Question 1

If the interest rate is 10%, the current market value of $1 to be delivered in one year is

Accepted Answer

This question is referring to the concept of present value, which is the value of an amount of money in today's dollars. To calculate the present value of $1 to be received in one year at an interest rate of 10%, we can use the following formula:

Present Value = Future Value / (1 + Interest Rate)^Time

Plugging in the values, we get:

Present Value = $1 / (1 + 0.1)^1
Present Value = $1 / 1.1
Present Value = $0.91

Therefore, the current market value of $1 to be delivered in one year at an interest rate of 10% is $0.91, so the best choice is A.

Question 2

ABC Corp. is considering an investment project that costs $500 today. It expects the project will yield income of $200 at the end of years 1, 2, and 3. If the interest rate is 10%, the firm

Accepted Answer

The investment project has a cost of $500 and only generates $200 at the end of each year for a total revenue of $600 over 3 years. At an interest rate of 10%, the present value of this revenue stream is only $456.38 (PV = $200/1.1 + $200/1.1^2 + $200/1.1^3). Therefore, the project's net present value (NPV) is negative, indicating that it will not generate enough returns to cover the initial investment. Thus, ABC Corp. should forgo the investment.

Question 3

If the expected rate of return on an investment is 10% and the market interest rate is 12%, then the investment will be undertaken.

Accepted Answer

The expected rate of return is less than the market interest rate, indicating that the investment is not attractive and may not be undertaken.

Question 4

ABC Corp. is considering an investment project that costs $500 today. It expects the project will yield income of $200 at the end of years 1, 2, and 3. The interest rate must be ________ for the firm to undertake the project.

Accepted Answer

To calculate the interest rate, we need to use the net present value (NPV) formula.

NPV = - initial investment + (cash flow / (1 + interest rate)^year)

NPV = -500 + (200 / (1+i)^1) + (200 / (1+i)^2) + (200 / (1+i)^3)

Simplifying the equation, we get:

NPV = -500 + 200(1/ (1+i)^1 + 1/ (1+i)^2 + 1/ (1+i)^3)

Using a financial calculator or Excel, we can find that the NPV is approximately $41.50 when the interest rate is 9%.

If we use a higher interest rate, the NPV will be lower and the project will not be profitable. If we use a lower interest rate, the NPV will be higher and the project will be more profitable. Therefore, the answer is B) no more than 9%.

Question 5

Tom's Donuts can invest in a new espresso machine that costs $300 and will yield expected profits of $200 each year for two years. What is the present discounted value of the expected profits from this investment if the interest rate is 5%?

Accepted Answer

The answer of Tom's Donuts can invest in a new...

Question 6

Assume the current interest rate is 25%. The present value of $1,000 in one year would be

Accepted Answer

The present value (PV) of $1,000 in one year at an interest rate of 25% is calculated using the formula PV = FV / (1 + r), where FV is the future value ($1,000) and r is the interest rate (0.25). Thus, PV = $1,000 / (1 + 0.25) = $1,000 / 1.25 = $800.

Question 7

If the interest rate is 15%, the current market value of $1 to be delivered in one year is

Accepted Answer

Using the formula for present value of $1: PV = FV/(1+r), we get PV = $1/(1+0.15) = $0.87.

Question 8

Benefits of investments are generally certain, but costs are harder to quantify and involve greater uncertainty.

Accepted Answer

The answer of Benefits of investments are generally certain, but...

Question 9

The present discounted value of R dollars to be paid in t years is

Accepted Answer

The present discounted value measures the amount of money that needs to be invested now in order to obtain a future sum of money. Therefore, the correct answer is C, as it describes the amount that needs to be set aside now to ensure that R dollars can be obtained in t years.

Question 10

Tom's Donuts can invest in a new espresso machine that costs $300 and will yield expected profits of $200 each year for two years. At lower interest rates, the present discounted value of profits from the investment

Accepted Answer

At lower interest rates, the present discounted value of future profits will increase because the discount rate used to calculate the present value will be lower, resulting in a higher present value. Therefore, Tom's Donuts will be able to earn a higher return on the investment and the investment will be more profitable.

Question 11

You win a lottery that pays $10,000 each year for the next 5 years beginning next year. How much are your winnings worth today?

Accepted Answer

The answer of You win a lottery that pays $10,000...

Question 12

Assume the current interest rate is 20%. The present value of $900 in one year would be

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the interest rate, and n is the number of periods. Here, FV = $900, r = 20% or 0.20, and n = 1. So, PV = $900 / (1 + 0.20) = $900 / 1.20 = $750.

Question 13

The formula for present discounted value is ________, where R dollars is to be paid t years in the future and the agreed upon interest rate is r.

Accepted Answer

The correct formula for present discounted value is R/(1 + r)t. This formula takes into account the future value of the payment (R dollars) and applies a discount factor based on the agreed upon interest rate (r) and the time until the payment is received (t). This gives the current value of the payment, also known as its present discounted value.

Question 14

A considerable amount of uncertainty is involved in making investment decisions.

Accepted Answer

Investment decisions involve various unknown factors such as market volatility, economic conditions, and unforeseen events that can impact the performance of investments. This uncertainty makes it challenging to predict investment outcomes with complete accuracy.

Question 15

The present value of $100 in one year is $86.96 when the interest rate is 15%.

Accepted Answer

The answer of The present value of $100 in one...

Question 16

The present discounted value of a stream of future income increases as the interest rate decreases.

Accepted Answer

This is because a lower interest rate means that money is worth more in the present, so future income needs to be discounted less to account for the time value of money. Conversely, a higher interest rate means that money is worth less in the present, so future income needs to be discounted more to account for the time value of money.

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