Deck 4: Investment Decisions: Look Ahead and Reason Back

Question 1

​If the annual interest rate is 10%,the net present value of receiving $550 in the next year is:

A)​$550
B)$551
C)$549
D)​$500

Answer 1

A

Question 2

​Lucy invested $10,000 at the rate of 12%.According to the rule of 72,it would take ______ years for her money to double

A)​4
B)5
C)6
D)​7

Answer 2

C

Question 3

​A publisher is deciding whether or not to invest in a new printer.The printer would cost $500,and it would increase cash flows by $600 for the next two years.If the cost of capital is 10% then the net present value of the investment is

A)​$1041.32
B)$541.32
C)$1090.91
D)​$590.91

Answer 3

B

Question 4

​The government is looking to double the living standards of its population in 18 years,what rate of GDP growth would it need to achieve that?

A)​1%
B)2%
C)3%
D)​4%

Question 5

​If the cost of capital increased to 25%,would the firm invest in the printer?

A)​Yes because the NPV>0
B)Yes because the NPV=0
C)Need information on the marginal benefits and costs
D)​No because the NPV<0

Question 6

​Use the following setup for the next four questions.
A publisher is deciding whether or not to invest in a new printer.The printer would cost $900,and would increase the cash flows in year 1 by $500 and in year 3 by $800.Cash flows do not change in year 2.If the interest rate is 12%
​Is the investment in the new printer feasible?

A)​Yes since NPV>0
B)No since NPV<0
C)Yes since the present value of the cash flows is greater than zero
D)​No since the present value of the cash flows is lesser than zero

Question 7

​Use the following setup for the next four questions.
A publisher is deciding whether or not to invest in a new printer.The printer would cost $900,and would increase the cash flows in year 1 by $500 and in year 3 by $800.Cash flows do not change in year 2.If the interest rate is 12%
​If the interest rate is 25%,but cash flows change such that the investment renders a cash flow of $500 in year 1 and $800 in year 2 instead of year 3,would the investment take place?

A)​Yes since NPV>0
B)No since NPV<0
C)Yes since the present value of the cash flows is greater than zero
D)​No since the present value of the cash flows is lesser than zero

Question 8

​A publisher is deciding whether or not to invest in a new printer.The printer would cost $900,and would increase the cash flows in year 1 by $500 and in year 3 by $800.Cash flows do not change in year 2.If the interest rate is 12%,what is the present value of the cash flows from the investment?

A)​$155.59
B)$1015.85
C)$1076.56
D)​$346.78

Question 9

​Use the following setup for the next four questions.
A publisher is deciding whether or not to invest in a new printer.The printer would cost $900,and would increase the cash flows in year 1 by $500 and in year 3 by $800.Cash flows do not change in year 2.If the interest rate is 12%
​If the interest rate rises to 25% would the investment still take place?

A)​Yes since NPV>0
B)No since NPV<0
C)Yes since the present value of the cash flows is greater than zero
D)​No since the present value of the cash flows is lesser than zero

Question 10

​According to the Net Present Value (NPV)rule,managers choose to invest if

A)​The NPV of the project is less than zero
B)The NPV of the project is greater than zero
C)The NPV of the project is equal to zero
D)​The NPV of the project is equal to the cost of capital

Question 11

​Ricky is thinking about borrowing $10,000 from Fred.He promises Fred cash flows of $5000 for the next three years.If Fred's cost of capital is 10%,what is the present value of the stream of cash flows?

A)​$9873.45
B)$12,434.26
C)$11,342.76
D)​$8677.69

Question 12

​If GDP is expected to increase at a steady rate of 3% per year,how many years would it take for living standards to double?

A)​10
B)20
C)24
D)​30

Question 13

​If the annual interest rate is 0%,the net present value of receiving $550 in the next year is

A)​$550
B)$551
C)$549
D)​$500

Question 14

​The higher the interest rates

A)​the more value individuals place on future dollars
B)the more value individuals place on current dollars
C)individuals do not place any importance on either current or future dollars
D)​does not affect the investment strategy

Question 15

​Use the following setup for the next four questions.
A publisher is deciding whether or not to invest in a new printer.The printer would cost $900,and would increase the cash flows in year 1 by $500 and in year 3 by $800.Cash flows do not change in year 2.If the interest rate is 12%
​What is the net present value of the investment?

A)​$115.85
B)$1055.59
C)$1076.56
D)​$346.78

Question 16

​Use the following setup for the next two questions.
A manufacturing firm is deciding whether or not to invest in a new printer that needs an initial investment of $150,000.The investment would increase cash flows in the first year by $80,000 and in the second year by $75,000.
​If the interest rate is 10% then the net present value of the investment is

A)​$5,000
B)- $9,091
C)-$15,290
D)​-$21,901

Question 17

​The lower the interest rates

A)​the more value individuals place on future dollars
B)the less value individuals place on future dollars
C)less investments will take place
D)​does not affect the investment strategy

Question 18

​A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal costs are $15.The firm currently charges $18 per unit.If the interest rate is 5% then the present value of the cash flows is

A)​$6,020.41
B)$51,020.41
C)-$7,380.95
D)​$10,000

Question 19

​If the interest rate is 11%,$1500 received at the end of 12 years is worth how much today?

A)​1500*(1+0.11)^12
B)1500/(1 +0 .11)^12
C)1500/(1 + 11)^12
D)​1500

Question 20

​A publisher is deciding whether or not to invest in a new printer.The printer would cost $500,and it would increase cash flows by $600 for the next two years.What is the present value of the cash flows from the investment?

A)​$1100
B)$541
C)$600
D)​$1041

Question 21

​Contribution margin is

A)​the contribution of each unit sold towards covering the fixed costs
B)the contribution of each unit sold towards covering the variable costs
C)the contribution of each unit sold towards covering the average variable costs
D)​All of the above

Question 22

​Break-even quantity is a point where

A)​the level of profit is maximized
B)the level of cost is minimized
C)Only variable costs are covered
D)​There are zero profits

Question 23

​Use the following setup for questions
A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
​If the interest is 5%,should the firm undertake the investment?

A)​Yes,since NPV=0
B)Yes,since NPV<0
C)Yes,since NPV>0
D)​No,since NPV=0

Question 24

​Which of the following will increase the price needed to break even?

A)​A decrease in overall fixed costs
B)A decrease in the marginal costs
C)An increase in fixed costs
D)​An increase in the level of production

Question 25

​A business produces 5,000 units per month.It spends $12,000 on raw materials.It pays wages of $20,000.Other costs include $50,000 for rent,paid by the month.In order to break even the selling price per unit will have to be:

A)​$25.20
B)$16.4
C)$20.30
D)​$28

Question 26

​Use the following setup for questions
A firm's fixed costs are $10 million.It sets the price at $1800 per unit and has marginal costs of $1,000.
​What is the firm's contribution margin?

A)​$1800
B)$800
C)$1000
D)​$300

Question 27

​Projects with a positive NPV create

A)​economic profits since they earn a return higher than the company's cost of capital
B)economic profits since they earn a return lower than the company's cost of capital
C)accounting profits only since they earn a return higher than the company's cost of capital
D)​accounting profits only since they earn a return lower than the company's cost of capital

Question 28

​Which of the following will decrease the break-even quantity?

A)​Falling fixed costs
B)Increasing marginal costs
C)An increase in the price
D)​Both A&C

Question 29

​The break-even quantity is

A)​Fixed Costs/Price
B)Fixed Costs/Marginal Cost
C)Fixed Costs/(Price - Marginal Costs)
D)​Contribution Margin/Fixed Costs

Question 30

​Which of the following defines a sunk cost?

A)​Cost of the next best alternative
B)Cost of producing an additional unit
C)An asset with no scrap value
D)​Total cost of producing a product

Question 31

​Use the following setup for questions
A firm's fixed costs are $10 million.It sets the price at $1800 per unit and has marginal costs of $1,000.
​What's the firm's contribution margin per unit?

A)​$12
B)$10
C)$8
D)​$4

Question 32

​Use the following setup for questions
A firm's fixed costs are $10 million.It sets the price at $1800 per unit and has marginal costs of $1,000.
​The break-even quantity is

A)​1250
B)625
C)416.67
D)​500

Question 33

​Use the following setup for questions
A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
​If the cost of capital is 5% then the net present value of the investment is

A)​$6,020.41
B)$7,380.95
C)-$7,380.95
D)​$10,000

Question 34

​Use the following setup for questions
A firm's fixed costs are $10 million.It sets the price at $1800 per unit and has marginal costs of $1,000.
​The break-even quantity is

A)​10000
B)5,555
C)12,500
D)​5,000

Question 35

​A business produces 4,000 units per month which it sells at $20/unit.Costs include: $10,000 on raw materials,$15,000 in wages for operators and $10,000 in wages to sales people.If the business is just breaking even,what are its fixed costs:

A)​$35,000
B)$40,000
C)$45,000
D)​$50,000

Question 36

​Use the following setup for the next two questions.
A manufacturing firm is deciding whether or not to invest in a new printer that needs an initial investment of $150,000.The investment would increase cash flows in the first year by $80,000 and in the second year by $75,000.
​If the cost of the capital is 9%,is the investment feasible?

A)​Yes because the NPV>0
B)Yes because the NPV=0
C)No because the NPV<0           
D)​Need information on the marginal benefits and costs

Question 37

​Which of the following variables are needed to determine the break-even quantity?

A)​Marginal costs
B)Fixed Costs
C)Selling Price
D)​All of the above

Question 38

​If a firm sells more than the break-even quantity,

A)​It will make a profit
B)It will only cover the variable costs
C)It will make a loss
D)​A firm is unable to sell above the break-even quantity

Question 39

​Use the following setup for questions
A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
​Ricky is thinking about borrowing $10,000 from Fred.He promises Fred cash flows of $5000 for the next three years.If Fred's cost of capital is 10%,what is the Net Present Value of the investment for Fred?

A)​-$126.55
B)$1,342.76
C)$2,434.26
D)​-$1,322.31

Question 40

​Which of the following will increase the break-even quantity?

A)​A decrease in overall fixed costs
B)A decrease in the marginal costs
C)A decrease in the price level
D)​An increase in price level

Question 41

​In the short-run,a firm's decision to shut-down should not take into consideration

A)​Avoidable costs
B)Variable costs
C)Fixed costs
D)​Marginal costs

Question 42

​A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.In the long run,the firm should

A)​Shut down since price is greater than average cost
B)Continue operating price is higher than average cost,its making a profit
C)Continue operating as the firm is covering all the variable costs and some of the fixed costs
D)​Shut-down because it is cost effective to pay off the remaining fixed costs

Question 43

​Use the following setup for questions
A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
​A catering company is producing at a point where its marginal costs are $25 and its fixed costs are $5000.At the current price of $10 it is producing 50 meals.If the demand goes up,such that they can now charge $20 per meal,how much should the firm now produce?

A)​60 meals
B)70 meals
C)80 meals
D)​None,they should shut down

Question 44

​Use the following setup for the next seven questions.
A firm is deciding between two different sewing machines.Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100.
​If the company plans to produce 9 units,which technology should the firm choose?

A)​Technology A
B)Technology B
C)Either technology because they are equally cost efficient
D)​Need more information

Question 45

​Use the following setup for the next seven questions.
A firm is deciding between two different sewing machines.Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100.
​At what quantity is the firm indifferent between the two technologies?

A)​10
B)2
C)5
D)​8

Question 46

​Use the following setup for the next seven questions.
A firm is deciding between two different sewing machines.Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100.
​If the price is $110 per unit,what is the break even amount of units for technology B?

A)​20
B)25
C)30
D)​None-They would have to shut down

Question 47

​Use the following setup for questions
A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
​What's the firm's current contribution margin?

A)​$15
B)$18
C)$3
D)​$4

Question 48

​A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the short run?

A)​$10
B)$25
C)$65
D)​$70

Question 49

​Use the following setup for the next seven questions.
A firm is deciding between two different sewing machines.Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100.
​What is the cost of production at the number of units where the company is indifferent between the two technologies?

A)​$750
B)$850
C)$950
D)​$1050

Question 50

​A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.In the short run,the firm should

A)​Shut-down as the firm is making a loss of $15,000 per week
B)Shut-down as price is lower than average cost
C)Continue operating as the firm is covering all the variable costs and some of the fixed costs
D)​Shut-down because it is cost effective to pay off the remaining fixed costs

Question 51

​Use the following setup for the next seven questions.
A firm is deciding between two different sewing machines.Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100.
​If the price is $60 per unit,what is the break even amount of units for technology A?

A)​50
B)100
C)150
D)​None-They would have to shut down

Question 52

​Use the following setup for the next seven questions.
A firm is deciding between two different sewing machines.Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100.
​If the price is $20 per unit,what is the break even amount of units for technology A?

A)​50
B)60
C)70
D)​None-They would have to shut down

Question 53

​Use the following setup for the next three questions.
Pastry Paradise is looking to expand.It decides to take over Sweet Tooth,a competitive firm.The two firms have similar technology but different costs.Pastry Paradise has $1500 fixed costs and $1 marginal cost per unit produced.Sweet Tooth has $500 fixed costs but $5 marginal cost per unit produced.
​What is the total cost,at the level of production where Pastry Paradise is indifferent between which technology is used?

A)​$1750
B)$1000
C)$1500
D)​$2000

Question 54

​Use the following setup for questions
A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
​The current break-even quantity is

A)​3000
B)600
C)500
D)​300

Question 55

​Use the following setup for the next seven questions.
A firm is deciding between two different sewing machines.Technology A has fixed costs of $500 and marginal costs of $50 whereas Technology B has fixed costs of $250 and marginal costs of $100.
​If the price is $60 per unit,what is the break even amount of units for technology B?

A)​50
B)60
C)70
D)​None-They would have to shut down

Question 56

​If the company plans to produce 5000 units of output,is using the competitor's technology a good idea?

A)​Yes
B)No
C)It does not matter,at 5000 units you are indifferent between the two technologies
D)​None of the above

Question 57

​Use the following setup for the next three questions.
Pastry Paradise is looking to expand.It decides to take over Sweet Tooth,a competitive firm.The two firms have similar technology but different costs.Pastry Paradise has $1500 fixed costs and $1 marginal cost per unit produced.Sweet Tooth has $500 fixed costs but $5 marginal cost per unit produced.
​If Pastry Paradise takes over Sweet Tooth,at what level of production would it be indifferent between which technology is used.

A)​500
B)750
C)250
D)​125

Question 58

​Which of the following will decrease the price needed to break even?

A)​A decrease in overall fixed but avoidable costs
B)A decrease in the marginal costs
C)An increase in sunk costs
D)​Both A&B

Question 59

​Use the following setup for questions
A cloth manufacturing firm is deciding whether or not to invest in new machinery.The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000.The firm's current fixed costs are $9,000 and current marginal cost are $15.The firm currently charges $18 per unit.
​A pottery craftsman is debating attending the crafters fair.It costs $50 to set up the booth and $20 in transportation to get his pottery to the fair.He nets $5 for each of his pieces,number of pots he must sell to make going to the fair worth the cost?

A)​10
B)12
C)14
D)​16

Question 60

​A firm's sunk costs are $100,000 and its marginal costs are $250 per unit.It produces 500,000 units and prices it at $400 per unit. ,How low can price go before the firm decides to shut down?

A)​$150
B)$250
C)$250.20
D)​$400

Question 61

A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.At what price does the firm consider shutting-down in the long run?

A)​$25
B)$0
C)$15
D)​$10

Question 62

​A firm will shut down in the long-run if

A)​P>AVC
B)PC)P=ATC
D)​P>ATC

Question 63

​A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the short run,this firm is

A)​incurring a loss of $2.00 per unit and should shut down.
B)unable to cover all of its fixed cost and hence should shut down.
C)incurring a profit.
D)​incurring a loss per unit of $2.00,but since it can still cover its variable costs,should continue to operate

Question 64

​Hold-up problems usually occur when

A)​One of the parties makes a heavy investment in equipment specific to its trading partner
B)One of the firms decides to invest heavily in general purpose equipment
C)Costs are avoidable
D)​Costs are incurred

Question 65

A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.At what price does the firm consider shutting-down in the long run?

A)​$45
B)$40
C)$95
D)​$55

Question 66

A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.At what price does the firm consider shutting-down in the short run?

A)​$25
B)$0
C)$15
D)​$10

Question 67

​If a firm anticipates that it is at a risk of being held up,it is more likely to

A)​forgo the transaction completely
B)merge with its trading partner
C)exchange "hostages"
D)​All the above

Question 68

​A firm sells 1000 units per week.It charges $70 per unit,the average variable costs are $25,and the average costs are $65.At what price would the firm consider shutting down in the long run?

A)​$10
B)$25
C)$65
D)​$70

Question 69

​A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.In the long run,the firm should

A)​Shut-down as the firm is making a loss of $10,000 per week
B)Shut-down as price is lower than average cost
C)Continue operating as the firm is covering all the variable costs and some of the fixed costs
D)​Shut-down because it is cost effective to pay off the remaining fixed costs

Question 70

​A shoe manufacturer is producing at a point where its marginal costs are $5 and its fixed costs are $5000.At the current price of $10 it is producing 500 pairs.If the demand goes down,such that they can now only charge $8 per pair,should they continue production in the short run?

A)​No because price has fallen
B)Yes because price is still higher than marginal costs
C)No because price is lower than average cost
D)​Yes because price is higher than marginal costs

Question 71

​A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.In the long run,the firm should

A)​Shut-down as the firm is making a loss of $15 million per week
B)Shut-down as the firm cannot cover the variable costs
C)Shut down because the price is lower than average cost
D)​None of the above

Question 72

​Firms that anticipate hold-up,choose organizational or contractual forms

A)​that give both parties the incentive to make relationship-specific investments
B)that give both parties the incentive to exploit each other's positions
C)that gives both parties an incentive to trade,even after the relationship-specific investments have been made
D)​Both A&C

Question 73

​A firm sets its price at $10.00 per unit.It has an average variable cost of $8.00 and an average fixed cost of $4.00 per unit.In the long run,this firm is

A)​earning zero profits and hence should shut down.
B)unable to cover all of its fixed cost and hence should shut down.
C)incurring a profit.
D)​incurring a loss per unit of $2.00,but since it can still cover its variable costs,should continue to operate.

Question 74

​In order to continue operating,in the long-run a firm must

A)​Charge a price equal to its AVC
B)Charge a price equal to its AFC
C)Charge a price equal to its AC
D)​None of the above

Question 75

​A firm will shut down in the short-run if

A)​P>AVC
B)PC)Profits<0
D)​P

Question 76

​A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.In the short run,the firm should

A)​Shut-down as the firm is making a loss of $15 million per week
B)Shut-down as the firm cannot cover the variable costs
C)Shut down because the price is lower than average cost
D)​None of the above

Question 77

A firm's fixed but avoidable costs are $100,000 and its variable costs are $250 per unit.It produces 50,000 units and prices it at $400 per unit.In the long-run,how low can price go before the firm decides to shut down?

A)​$150
B)$252
C)$250.20
D)​$400

Question 78

A firm sells 300,000 units per week.It charges $ 35 per unit,the average variable costs are $40,and the average costs are $55.At what price does the firm consider shutting-down in the short run?

A)​$45
B)$40
C)$95
D)​$55

Question 79

​A firm sells 1000 units per week.It charges $15 per unit,the average variable costs are $10,and the average costs are $25.In the short run,the firm should

A)​Shut-down as the firm is making a loss of $10,000 per week
B)Shut-down as price is lower than average cost
C)Continue operating as the firm is covering all the variable costs and some of the fixed costs
D)​Shut-down because it is cost effective to pay off the remaining fixed costs

Question 80

​What are some of the solutions for a hold-up problem?

A)​Mergers
B)Contracts
C)Exchange of 'hostages'
D)​All the above