Question 1

Refer to the data provided in Table 11.3 below to answer the following question(s).
Table 11.3
Project Total Investment Expected Rate of Return
(dollars) (percentage)
 $$\begin{array} { l l r } 
\text { New computer for sales staff } & \$ 250,000 & 11 \
\text { Remodel for distribution center } & \$ 200,000 & 9 \
\text { On-site day care center } & \$ 100,000 & 5 \
\text { Employee fitness center } & \$ 50,000 & 4
\end{array}$$
-Refer to Table 11.3. If the interest rate is 10%, Blackstar Drone Manufacturing should

Accepted Answer

The correct choice is to fund only the purchase of new computers for its sales staff because this is the only project with an expected rate of return (11%) that is higher than the interest rate (10%). Projects with returns below the interest rate are not financially beneficial to pursue.

Question 2

Existing firms in the rental car industry will stay in the industry but will not want to undertake any investment projects other than to replace depreciating capital stock if the normal rate of return in the industry is ________ and the return that firms earn in this industry equals exactly ________.

Accepted Answer

If the return that firms earn in the industry equals exactly the normal rate of return, firms have no incentive to leave the industry nor to expand significantly. They will only invest enough to maintain their current operations, which includes replacing depreciating capital stock.

Question 3

Existing firms will want to leave the rental car industry if the normal rate of return in the industry is ________ and the return that firms earn in this industry equals exactly ________.

Accepted Answer

Firms will want to leave the industry if the return they earn is less than the normal rate of return. In this case, the normal rate is 12%, but firms are earning only 9%.

Question 4

Refer to the data provided in Table 11.4 below to answer the following question(s).
Table 11.4 $$\begin{array}{l}
\begin{array} { l c c } 
&\text { Total Investment }&\text {Expected Rate of Return }\
 { \text { Project } } & \text { (dollars) } & \text { (percentage) } \
\hline \text { New bookkeeping software } & \$ 300,000 & 10 \
\text { New tractor } & \$ 400,000 & 24 \
\text { New grain storage tanks } & \$ 500,000 & 20 \
\text { Irrigation system } & \$ 1,000,000 & 30
\end{array}
\end{array}$$
-Refer to Table 11.4. If the interest rate is 22%, then the farmer will only

Accepted Answer

The farmer will only invest in projects with an expected rate of return higher than the interest rate of 22%. The tractor and the irrigation system have expected rates of return of 24% and 30%, respectively, which are both higher than 22%.

Question 5

As interest rates ________, a firm would have to pay less now to purchase the same number of future dollars.

Accepted Answer

The answer of As interest rates ________, a firm would...

Question 6

Refer to the data provided in Table 11.4 below to answer the following question(s).
Table 11.4 $$\begin{array}{l}
\begin{array} { l c c } 
&\text { Total Investment }&\text {Expected Rate of Return }\
 { \text { Project } } & \text { (dollars) } & \text { (percentage) } \
\hline \text { New bookkeeping software } & \$ 300,000 & 10 \
\text { New tractor } & \$ 400,000 & 24 \
\text { New grain storage tanks } & \$ 500,000 & 20 \
\text { Irrigation system } & \$ 1,000,000 & 30
\end{array}
\end{array}$$
-Refer to Table 11.4. When the interest rate ________, the farmer will investment in all four projects.

Accepted Answer

When the interest rate is less than 10%, it is lower than the expected rate of return for all projects, making it beneficial for the farmer to invest in all of them.

Question 7

Refer to the data provided in Table 11.3 below to answer the following question(s).
Table 11.3
Project Total Investment Expected Rate of Return
(dollars) (percentage)
 $$\begin{array} { l l r } 
\text { New computer for sales staff } & \$ 250,000 & 11 \
\text { Remodel for distribution center } & \$ 200,000 & 9 \
\text { On-site day care center } & \$ 100,000 & 5 \
\text { Employee fitness center } & \$ 50,000 & 4
\end{array}$$
-Refer to Table 11.3. If the interest rate is 12.5%, Blackstar Drone Manufacturing's total investment would be

Accepted Answer

When the interest rate is 12.5%, none of the projects listed have an expected rate of return that exceeds this interest rate. Therefore, it would not be financially prudent to invest in any of these projects, resulting in a total investment of $0.

Question 8

All else equal, less investment takes place at

Accepted Answer

Higher market interest rates make borrowing more expensive, which reduces investment.

Question 9

In general, a firm will be unlikely to invest as long as the

Accepted Answer

A firm will be unlikely to invest if the profits from the investment are insufficient to cover the interest payments on the borrowed money used for the investment. This is because the cost of borrowing (interest payments) would exceed the returns from the investment, making it financially unviable.

Question 10

Refer to the data provided in Table 11.4 below to answer the following question(s).
Table 11.4 $$\begin{array}{l}
\begin{array} { l c c } 
&\text { Total Investment }&\text {Expected Rate of Return }\
 { \text { Project } } & \text { (dollars) } & \text { (percentage) } \
\hline \text { New bookkeeping software } & \$ 300,000 & 10 \
\text { New tractor } & \$ 400,000 & 24 \
\text { New grain storage tanks } & \$ 500,000 & 20 \
\text { Irrigation system } & \$ 1,000,000 & 30
\end{array}
\end{array}$$
-Refer to Table 11.4. When the interest rate ________, the farmer will engage in no investment.

Accepted Answer

When the interest rate is greater than 30%, the cost of borrowing exceeds the expected rate of return on all investment options, making none of them financially viable.

Question 11

Ceteris paribus, when market interest rates ________, firms undertake ________ investment projects.

Accepted Answer

When market interest rates increase, the cost of borrowing funds for investment projects becomes higher, leading firms to undertake fewer investment projects.

Question 12

A firm should never undertake an investment if the present value of the

Accepted Answer

The correct choice is B because if the present value of the income stream (or returns) from an investment is less than the full cost of the investment project, it means the investment would not cover its costs, let alone generate a profit. This makes it an unwise financial decision.

Question 13

Saying a firm will continue investing up to the point at which ________ is equivalent to saying that a firm will keep investing in new capital up to the point where the expected rate of return is equal to the interest rate.

Accepted Answer

The correct statement is that a firm will continue investing in new capital up to the point where the marginal revenue product of capital is equal to its rental cost. This is because the marginal revenue product of capital represents the additional revenue generated by the last unit of capital, and the rental cost represents the cost of using that capital. When these two are equal, it means the firm is making an investment that yields a return equal to its cost, which is analogous to the expected rate of return being equal to the interest rate.

Question 14

As interest rates ________, a firm would have to pay more now to purchase the same number of future dollars.

Accepted Answer

The answer of As interest rates ________, a firm would...

Question 15

Refer to the data provided in Table 11.4 below to answer the following question(s).
Table 11.4 $$\begin{array}{l}
\begin{array} { l c c } 
&\text { Total Investment }&\text {Expected Rate of Return }\
 { \text { Project } } & \text { (dollars) } & \text { (percentage) } \
\hline \text { New bookkeeping software } & \$ 300,000 & 10 \
\text { New tractor } & \$ 400,000 & 24 \
\text { New grain storage tanks } & \$ 500,000 & 20 \
\text { Irrigation system } & \$ 1,000,000 & 30
\end{array}
\end{array}$$
-Refer to Table 11.4. If the interest rate is 26%, then the farmer will engage in investment of

Accepted Answer

The farmer will engage in investment of $1,000,000 because the expected rate of return for the irrigation system is 30%, which is greater than the interest rate of 26%.

Question 16

Refer to the data provided in Table 11.3 below to answer the following question(s).
Table 11.3
Project Total Investment Expected Rate of Return
(dollars) (percentage)
 $$\begin{array} { l l r } 
\text { New computer for sales staff } & \$ 250,000 & 11 \
\text { Remodel for distribution center } & \$ 200,000 & 9 \
\text { On-site day care center } & \$ 100,000 & 5 \
\text { Employee fitness center } & \$ 50,000 & 4
\end{array}$$
-Refer to Table 11.3. If the interest rate is 2.5%,Blackstar Drone Manufacturing should

Accepted Answer

All projects have an expected rate of return higher than the interest rate of 2.5%, making them financially viable to fund.

Question 17

Refer to the data provided in Table 11.3 below to answer the following question(s).
Table 11.3
Project Total Investment Expected Rate of Return
(dollars) (percentage)
 $$\begin{array} { l l r } 
\text { New computer for sales staff } & \$ 250,000 & 11 \
\text { Remodel for distribution center } & \$ 200,000 & 9 \
\text { On-site day care center } & \$ 100,000 & 5 \
\text { Employee fitness center } & \$ 50,000 & 4
\end{array}$$
-Refer to Table 11.3. If the interest rate is 10%, Blackstar Drone Manufacturing's total investment would be

Accepted Answer

When the interest rate is 10%, the company would only invest in projects with an expected rate of return higher than the interest rate. Only the "New computer for sales staff" project has an expected rate of return (11%) higher than the interest rate (10%), so the total investment would be $250,000.

Question 18

Suppose that a national election occurs that generates a feeling of certainty in the market. It is likely that this incident will ________ the level of investment spending.

Accepted Answer

When a national election generates a feeling of certainty in the market, it typically increases the level of investment spending because investors feel more confident about the future economic and political environment, leading to more investments.

Question 19

Refer to the data provided in Table 11.3 below to answer the following question(s).
Table 11.3
Project Total Investment Expected Rate of Return
(dollars) (percentage)
 $$\begin{array} { l l r } 
\text { New computer for sales staff } & \$ 250,000 & 11 \
\text { Remodel for distribution center } & \$ 200,000 & 9 \
\text { On-site day care center } & \$ 100,000 & 5 \
\text { Employee fitness center } & \$ 50,000 & 4
\end{array}$$
-Refer to Table 11.3. If the interest rate is 4.5%, Blackstar Drone Manufacturing's total investment would be

Accepted Answer

The answer of Refer to the data provided in Table...

Question 20

A firm should cut back on investing if

Accepted Answer

When the Marginal Revenue Product of Capital (MRPK) is less than the price of capital, it means that the cost of investing in additional capital is higher than the revenue that the new capital would generate. Therefore, it would be economically rational for the firm to cut back on investing.

Quiz 11: Input Demand: the Capital Market and the Investment Decision

Existing firms in the rental car industry will stay in the industry but will not want to undertake any investment projects other than to replace depreciating capital stock if the normal rate of return in the industry is and the return that firms earn in this industry equals exactly .

Existing firms will want to leave the rental car industry if the normal rate of return in the industry is and the return that firms earn in this industry equals exactly .