Deck 3: Time Value of Money: an Introduction

Question 1

Use the information for the question(s) below.

As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Another oil refiner is offering to trade you
Of Alaska North Slope (ANS) crude oil for
Of West Texas Intermediate (WTI) crude oil. Assuming you currently have
Of WTI crude, the added benefit (cost) to you if you take the trade is closest to ________.

A) ($1550)
B) $1550
C) ($3475)
D) $3475

Answer 1

$1550

Question 2

An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You don't care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac?

A) $87,000, since the Cadillac could be sold for this price.
B) $52,000, since the Cadillac could be bought for this price.
C) $35,000, since this is the difference between purchase and resale price of the Cadillac.
D) $35,000, since this is the value of the car that you really want to buy.

Answer 2

$35,000, since this is the difference between purchase and resale price of the Cadillac.

Question 3

Which of the following statements regarding the cost-benefit analysis is NOT correct?

A) The first step in evaluating a project is to identify its costs and benefits.
B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values.
C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker.
D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.

Answer 3

In the absence of competitive markets, we can use one-sided prices to determine exact cash values.

Question 4

Costs and benefits must be put in common terms if they are to be compared.

Question 5

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision?

A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms.
B) He ignores the benefits of consuming the $1.00 today against the benefits of consuming the $1.00 five years from now.
C) He fails to consider the costs of not consuming the $1.00 today.
D) He considers that the value of the cash he may have in the future is the same as the value of cash he has today.

Question 6

Use the information for the question(s) below.

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you were to refine this crude oil and sell the unleaded gasoline is closest to ________.

A) ($766,150)
B) $766,150
C) ($770,032)
D) $770,032

Question 7

A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer?

A) No, the costs are $1500 more than the benefits.
B) No, the costs and the benefits are the same.
C) Yes, the costs are $2500 less than the benefits.
D) Yes, the costs are $2000 less than the benefits.

Question 8

Which of the following is the overarching principle that a financial manager should follow when making decisions?

A) Decisions should generate the greatest benefits for the firm.
B) Decisions should provide benefit to the firm without incurring costs.
C) Decisions should be on behalf of the firm's owners that give the greatest benefit to those owners, the firm's employees and the firm's other stakeholders.
D) Decisions should increase the value of the firm to its investors.

Question 9

A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision?

A) the cost of the machine used to produce the sunscreen
B) the manufacturing process of the sunscreen
C) the cost of the existing advertising campaign
D) the cost of the courtside advertising at the tennis matches

Question 10

Use the information for the question(s) below.

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you were to sell the
Of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________.

A) ($1400)
B) $1400
C) ($3908)
D) $3908

Question 11

Whenever a good trades in a competitive market, the price determines the value of the good.

Question 12

In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer?

A) $744,000
B) $1,240,000
C) $992,000
D) $1,488,000

Question 13

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company?

A) Both decisions involve the purchase of assets that are essential for the existence of the investor.
B) Both decisions involve the rental of a useful asset.
C) Both decisions have the potential to affect the firm.
D) Both decisions should be made based upon the tradeoff benefits and costs across time.

Question 14

In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

Question 15

Use the information for the question(s) below.

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Another oil refiner is offering to trade you
Of Alaska North Slope (ANS) crude oil for
Of West Texas Intermediate (WTI) crude oil. Assuming you just purchased
Of WTI crude at the current market price, the total revenue (cost) to you if you take the trade is closest to ________.

A) $755,650
B) $766,150
C) $767,600
D) $776,650

Question 16

To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.

Question 17

Use the information for the question(s) below.

As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________.

A) $794,274
B) $780,000
C) $781,550
D) $784,091

Question 18

What is a competitive market?

A) a market in which goods have a different ask price and bid price
B) a market in which a good can be bought and sold at the same price
C) a market in which a good is sold at a lower price than that for which it can be bought
D) a market in which a good is bought for a lower price than that for which it can be sold

Question 19

Use the information for the question(s) below.

As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude.
Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do?

A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude.
B) Do nothing; refine the 10,000 bbl of WTI crude.
C) Trade the 10,000 bbl WTI crude with the other refiner and refine the 10,150 bbl of ANS crude.
D) Trade the 10,000 bbl WTI crude with the other refiner and then sell the 10,150 bbl of ANS crude.

Question 20

A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate?

A) Real-world decisions are complex and require information from many sources if the decisions are to be valid.
B) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision.
C) All of the costs and benefits associated with a decision can never be fully identified.
D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company.

Question 21

Use the information for the question(s) below.
Coloma Cooper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore. Because of its higher copper content, Coloma can produce $940 worth of copper from one ton of high-grade copper ore.
A mining company is offering to trade 7,250 tons of low-grade copper ore for 5,000 tons of high-grade copper ore. Assuming Coloma currently has 5,000 tons of high-grade ore, what should it do?

Question 22

Explain the role played by some of the other management disciplines in financial decision making.

Question 23

You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

A) $445
B) $545
C) $645
D) $345

Question 24

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

A) They can be used to determine how much an asset can be sold for.
B) They can be used to convert different services and commodities into equivalent cash values which can be compared.
C) They allow all commodities and services to be assigned a fixed and unchanging value.
D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.

Question 25

A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin?

A) $0.01, since he paid nothing to obtain the coin and it has a face value of one cent.
B) $35,000, since this is the price that the coin would fetch on the open market.
C) At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value.
D) At least $35,000, since the value of the coin will increase in the future.

Question 26

A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software?

A) $56,500
B) $45,200
C) $113,000
D) $79,100

Question 27

A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why?

A) Because the company has no need of barley, the opportunity should not be taken.
B) Because the opportunity does not meet the company's need for wheat, the opportunity should not be taken.
C) Because the value of the opportunity is positive, the opportunity should be taken.
D) Because the value of the opportunity is negative, the opportunity should not be taken.

Question 28

The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.

Question 29

What is one of the main obstacles in cost-benefit analysis?

Question 30

A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton?

A) 3010 U.S. dollars per ton
B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD
C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL
D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR

Question 31

A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

A) greater than $2.90 per gallon
B) greater than $2.92 per gallon
C) greater than $2.94 per gallon
D) greater than $2.96 per gallon

Question 32

Which of the following best describes the valuation principle?

A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks.
B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks.
D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.

Question 33

If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.

Question 34

How can we perform a cost-benefit analysis in case they are occurring in different currencies?

Question 35

You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?

A) -$320
B) -$340
C) -$300
D) $300

Question 36

Use the information for the question(s) below.
Coloma Cooper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore. Because of its higher copper content, Coloma can produce $940 worth of copper from one ton of high-grade copper ore.
A company that manufactures copper piping is offering to trade you 5,925 tons of low-grade copper ore for 4,000 tons of high-grade copper ore. Assuming you currently have 4,000 tons of high-grade ore, what are the total benefits and added benefits of taking the trade?

Question 37

Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Duty's marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one?

A) No, since costs are $7,800,000 more than benefits.
B) No, since costs are $6,800,000 more than benefits.
C) Yes, since the benefits are $3,400,000 more than the costs.
D) Yes, since the benefits are $7,300,000 more than the costs.

Question 38

Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition,
What is the value, in U.S. dollars, of the best deal the international seafood supplier can make?

A) $12,333
B) $14,333
C) $14,833
D) $13,333

Question 39

Whenever a good trades in a competitive market, the ________ determines the value of the good.

A) supply
B) price
C) demand
D) cost

Question 40

A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company?

A) -$5200
B) $0
C) $15,000
D) $16,000

Question 41

On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B?

A) -$1.33
B) -$0.67
C) $1.06
D) $1.60

Question 42

You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer. You learn that the Dial-o-matic sells for $29.95. Ronco also includes a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95 in this deal. Assuming that there is a competitive market for Ronco items, at what price must Ronco offer this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?

Question 43

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

A) The State Bank would experience a surge in demand for loans.
B) The Colonial Bank would experience a surge in demand for deposits.
C) The State Bank would experience a fall in demand for deposits.
D) The Colonial Bank would experience a surge in demand for loans.

Question 44

How does arbitrage help the Law of One Price?

Question 45

A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches?

A) $24.0 per hour
B) $29.0 per hour
C) $4.0 per hour
D) $48.0 per hour

Question 46

A 2013 Toyota Camry can be bought in Buffalo, NY, for $18,620. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2013 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.92 Canadian?

A) $17,130
B) $24,287
C) $20,239
D) $28,335

Question 47

Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?

A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price.
B) The posted prices of oats can vary widely between grocery stores, even within the same local area.
C) Grocery stores mark up the prices of their oats up to make a profit.
D) Grocery stores typically sell oats in different packaging, which results in different prices within the same store.

Question 48

Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most?

A) a power station that uses uranium 308 to produce electrical energy
B) a metals trader who stockpiles and sells actual physical quantities of uranium 308
C) a speculator who buys and sells uranium 308 on the market without ever using the metal
D) All buyers and sellers would have the same value for 250 pounds of uranium 308.

Question 49

Why are arbitrage opportunities short-lived?

A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down.
B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values.
C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.
D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.

Question 50

Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?

A) $1,200,000
B) $3,900,000
C) $2,700,000
D) $9,000,000

Question 51

Advanced Micro Devices (NYSE: AMD) is currently trading at $20.75 on the NYSE. Advanced Micro Devices is also listed on NASDAQ. Assume it is currently trading on NASDAQ at $20.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 1000 shares?

Question 52

Which of the following statements regarding the Law of One Price is INCORRECT?

A) At any point in time, the price of two equivalent goods trading in different competitive markets will be the same.
B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets.
C) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets.
D) An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.

Question 53

Which of the following is an example of arbitrage?

A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted.
B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%.
C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.
D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.

Question 54

You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?

A) No, because the market fora used XBOX 360 is not the same as the market for a new XBOX 360.
B) No, because the market for a used XBOX 360 is a competitive market.
C) Yes, because the market for a used XBOX 360 is a competitive market.
D) Yes, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.

Question 55

If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur?

A) a surge in conversion of dollars to yen in Tokyo
B) a surge in conversion of euros to yen in Tokyo
C) a surge in conversion of euros to dollars in Paris
D) a surge in conversion of euros to yen in Paris

Question 56

Which of the following statements regarding arbitrage and security prices is INCORRECT?

A) We call the price of a security in a normal market the no-arbitrage price for the security.
B) In financial markets it is possible to sell a security you do not own by doing a short sale.
C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
D) The general formula for the no-arbitrage price of a security is Price(security) = PV (all cash flows paid by the security).

Question 57

"If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets."
What do we call the above statement?

A) The Net Present Value rule
B) The Law of One Price
C) The Valuation Principle
D) The Time Value of Money

Question 58

Consider the following prices from a McDonald's Restaurant:

A McDonald's Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?

A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67.
B) No, no arbitrage opportunity exists.
C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.34.
D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.67.

Question 59

Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares?

A) No, no arbitrage opportunity exists.
B) Yes, buy on NASDAQ and sell on NYSE, make $25.
C) Yes, buy on NYSE and sell on NASDAQ, make $25.
D) Yes, buy on NASDAQ and sell on NYSE, make $250.

Question 60

Consider the following prices from a McDonald's Restaurant:

A McDonald's Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assuming that there is a competitive market for McDonald's food items, at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the Law of One Price?

A) $4.08
B) $4.62
C) $5.44
D) $6.80

Question 61

A tenant wants to lease a building for $50,000 per year. She signs a five-year rental agreement that states that she will pay $25,000 every six months for the next five years. Which of the following is the timeline for her rental payments, assuming she makes the first payment immediately?

A)
B)
C)
D)

Question 62

Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information?

A) $2460
B) $13,863
C) $27,726
D) $32,460

Question 63

An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made?

A) No, because the investment will yield $82,840 less than putting the money in a bank.
B) Yes, because the investment will yield $66,272 more than putting the money in a bank.
C) Yes, because the investment will yield $74,556 more than putting the money in a bank.
D) Yes, because the investment will yield $82,840 more than putting the money in a bank.

Question 64

Which of the following statements is INCORRECT based on the time value of money?

A) In general, money today is worth more than money in one year.
B) We define the risk-free interest rate (rf) for a given period as the interest rate at which money can be borrowed or lent without risk over that period.
C) We refer to (1 - rf) as the interest rate factor for risk-free cash flows.
D) For most financial decisions, costs and benefits occur at different points in time.

Question 65

The one-year discount factor is the discount at which we can purchase money in the future, one year from now.

Question 66

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

A) For an investment project to be considered, costs must have a higher dollar value than benefits.
B) In most investment projects, costs are incurred up front, but benefits are received in the future.
C) For practical purposes, a dollar today may be considered to be equal to a dollar at some future time.
D) Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest.

Question 67

Samantha enters a rent-to-own agreement for living room furniture. She will pay $60 per month for one year. Which of the following shows the timeline for her payments if the first payment is one month from now?

A)
B)
C)
D)

Question 68

What is one of the prerequisite conditions for the Valuation Principle to work?

Question 69

If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________.

A) $462.96 in one year
B) $500.00 in one year
C) $540.00 in one year
D) None of the above

Question 70

Dollar amounts received at different points in time cannot be compared in absolute terms.

Question 71

If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________.

A) $688.07 today
B) $750 today
C) $825.68 today
D) None of the above

Question 72

A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lender's perspective?

A)
B)
C)
D)

Question 73

Whose cash flow is best described by the timeline shown below?

A) Joe, who puts down $3,500 to buy a car, and then makes annual payments of $1,000
B) Harry, who borrows $3,500, and then receives an annual payment of $1,000
C) Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000
D) Leo, who borrows $3,500, and then pays back the loan in four annual payments of $1,000

Question 74

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one year's time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investor's decision may be flawed?

A) It does not consider the current market interest rate.
B) It does not consider the fact that though costs are incurred today, the benefits occur in one year's time.
C) It does not consider the value of the $10,000 in one year's time if invested elsewhere.
D) It does not consider whether the $10,000 will be needed elsewhere.

Question 75

In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.

Question 76

If $432 invested today yields $450 in a year's time, what is the discount factor?

A) 0.10
B) 0.96
C) 1.96
D) 1.92

Question 77

Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one year's time?

A) $4298
B) $212
C) $4712
D) $6597

Question 78

How can we convert the value of money from one point in time to another?

A) using the current exchange rate
B) using a cost-benefit analysis
C) using the valuation principle
D) using the current interest rate

Question 79

Which of the following situations is best described by the timeline shown below?

A) You make payments of $250 per month for six months.
B) You receive payments of $250 per month for six months.
C) You make payments of $250 per month for five months.
D) You receive payments of $250 per month for five months.

Question 80

Why should you approach every problem by drawing a timeline?

A) A timeline allows you to quickly sum cash flows over time.
B) A timeline eliminates the majority of flawed financial decisions.
C) A timeline can be used to schedule events which are yet to occur.
D) A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.