Deck 5: Choices Involving Time and Profit Maximization

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

Answer 1

$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

Answer 2

$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

Answer 3

$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

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%

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%

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

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

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

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?

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

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