Question 1

Kastle Corporation is considering building a new plant.It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today.Of the interest rates below,which is the highest interest rate at which Kastle would still be willing to build the plant?
A) 3 percent
B) 3.5 percent
C) 4 percent
D) 4.5 percent

Accepted Answer

The answer of Kastle Corporation is considering building a new...

Question 2

The You Look Marvelous! cosmetic company is considering building a new shampoo factory.Its accountants and board of directors meet and decide that it is not a good idea to build the factory.If interest rates fall after the meeting
A) the present value of the factory rises.It's more likely the company will build the factory.
B) the present value of the factory rises.It's less likely the company will build the factory.
C) the present value of the factory falls.It's more likely the company will build the factory.
D) the present value of the factory falls.It's less likely the company will build the factory.

Accepted Answer

The answer of The You Look Marvelous! cosmetic company is...

Question 3

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?
A) deadweight loss
B) present value
C) economic growth
D) financial intermediation

Accepted Answer

When the interest rate falls, the present value of future profits from investment projects increases, making these projects more attractive to investors. Therefore, investment increases.

Question 4

Nancy would like to double the money in her retirement account in five years.According to the rule of 70,what rate of interest would she need to earn to attain her objective?
A) 5 percent
B) 7 percent
C) 10 percent
D) 14 percent

Accepted Answer

The answer of Nancy would like to double the money...

Question 5

According to the rule of 70,if the interest rate is 5 percent,how long will it take for the value of a savings account to double?
A) about 3.5 years
B) about 6.3 years
C) about 12 years
D) about 14 years

Accepted Answer

The answer of According to the rule of 70,if the...

Question 6

Other things the same,an increase in the interest rate makes the quantity of loanable funds supplied
A) rise,and investment spending rise.
B) rise,and investment spending fall.
C) fall,and investment spending rise.
D) fall,and investment spending fall.

Accepted Answer

An increase in the interest rate makes saving more attractive, leading to an increase in the quantity of loanable funds supplied. However, the higher interest rates also make borrowing more expensive, discouraging investment spending by firms. Therefore, an increase in the interest rate leads to a rise in the quantity of loanable funds supplied, but a fall in investment spending.

Question 7

Twenty years ago,Dr.Montgomery borrowed money from her parents to pay her tuition at graduate school.Now she wants to pay them back.She gives them double what they gave her.According to the rule of 70,what interest rate would have given her parents the same amount of money if they had put it in the bank rather than lending it to their daughter?
A) 3.5 percent
B) 4.5 percent
C) 5 percent
D) 7 percent

Accepted Answer

The answer of Twenty years ago,Dr.Montgomery borrowed money from her...

Question 8

A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty.The first one gives her $100,000 one year from today and $100,000 two years from today.The second one gives her $132,000 one year from today and $66,000 two years from today.As her agent,you must compute the present value of each contract.Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first?
A) 7 percent
B) 8 percent
C) 9 percent
D) 10 percent

Accepted Answer

The answer of A University of Iowa basketball standout is...

Question 9

Rita puts $10,000 into each of two different assets.The first asset pays 10 percent interest and the second pays 5 percent.According to the rule of 70,what is the approximate difference in the value of the two assets after 14 years?
A) $12,000
B) $14,000
C) $15,500
D) $20,000

Accepted Answer

The answer of Rita puts $10,000 into each of two...

Question 10

A firm has four different investment options.Option A will give the firm $10 million at the end of one year,$10 million at the end of two years,and $10 million at the end of three years.Option B will give the firm $5 million at the end of one year,$10 million at the end of two years,and $15 million at the end of three years.Option C will give the firm $15 million at the end of one year,$10 million at the end of two years,and $5 million at the end of three years.Option D will give the firm $21 million at the end of one year,nothing at the end of two years,and $9 million at the end of three years.Which of these options has the highest present value if the rate of interest is 5 percent?
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The answer of A firm has four different investment options.Option...

Question 11

Other things the same,an increase in the interest rate makes the quantity of loanable funds demanded
A) rise,and investment spending rise.
B) rise,and investment spending fall.
C) fall,and investment spending rise.
D) fall,and investment spending fall.

Accepted Answer

An increase in interest rates makes borrowing more expensive, which reduces demand for loanable funds. This leads to a decrease in the quantity of loanable funds demanded. When investment spending falls along with it, it is because businesses are finding fewer investment opportunities attractive due to the higher interest rates.

Question 12

Sari puts $100 into an account with an interest rate of 10 percent.According to the rule of 70,about how much does she have at the end of 21 years?
A) $210
B) $300
C) $800
D) $1,010

Accepted Answer

The rule of 70 is a way to estimate the number of years it takes for an investment to double in value at a given annual rate of return by dividing 70 by the interest rate. With a 10 percent interest rate, it takes about 7 years for the investment to double (70/10 = 7). In 21 years, the investment doubles 3 times (21/7 = 3). Starting with $100, after the first 7 years it doubles to $200, after 14 years it doubles again to $400, and after 21 years it doubles once more to $800.

Question 13

A car salesperson gives you four alternative ways to pay for your car.The first is to pay $18,000 today.The second is to pay $19,000 one year from today.The third is to pay $20,300 two years from today.The fourth is to pay $21,500 three years from today.If the interest rate is 6 percent,which payment option has the lowest present value and which has the highest?
A) The first is lowest;the second is highest.
B) The second is lowest;the third is highest.
C) The third is lowest;the fourth is highest.
D) The fourth is lowest;the first is highest.

Accepted Answer

The answer of A car salesperson gives you four alternative...

Question 14

U.S.Phones is considering buying new equipment to build a factory.If the interest rate rises,
A) the present value of the returns from the factory will fall,so U.S.Phones will be less likely to build the factory.
B) the present value of the returns from the factory will fall,so U.S.Phones will be more likely to build the factory.
C) the present value of the returns from the factory will rise,so U.S.Phones will be less likely to build the factory.
D) the present value of the returns from the factory will rise,so U.S.Phones will be more likely to build the factory.

Accepted Answer

When interest rates rise, the cost of borrowing money increases. This means that the cost of financing the new equipment to build the factory also increases. As a result, the present value of the returns from the factory will fall, making the investment less attractive. Therefore, U.S. Phones will be less likely to build the factory.

Question 15

According to the rule of 70,if the interest rate is 10 percent,about how long will it take for the value of a savings account to double?
A) about 6.3 years
B) about 7 years
C) about 7.7 years
D) about 10 years

Accepted Answer

The rule of 70 states that to find the approximate number of years it takes for a certain variable to double, you divide 70 by the annual growth rate. 
In this case, we divide 70 by 10, giving us approximately 7 years. Therefore, the correct answer is B, about 7 years.

Question 16

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year A) doubles every 70/X years. B) doubles every 70(1 - 1/X)years. C) doubles every 70/X² years. D) doubles every 70/(1 - X)years.

Accepted Answer

The rule of 70 states that a variable will double in approximately 70/X years, where X is the annual growth rate as a percentage. Therefore, choice A correctly states that a variable with a growth rate of X percent per year will double every 70/X years.

Question 17

The concept of present value helps explain why
A) investment decreases when the interest rate increases,and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.
B) investment decreases when the interest rate increases,but it is of no help in explaining why the quantity of loanable funds demanded decreases when the interest rate increases.
C) the quantity of loanable funds demanded decreases when the interest rate increases,but it is of no help in explaining why investment decreases when the interest rate increases.
D) None of the above are correct;the concept of present value is of no help in explaining why either investment or the quantity of loanable funds demanded decreases when the interest rate increases.

Accepted Answer

The concept of present value is based on the idea that money today is worth more than the same amount of money in the future. Therefore, when interest rates increase, the present value of future cash flows decreases, making investment less attractive. This also explains why the quantity of loanable funds demanded decreases, as higher interest rates lead to higher borrowing costs, reducing the amount of funds that borrowers are willing to demand.

Question 18

Yoyo's Frozen Yogurt,Inc.is thinking of building a new warehouse.They believe that this will given them $50,000 of additional revenue at the end of one year,$60,000 additional revenue at the end of two years,and $70,000 in additional revenue at the end of three years.If the interest rate is 5 percent,Yoyo would be willing to pay
A) $140,000,but not $150,000.
B) $150,000,but not $160,000.
C) $160,000,but not $170,000.
D) $170,000,but not $180,000.

Accepted Answer

We can use the present value formula to determine the most Yoyo would be willing to pay for the warehouse, given the additional revenues it will generate. 
PV = FV/ (1 + i)^n 
PV = $50,000/(1+.05)^1 + $60,000/(1+.05)^2 + $70,000/(1+.05)^3 
PV = $50,000/1.05 + $60,000/1.1025 + $70,000/1.1576 
PV = $47,619.05 + $54,375.66 + $60,338.52 
PV = $162,333.23 
Thus, Yoyo would be willing to pay up to $160,000 for the warehouse, which is the closest option to our calculated present value. Therefore, the answer is C.

Question 19

Which of the following is the largest?
A) the future value of $250 with 3% interest for 2 years
B) the future value of $250 at 2% interest for 3 years
C) the present value of $250 to be paid in two years when the interest rate is 3%
D) the present value of $250 to be paid in three years when the interest rate is 2%

Accepted Answer

The answer of Which of the following is the largest?
A)...

Question 20

If the interest rate is r percent,then the rule of 70 says that your savings will double about every
A) 70/(1 - r)years.
B) 70/(1 + r)years.
C) 70/r years.
D) 70(1 + r)/r years.

Accepted Answer

The answer of If the interest rate is r percent,then...

Quiz 27: The Basic Tools of Finance

Kastle Corporation is considering building a new plant.It will cost $1 million today to build it and it will generate revenues of $1.121 million three years from today.Of the interest rates below,which is the highest interest rate at which Kastle would still be willing to build the plant?

The You Look Marvelous! cosmetic company is considering building a new shampoo factory.Its accountants and board of directors meet and decide that it is not a good idea to build the factory.If interest rates fall after the meeting

Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?

Nancy would like to double the money in her retirement account in five years.According to the rule of 70,what rate of interest would she need to earn to attain her objective?

According to the rule of 70,if the interest rate is 5 percent,how long will it take for the value of a savings account to double?

Other things the same,an increase in the interest rate makes the quantity of loanable funds supplied

Rita puts $10,000 into each of two different assets.The first asset pays 10 percent interest and the second pays 5 percent.According to the rule of 70,what is the approximate difference in the value of the two assets after 14 years?

Other things the same,an increase in the interest rate makes the quantity of loanable funds demanded

Sari puts $100 into an account with an interest rate of 10 percent.According to the rule of 70,about how much does she have at the end of 21 years?

U.S.Phones is considering buying new equipment to build a factory.If the interest rate rises,

According to the rule of 70,if the interest rate is 10 percent,about how long will it take for the value of a savings account to double?

The rule of 70 can be stated as follows: A variable with a growth rate of X percent per year

The concept of present value helps explain why

Which of the following is the largest?

If the interest rate is r percent,then the rule of 70 says that your savings will double about every