Exam 15: Investment, Time, and Capital Markets

The authors cite a recent study of MBA programs that compares pre-MBA salaries with post-MBA salaries. For some of the highest ranked schools, the salary difference was roughly $100,000 per year, and the difference was roughly $60,000 for some schools ranked near the bottom of the top 20. Is it possible that the financial returns from an MBA earned at a lower ranked school may actually exceed the returns from a top ranked school?

A "risky" asset will earn a rate of return close to that of "riskless" assets if its risk is

Scenario 15.6: Consider the following decision that Eileen has to make: Eileen is considering buying a $4000 computer for her daughter. Eileen hopes that with the computer her daughter's schoolwork will improve so much that in two years time she will be offered a full-ride scholarship to college. The scholarship is paid for four years and is valued at $25,000 per year. Even with the computer the probability that the scholarship will be awarded is 10%. -Refer to Scenario 15.6. What formula shows the dollar stream expected from this purchase?

If technological breakthroughs in the computer and software industries cause large numbers of firms to consider investment projects they hadn't previously thought of,

The asset beta in the Capital Asset Pricing Model is a moderate number that measures

The authors claim that monopolists will tend to practice stronger conservation of depletable resources than would occur under a perfectly competitive market structure. Why is this true?

For an investment in a hybrid auto like the Toyota Prius, the car owner typically pays a higher initial price for the car but enjoys lower fuel costs for the life of the vehicle. The authors note that consumers tend to use discount rates that are too high when computing the net present value of these investment decisions. If this is true, consumers would tend to place too ________ emphasis on the initial purchase price and too ________ emphasis on the future fuel savings when computing the net present value of the investment.

If an asset's beta is high, its

You have won a contest and are allowed to choose between two prizes. One option is to receive $200 today and another $200 one year from now. The second option is $100 today and an additional $325 one year from now. At what interest rate (if any) is the present value of the two prizes identical?

The PDV of a perpetuity with a yearly payment of $500 at an interest rate of 5% is

The difference between a Treasury bill and a Treasury bond is that the bill

When purchasing autos and other durable goods, consumers tend to use discount rates that are inversely proportional to their income, so the discount rates are lower for consumers with higher income. The key reason for this behavior is that:

Which is a stock variable?

If individuals decide to save more for retirement,

Thompson Industries produces packaging materials. Thompson is considering undertaking one or both of two investment projects. The first investment involves a new automated warehouse for the firm's foam and plastic inventory. The warehouse can be expected to have a useful life of ten years, after which it will be obsolete with no scrap value. The warehouse involves $3,000,000 in capital cost that must be paid immediately. The warehouse will lower the firm's cost $400,000 for each of the first five years, and $500,000 per year thereafter. The second project involves the acquisition of a computerized order system that would allow the firm's salespeople to link directly with the computer to place orders. The computerized network will require an initial capital cost of $1,000,000, but will save the firm $300,000 per year in support staff costs. Thompson's managers believe that the order system will be obsolete after five years. Cash flows for each project will be at year end. Thompson uses a 10% discount rate in evaluating the investment projects. interest rates and future cash flows are in real terms, net of all tax effects. a. Calculate the net present value of each investment project. Which project(s) should the firm accept? b. Comment on the impact of a change in the discount rate on the NPV. (Analyze both an increase and a decrease in the NPV.)

A perpetual payment of $10,000, offered for sale at $125,000, is being offered at an effective yield of

Scenario 15.2: Consider the payment streams listed below that are available from different capital projects for Furry Software. The firm must choose to implement just one out of the three possible projects. -Refer to Scenario 15.2. With no other information available, it is

Why does the NPV of a college education tend to be positive but relatively small?

Which of the following statements is NOT true?

From the Hotelling rule, we would expect that a perfectly competitive industry selling an exhaustible resource would