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

Accepted Answer

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

Accepted Answer

The rule of 72 is a quick calculation that estimates the number of years it will take for an investment to double in value, given a fixed annual rate of interest.
To use the rule of 72, you divide the annual rate of return into 72. In this case, 72/12 = 6. So, it would take Lucy 6 years for her investment to double. The closest option to 6 years is Choice letter (C), so it is the best choice.

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

Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. Here, the cash flows of $600 for two years are discounted at a 10% rate, and then the initial investment of $500 is subtracted. The calculation is as follows: NPV = ($600 / (1+0.10)^1) + ($600 / (1+0.10)^2) - $500 = $545.45 + $495.87 - $500 = $541.32.

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%

Accepted Answer

In order to double the living standards of the population in 18 years, the GDP must grow at an annual rate of 4%. This is because the Rule of 70 states that the number of years it takes for a certain variable to double can be found by dividing 70 by the growth rate. Therefore, 70/4 = 17.5, which is close to the given time frame of 18 years. A GDP growth rate of 1%, 2%, or 3% would not be sufficient to double the living standards of the population within 18 years.

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

Accepted Answer

The NPV is positive, which means that the firm would make a profit by investing in the printer.

Question 6

​Use the following setup for the next question.
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

Accepted Answer

The NPV is positive, which means that the investment is feasible.

Question 7

​Use the following setup for the next question.
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

Accepted Answer

At an interest rate of 12%, the cash flows can be discounted as follows:
Year 0: -900
Year 1: 500/(1.12) = $446.43
Year 2: 0
Year 3: 800/(1.12)^3 = $549.59

NPV = -900 + 446.43 + 549.59 = $96.02
NPV is positive, so the investment would take place.

At an interest rate of 25%, the cash flows would be:
Year 0: -900
Year 1: 500/(1.25) = $400
Year 2: 800/(1.25)^2 = $512

NPV = -900 + 400 + 512 = $12
NPV is positive at 25%, but the cash flows have been rearranged. Since the cash flows are not the same as before, we cannot directly compare the NPV at 12% and 25%. However, since the NPV is much lower at 25%, it is unlikely that the investment would take place at the higher interest rate. Therefore, the best answer is B.

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

Accepted Answer

The present value of the cash flows is $1015.85. This is calculated by taking the sum of the present values of the cash flows in each year, which are $500/(1.12^1) + $0/(1.12^2) + $800/(1.12^3) = $1015.85.

Question 9

​Use the following setup for the next question.
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

Accepted Answer

To determine if an investment is worthwhile, we need to calculate the net present value (NPV) of the investment. At a 12% interest rate, the NPV of the printer investment is:

NPV = -$900 + $500/(1.12) + $800/(1.12)^3
NPV = -$22.48

Since the NPV is negative, the investment should not be made.

If the interest rate were to increase to 25%, the NPV calculation would be:

NPV = -$900 + $500/(1.25) + $800/(1.25)^3
NPV = -$291.34

This NPV calculation is also negative and is a larger negative value than the prior calculation at the lower interest rate. Therefore, the investment should still not be made. The correct answer is B, No since NPV<0.

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

Accepted Answer

According to the Net Present Value (NPV) rule, managers should choose to invest in a project only if its NPV is greater than zero. This is because a positive NPV indicates that the project is expected to generate a return that is higher than the cost of capital, which implies that the investment is worth undertaking. A negative NPV, on the other hand, means that the project is expected to generate a return that is lower than the cost of capital, which suggests that the investment is not viable. Similarly, a zero NPV implies that the investment will generate a return that is just enough to cover its cost, but not enough to generate value for the company. Hence, the best choice is B, as it represents the condition under which an investment is expected to create value for the company.

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

Accepted Answer

The present value of the cash flows can be calculated using the formula for the present value of an annuity: PV = C * [(1 - (1 + r)^-n) / r], where C is the cash flow per period, r is the discount rate, and n is the number of periods. Plugging in the values: PV = $5000 * [(1 - (1 + 0.10)^-3) / 0.10] = $12,434.26.

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

Accepted Answer

To calculate the number of years it takes for living standards to double, we can use the rule of 70. The rule of 70 states that the number of years it takes for a variable to double is approximately 70 divided by the annual growth rate of that variable. In this case, the annual growth rate is 3%, so we can calculate the number of years as 70/3 = 23.33, which we can round up to 24 years. Therefore, the answer is C) 24.

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

Accepted Answer

When the annual interest rate is 0%, the present value of receiving $550 in the next year is simply $550. This is because there is no discounting of future cash flows in the absence of an interest rate. Therefore, the net present value (NPV) of receiving $550 is also $550. None of the other options are correct as they do not reflect the actual NPV in this scenario.

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

Accepted Answer

Higher interest rates make borrowing more expensive and saving more rewarding, leading individuals to value current dollars more because they can earn more interest on savings or because borrowing costs are higher.

Question 15

​Use the following setup for the next question.
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

Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows back to their present value and subtracting the initial investment. The formula for NPV is: NPV = (Cash Flow in Year 1 / (1+r)^1) + (Cash Flow in Year 3 / (1+r)^3) - Initial Investment, where r is the interest rate. Plugging in the given values: NPV = ($500 / (1+0.12)^1) + ($800 / (1+0.12)^3) - $900 = $446.43 + $570.42 - $900 = $116.85 (rounded to two decimal places).

Question 16

​Use the following setup for the next question.
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

Accepted Answer

The answer of ​Use the following setup for the next...

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

Accepted Answer

Lower interest rates make future dollars more valuable because the cost of borrowing money is cheaper, encouraging spending and investment now rather than saving for higher returns later.

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

Accepted Answer

The present value calculation is as follows:

PV = (25,000/(1+0.05)^1) + (30,000/(1+0.05)^2) - 45,000

PV = 23,809.52 + 26,210.89 - 45,000

PV = $4,020.41

Since the present value of the cash flows is positive, the investment is profitable. Therefore, the best choice is to invest in the new machinery. The present value of the cash flows is $51,020.41, which is greater than the cost of the machinery.

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

Accepted Answer

We need to use the present value formula which is:
Present Value = Future Value / (1 + r)n
where r is the interest rate and n is the number of years.

Plugging in the values, we get:
Present Value = 1500 / (1 + 0.11)12
Present Value = 1500 / 3.169865...
Present Value = $473.63 (rounded to the nearest cent)

So, the best choice is B.

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

Accepted Answer

The present value of the cash flows is $1100. This is calculated by taking the sum of the present values of the cash flows for each year. The present value of the cash flow for the first year is $600 / (1 + r), where r is the discount rate. The present value of the cash flow for the second year is $600 / (1 + r)^2. The discount rate is not given in the question, so we cannot calculate the exact present value. However, we can say that the present value of the cash flows will be greater than $500, which is the cost of the printer. This means that the investment in the new printer is a good one.

Quiz 4: Investment Decisions: Look Ahead and Reason Back

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

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 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

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?

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

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?

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

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?

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?

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

The higher the interest rates

The lower the interest rates

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

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?

Quiz 4: Investment Decisions: Look Ahead and Reason Back

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

​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 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

​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?

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

​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?

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

​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?

​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?

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

​The higher the interest rates

​The lower the interest rates

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

​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?