1. Stephanie offers to pay Josh $1,000 a year from now if he will loan her money
ID: 1213456 • Letter: 1
Question
1. Stephanie offers to pay Josh $1,000 a year from now if he will loan her money today. Assume that there is no inflation over this period. If Josh wants to earn 10% interest, then the maximum amount he will lend Stephanie is:
$826.45
$90
$990.09
$909.09
2. Which piece of information is not needed in order to calculate the present value of a sum of money to be received in the future?
the means through which the money will be paid (cash, check, cashier's check, and so on)
the amount of money to be received
the amount of time until the money is received
the interest rate
3.Keeping in mind the time value of money, if you won a $100 million lottery jackpot, what would be the most likely payout arrangement in lieu of taking $4 million a year over the next 25 years?
The lottery commission gives you the option to take a lump sum of $100 million today.
The lottery commission gives you the option to take a lump sum of $128 million today.
The lottery commission gives you the option to take a lump sum of $72 million today.
It would never be in the best interest of the lottery commission to offer any winner a lump sum in lieu of an annual payment.
4. Suppose you are asked to evaluate a project in which you will receive $1,000 one year from now and $2,000 two years from now, and it will incur costs of $400 now. What is the net present value of this project if the interest rate is 10%?
2,600.00
$2,161.98
$2,561.98
$2327.27
5. The net present value of a project can be defined by:
the present value of current and future benefits minus the present value of current and future costs.
the future value of current and future benefits minus the present value of current and future costs.
the present value of current and future benefits plus the present value of current and future costs.
the present value of current and future benefits plus the future value of current and future costs.
6. Which of the following is an advantage that the concept of "present value" gives decision makers?
It compares the value of a dollar realized today with the value of a dollar realized at a later date.
It factors out the complication created by time.
It evaluates a project as if all relevant costs and benefits were occurring today rather than at different times.
It simplifies any cost-benefit analysis by always assuming that any costs associated with a project are incurred before benefits are realized.
7. Which of the following statements are TRUE? [Hint: Assume there is no inflation.]
Receiving $10 today is worth less than having $10 in the future.
Receiving $10 today is worth more than having $10 in the future.
Receiving $10 today is the same as having $10 one year from now.
Receiving $10 today cannot be meaningfully compared to having $10 in the future.
8. All of the following are true statements that a problem solver must address when deciding whether to take on a project EXCEPT:
The benefits and costs of a project always arrive at the same time.
Implicit costs must be factored into the decision.
Explicit costs must be factored into the decision.
Benefits must be compared with costs.
9. Thomas has $10,000 to lend at an annual interest rate of 8%. Suppose at the end of years 2, 3, and 4 he reinvests the original $10,000 plus the interest earnings at the same interest rate. How much money will he have at the end of year 4?
$13,604
$12,597
$11,664
$10,800
Explanation / Answer
1. Ans: $909.09
Explanation: P = F(P/F, 10%, 1) = $1000(0.9091) = $909.10
2. Ans: the means through which the money will be paid (cash, check, cashier's check, and so on)
No explanation is needed here.
3. Ans: The lottery commission gives you the option to take a lump sum of $100 million today.
Explanation: According to time value of money concept, it is better to receive $100 today instead of receiving $4 million a year over the next 25 years. Because value of money today is more than the value tomorrow.
4. Ans: $2161.98
Explanation: NPV = - 400 + 1000(P/F, 10%, 1) + 2000(P/F, 10%, 2)
= - 400 + 1000(0.9091) + 2000(0.8264) = $2161.98
5. Ans: the present value of current and future benefits minus the present value of current and future costs.
No explanation is needed here.
6. Ans: It evaluates a project as if all relevant costs and benefits were occurring today rather than at different times.
7. Ans: Receiving $10 today is worth more than having $10 in the future.
Explanation: Because value of money today is more than the value tomorrow.
8. Ans: The benefits and costs of a project always arrive at the same time.
9. Ans: $13,604
Explanation: F = P(F/P, 8%, 4) = 10,000(1.3604) = $13,604
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