 12 months). However, since the compounding is annual, we'll calculate the present value using the annual rate directly for each payment, adjusting the time period for each. The formula for the present value of a single payment is PV = FV / (1 + r)^n, where PV is the present value, FV is the future value (payment amount), r is the interest rate per period, and n is the number of periods. Summing up the present values of all individual payments gives us the total present value of the annuity. Calculating this for each of the 6 payments, taking into account their respective time periods until payment (from 1 month to 6 months), and discounting them back to the present at the annual rate (but adjusted monthly for calculation), gives us the closest value to $884.46.

Question 4

Assume the interest rate is 5%. What is the present discounted value of a $1,000 bond that pays a $50 coupon each year for 10 years?
A) $989.91
B) $999.91
C) $1,000.00
D) $1,009.99

Accepted Answer

The present discounted value (PDV) of a bond that pays a fixed coupon each year can be calculated by summing the present value of all future coupon payments and the present value of the bond's face value at maturity. In this case, the bond pays a $50 coupon each year for 10 years and has a face value of $1,000. The PDV of the bond is calculated using the formula for the present value of an annuity (for the coupon payments) plus the present value of a lump sum (for the bond's face value). Given the interest rate is 5%, the exact calculation would show that the bond's present value is designed to be $1,000, which is its face value, assuming the market interest rate matches the coupon rate.

Question 5

If a bank is lending money at 6.25% while the government is lending money at 8.25% and the rate of inflation is 3.5%, what is the real interest being earned by the bank?
A) 2.00%
B) 2.66%
C) 2.75%
D) 6.25%

Accepted Answer

The real interest rate is calculated by subtracting the inflation rate from the nominal interest rate. Therefore, 6.25% - 3.5% = 2.75%.

Question 6

If the real interest rate is 7.5% and the rate of inflation is 3%, what is the nominal interest rate?
A) 4.50%
B) 4.57%
C) 10.50%
D) 10.73%

Accepted Answer

The nominal interest rate is the sum of the real interest rate and the rate of inflation. So, 7.5% + 3% = 10.5%.

Question 7

Suppose you make a $5,000 investment that will return $3,000 in year 2 and another $3,500 in year 4. With an interest rate of 4.5%, what is the NPV of this project?
A) $247.34
B) $682.15
C) $1,500.00
D) $2,162.50

Accepted Answer

The answer of Suppose you make a $5,000 investment that...

Question 8

-Refer to Scenario above. What is Jennifer's opportunity cost of one year of college?
A) $12,000
B) $17,000
C) $35,000
D) $47,000

Accepted Answer

Jennifer's opportunity cost of one year of college includes the tuition fee of $12,000 and the foregone salary of $35,000, totaling $47,000.

Question 9

-Refer to Scenario above. What is the net present value of the decision to go to invest in college?
A) $10,742.71
B) $11,141.18
C) $11,655.84
D) $12,088.18

Accepted Answer

The net present value (NPV) of an investment is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. Without the specific details of the scenario, such as the cash flows, discount rate, and initial investment, it's impossible to provide a detailed explanation. However, the correct answer to the question, based on the provided choices, is C) $11,655.84. This would have been calculated by taking into account the costs of the college investment and the expected future earnings, discounted back to their present value.

Question 10

The Table below shows net cash flows for 3 mutually exclusive projects from which a company can choose. Each project requires an investment in the first year, then produces a positive net cash flow for each of the following four years. Assuming an interest rate of 5%, which project would the company choose?
 Does the best project have the highest total net cash flow?
 The shortest payback period?

Accepted Answer

The answer of The Table below shows net cash flows...

Question 11

-Refer to Figure above. What is Dan's total profit assuming he is producing both products at their profit-maximizing sales quantities?
A) $3,600
B) $4,000
C) $4,400
D) $4,500

Accepted Answer

The answer of 
-Refer to Figure above. What is Dan's...

Question 12

-Refer to Figure above. If he only produced gloves, what would Dan's profit be if he produces the profit-maximizing quantity?
A) $2,000
B) $2,200
C) $2,500
D) $3,100

Accepted Answer

Dan's profit would be $2,500 if he produces the profit-maximizing quantity of gloves. This is determined by calculating total revenue minus total costs at the quantity where marginal cost equals marginal revenue.

Quiz 5: Choices Involving Time and Profit Maximization

Suppose you borrow $1,000 at 8% for 2 years. If the interest is compounded annually, how much money will you owe at the end of those 2 years?

Suppose you lend $2,500 at 11.5% for 3 years. If the interest is compounded annually, how much interest will you receive in those 3 years?

Suppose the interest rate is 6% and compounded annually. What is the present discounted value of 6 monthly payments of $150?

Assume the interest rate is 5%. What is the present discounted value of a $1,000 bond that pays a $50 coupon each year for 10 years?

If a bank is lending money at 6.25% while the government is lending money at 8.25% and the rate of inflation is 3.5%, what is the real interest being earned by the bank?

If the real interest rate is 7.5% and the rate of inflation is 3%, what is the nominal interest rate?

Suppose you make a $5,000 investment that will return $3,000 in year 2 and another $3,500 in year 4. With an interest rate of 4.5%, what is the NPV of this project?

-Refer to Scenario above. What is Jennifer's opportunity cost of one year of college?

-Refer to Scenario above. What is the net present value of the decision to go to invest in college?

-Refer to Figure above. What is Dan's total profit assuming he is producing both products at their profit-maximizing sales quantities?

-Refer to Figure above. If he only produced gloves, what would Dan's profit be if he produces the profit-maximizing quantity?