Exam 16: Using Present Value to Make Multi-Period Managerial Decisions

If the present value of an individual's savings account is $100,000, what is its future value in 5 years if the account earns an annual interest rate of 2 percent?

Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.023 × Q)- $350,000, where Q is the annual quantity of the input the firm needs. If the firm needs 355,000 units of the input each year, the manager _______buy the equipment because the NPV is _ _______.

Fresh Flour makes baking flour and sells its flour in 4 pound sacks or bags. The managers of Fresh Flour are considering whether the firm should make or buy the flour sacks. To make the sacks, Fresh Flour needs a $500,000 piece of equipment. Using this equipment, Fresh Flour can make a flour sack for $0.01 and, for simplicity, ignore taxes and assume that the $0.01 cost includes depreciation and all other costs. Fresh Flour would finance the $500,000 investment using its own funds and, if it purchased the flour sacks from another firm, it would pay $0.19 a flour sack. The life span of the equipment is 10 years and it has no salvage value at the end of the ten years. If the discount rate is 6 percent and the firm needs 400,000 flour sacks a year, what is the net present value of the equipment?

Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.082 × Q)- $200,000, where Q is the annual quantity of the input the firm needs. If the firm needs 175,000 units of the input each year, the manager_______ buy the equipment because the NPV is ________ .

All else equal, if a firm has complex input specifications, it is likely cost saving for the firm to buy the input for another firm.

The longer the period of time until receiving a future amount of money, the more interest that can be earned, so the larger the discount factor.

If the life span of a piece of equipment is 10 years and its current cost is $400,000, what is the straight- line depreciation allowance each year?

The issuer of a bond promises to make _ ________ payments at specified times and repay the_______ at some point in the future and the bond's price in the market _______fluctuate over the life of the bond.

Financing an investment with debt increases the net present value of the investment.

Profit- maximizing managers should make efforts to receive profits in future and incur costs in the present.

As long as the discount rate is_______ the interest rate on a loan, the present value of the cost of an investment equals the initial cost of the investment.

If a firm has a long- run average cost of $2 when it produces 4,000 units of an input and has a long- run average cost of $1 when it produces $10,000 units and the firm needs 10,000 units of the input, the firm_______ experience economies of scale, which makes the firm ________ likely to make the input rather than buy it.

Interest paid of debt- financed investments is referred to as a tax shield.

A manager is considering investing in a new piece of equipment. The equipment cost $50,000 and the manager will finance the full amount of the cost over three years at an interest rate of 4 percent. In the third year, the manager will repay the entire principal of the loan plus the year's annual interest, after making interest- only payments for the first two years. The equipment will generate $30,000 in future operating profit each of the three years and has a salvage value of zero at the end of the three years. The tax rate on the firm's profit is 8 percent each year. What is the net present value of the investment?

Fresh Flour makes baking flour and sells its flour in 4 pound sacks or bags. The managers of Fresh Flour are considering whether the firm should make or buy the flour sacks. To make the sacks, Fresh Flour needs a $500,000 piece of equipment. Using this equipment, Fresh Flour can make a flour sack for $0.01 and, for simplicity, ignore taxes and assume that the $0.01 cost includes depreciation and all other costs. Fresh Flour would finance the $500,000 investment using its own funds and, if it purchased the flour sacks from another firm, it would pay $0.19 a flour sack. The life span of the equipment is 10 years and it has no salvage value at the end of the ten years. The discount rate is 6 percent. How many flour sacks does Fresh Flour need each year in order for the net present value to be positive?

A firm is considering using its own funds to finance an investment, but needs an estimate of the discount rate. Currently the firm is earning 4 percent on funds held in a bank account and 6 percent on funds held in stocks. If the firm has 20 percent of its funds in the bank account and the remaining 80 percent in stocks, what is the firm's weighted average cost of capital?

The present value of a bond is the only price that buyers are willing to spend on the bond and the only price sellers are willing to accept for the bond.

In a sensitivity analysis, managers should change ________ variable(s)at a time to determine how sensitive the_______ _ value of the investment is to the different variables used in the calculations.

Depreciation allowance ________the taxes a firm must pay and ________ the net present value of an investment.

When a firm uses its own funds to self- finance an investment, the operating profit exceeds the taxable profit.