Question 1

The interest rate is 10% and is expected to stay constant at that level forever.The present discounted value of $50,000 a year forever starting today is

Accepted Answer

The present discounted value formula is: 
Present value = Cash flow / (interest rate * discount factor)

Since the interest rate is expected to stay constant forever, the discount factor is simply 1 / (1 + i) = 1 / (1 + 0.1) = 0.9091.

Therefore, the present discounted value of $50,000 a year forever starting today is:
Present value = $50,000 / (0.1 * 0.9091) = $550,000.

So, the best choice is B.

Question 2

According to a recent story in the New York Times, the South African gold strike has been costing South African mining companies about $7.5 million per day.Assuming that this number is the value of the gold that was not mined because of the strike, minus the labor costs (and other operating costs)that are saved by shutting down the mines, what is wrong with this calculation?

Accepted Answer

The answer of According to a recent story in the...

Question 3

If the interest rate is 18%, and will remain 18% forever, how much would a rational investor be willing to pay for an asset that will pay him 9,440 dollars 1 year from now, 1,392 dollars 2 years from now, and nothing at any other time?

Accepted Answer

To find the present value of the future cash flows, we discount each payment back to the present using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods. For the 9,440 dollars 1 year from now, PV = 9440 / (1 + 0.18)^1 = 8000. For the 1,392 dollars 2 years from now, PV = 1392 / (1 + 0.18)^2 = 1000. Adding these together, 8000 + 1000 = 9000 dollars.

Question 4

A certain wine costs $3 a bottle to produce.The amount that people are willing to pay to drink it t years after it has been bottled is $2 + 3t.Storage costs, not including interest, are $.50 per year.If the interest rate is 5%, how much would a rational investor be willing to pay for it at the time it is bottled? Explain how you got your answer.Feel free to write formulas for present value calculations without working out the numerical answer if it involves long calculations.(Hint: How long would the wine be kept before it is drunk? At what price would it sell?)

Accepted Answer

The answer of A certain wine costs $3 a bottle...

Question 5

The interest rate is 10% and will remain 10% forever.Suppose that you do not drink wine but are interested in buying it for investment purposes.How much would you be willing to pay for each of the following?
a.A bottle of wine that will be worth $22 a year from now and will then go bad and be worthless.
b.A bottle of wine that will be worth $22 a year from now and will rise in value by $1 a year forever? Explain your answer.

Accepted Answer

The answer of The interest rate is 10% and will...

Question 6

Suppose that the cost of personal computers falls by 20% per year.To make this problem relatively easy, we will assume that their quality does not change and that computers never wear out.You plan to get one sometime.What is the rational way to decide when to buy one?

Accepted Answer

The answer of Suppose that the cost of personal computers...

Quiz 10: Asset Markets-Part A

The interest rate is 10% and is expected to stay constant at that level forever.The present discounted value of $50,000 a year forever starting today is

If the interest rate is 18%, and will remain 18% forever, how much would a rational investor be willing to pay for an asset that will pay him 9,440 dollars 1 year from now, 1,392 dollars 2 years from now, and nothing at any other time?

Suppose that the cost of personal computers falls by 20% per year.To make this problem relatively easy, we will assume that their quality does not change and that computers never wear out.You plan to get one sometime.What is the rational way to decide when to buy one?