Question 1

To calculate the internal rate of return on a factory that would yield a perpetual future stream of income,one would divide

Accepted Answer

The internal rate of return (IRR) for a perpetual stream of income is calculated by dividing the annual future payment by the cost of the factory, which gives the rate at which the present value of the future income stream equals the cost of the investment.

Question 2

The question "What are you going to do with that major?" implicitly questions

Accepted Answer

The question about what someone will do with their major implicitly asks about the market value of the skills and knowledge developed through that major. It assumes that the primary purpose of a college education is to prepare someone for a career, and therefore asks whether the major will lead to job opportunities and financial success. This reflects a market-oriented perspective on higher education.

Question 3

Using the Internal Rate of Return approach to investment,one would undertake an investment if the internal rate of return

Accepted Answer

The Internal Rate of Return (IRR) approach to investment involves calculating the discount rate at which the net present value of an investment becomes zero. If the IRR exceeds the interest rate, then the investment is expected to generate a return that is higher than the cost of financing the investment. Therefore, the best choice is C, as it indicates that the investment is expected to be profitable. Choices A and D are incorrect, as an IRR of zero or less than the interest rate would indicate that the investment is not expected to generate a return that is higher than the cost of financing the investment. Choice B is also incorrect, as the interest rate is not necessarily indicative of the expected return on the investment.

Question 4

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.His benefit of a degree would be

Accepted Answer

The answer of At age 40,Joe is considering quitting his...

Question 5

With respect to events like global warming some economists suggest using falling discount rates because

Accepted Answer

Exponential discounting gives very low weight to costs incurred far into the future, which is not desirable in the case of events like global warming. Using falling discount rates would address this issue and give more weight to future costs.

Question 6

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.Which of the following makes it less likely that Joe will decide to go back to college full-time?

Accepted Answer

If the government enacts mandatory retirement at age 60, it would give Joe only 20 years to work with his new college degree instead of 30, making the investment less attractive.

Question 7

If a firm needs one machine to produce a product,and must replace the machine when it wears out,then the firm should pick a durability level of the machine that

Accepted Answer

The firm should choose a durability level that minimizes the present discounted cost of having the machine forever. This takes into account both the initial expense and the future value of the machine, as well as the time value of money. By minimizing the present discounted cost, the firm can ensure that it is making the most economically efficient decision for the long-term.

Question 8

Billy is considering the purchase of a rental house.The house costs $240,000 and it will generate annual revenues of $15,000 and annual expenses of $3,000.Nevertheless,Billy will need to borrow $240,000 at an interest rate of 7% per year in case he decides to make this investment.Should Billy purchase this house?

Accepted Answer

The annual interest on the loan is $240,000 * 7% = $16,800, which is higher than the net income from the property ($15,000 revenue - $3,000 expenses = $12,000 net income). Therefore, Billy will lose money.

Question 9

A bond issuer agrees to pay a stated nominal amount each year.An increase in the nominal interest rate will cause

Accepted Answer

An increase in the nominal interest rate will make the bond less attractive to investors as they can now earn a higher return elsewhere. As a result, they will demand a lower price for the bond, causing its price to fall.

Question 10

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.Which of the following makes it more likely that Joe will decide to go back to college full-time?

Accepted Answer

A lower interest rate decreases the opportunity cost of going back to school, making it more financially feasible for Joe to invest in his education.

Question 11

Suppose a new cost-saving device will forever generate $1,000 net savings per year to a firm.The device costs $10,000.Using the Internal Rate of Return approach,will the firm make the investment?

Accepted Answer

The Internal Rate of Return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. In this case, the IRR is 10% because the device generates a perpetual annual savings of $1,000 for a one-time cost of $10,000. Therefore, the firm will make the investment if the interest rate is less than 10%, as the return on the investment exceeds the cost of capital.

Question 12

An individual who wants to stop smoking but chooses not to

Accepted Answer

Choosing not to stop smoking despite wanting to reflects present bias, which is a tendency to prioritize immediate rewards or gratifications over long-term benefits or goals. It is not necessarily indicative of irrationality or uncontrollable addiction, although these factors may also play a role in the individual's decision-making.

Question 13

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.His cost of going back to college is

Accepted Answer

The answer of At age 40,Joe is considering quitting his...

Question 14

In using the Internal Rate of Return approach,one must first calculate the discount rate on the investment that makes

Accepted Answer

The Internal Rate of Return (IRR) is the discount rate at which the Net Present Value (NPV) of an investment becomes zero. Therefore, in order to use the IRR approach to evaluate an investment, the first step is to find the discount rate (IRR) that makes the NPV of the investment equal to zero. Choice A is the correct choice as it directly relates to finding the IRR. The other choices are incorrect as they do not relate to finding the discount rate (IRR).

Question 15

Assume a baseball player's development in the minor leagues yields -$250,000 per year for four years.If the player were to have a single big league season and be paid $350,000,how much revenue would the player need to generate to be considered a positive net present value project from the point of view of the team owner if the interest rate was 4%?

Accepted Answer

In order for the player's development to be a positive net present value project, the present value of the player's revenue must exceed the present value of the player's development costs. Using a 4% interest rate, the present value of the development costs over four years is approximately $984,423. Using the same interest rate, the present value of the player's $350,000 salary is approximately $327,722. Therefore, the player would need to generate at least $1,312,145 in revenue to be considered a positive net present value project. Given that the player generated -$250,000 per year in development costs, the total revenue needed for a positive net present value project would be $1,450,000 ($1,312,145 + $250,000 x 4 years). Thus, the answer is A) $1.45 million.

Question 16

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.From an investment standpoint,Joe will go back full-time if

Accepted Answer

The answer of At age 40,Joe is considering quitting his...

Question 17

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.If these are real amounts (adjusted for inflation),then the discount rate to be used should be

Accepted Answer

When considering inflation-adjusted amounts, it is important to use the real rate of interest. This accounts for the impact of inflation on both the costs and the benefits involved. Using the nominal rate of interest or rate of inflation alone would not provide an accurate assessment of the value of Joe's decision. The discount rate should reflect the real return on investment considering the inflation. Therefore, B is the best choice.

Question 18

Billy is considering the purchase of a rental house.The house costs $240,000 and it will generate annual revenues of $15,000 and annual expenses of $3,000.What is the internal rate of return of this investment?

Accepted Answer

The internal rate of return (IRR) is calculated by finding the discount rate that makes the net present value (NPV) of the cash flows from the investment equal to zero. The annual net cash flow is $15,000 - $3,000 = $12,000. The IRR is the rate at which the present value of these cash flows equals the initial investment of $240,000. Solving for IRR gives approximately 5%.

Question 19

Today John says: "I will start working out tomorrow." Yet,as tomorrow arrives he doesn't.This is an example of

Accepted Answer

This scenario is an example of time inconsistent preferences, where John's preference in the present is not consistent with his preference in the future. He intends to work out tomorrow but fails to follow through on his plan. This indicates a preference for present satisfaction over future benefits.

Question 20

If a bond's coupon adjusts to pay a constant real rate of return,then an increase in inflation would cause

Accepted Answer

If a bond's coupon adjusts to pay a constant real rate of return, then an increase in inflation would cause the nominal coupon payment to rise. This is because the coupon rate is tied to the real rate of return, so as inflation increases, the nominal coupon must also increase to maintain the same real rate of return.

Quiz 16: Interest Rates, Investments, and Capital Markets

To calculate the internal rate of return on a factory that would yield a perpetual future stream of income,one would divide

The question "What are you going to do with that major?" implicitly questions

Using the Internal Rate of Return approach to investment,one would undertake an investment if the internal rate of return

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.His benefit of a degree would be

With respect to events like global warming some economists suggest using falling discount rates because

If a firm needs one machine to produce a product,and must replace the machine when it wears out,then the firm should pick a durability level of the machine that

A bond issuer agrees to pay a stated nominal amount each year.An increase in the nominal interest rate will cause

Suppose a new cost-saving device will forever generate $1,000 net savings per year to a firm.The device costs $10,000.Using the Internal Rate of Return approach,will the firm make the investment?

An individual who wants to stop smoking but chooses not to

At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.His cost of going back to college is

In using the Internal Rate of Return approach,one must first calculate the discount rate on the investment that makes

Billy is considering the purchase of a rental house.The house costs $240,000 and it will generate annual revenues of $15,000 and annual expenses of $3,000.What is the internal rate of return of this investment?

Today John says: "I will start working out tomorrow." Yet,as tomorrow arrives he doesn't.This is an example of

If a bond's coupon adjusts to pay a constant real rate of return,then an increase in inflation would cause