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

All else equal, the present value of a sum of money will be smaller the larger the interest rate.

The discount factor_______ _ the _ _______value to convert it to the ________ value.

Given an annual interest rate of 5 percent, what is the present value of receiving $2,000 in one year?

Smooth Concrete is a local firm specializing in concrete driveways. Considering that concrete is very heavy, Smooth Concrete is more likely to _______its own concrete to _______transportation costs.

The lower the tax rate, the _______the after- tax profits and the ________ the after- tax net present value of an investment.

All else equal, _______is likely to have a greater _______effect on the net present value than_______.

The above table shows the future operating profits from an investment. The future operating profits are earned at the end of e the respective years. -Refer to the table above. If the discount rate is 5 percent and the cost of the investment is $42,000, what is the net present value of the investment?

In order to analyze costs and benefits that are paid and received at different times, they must be valued at _______in time as funds received or paid in the future are worth _______than the same amount received or paid today.

The profit- maximizing manager of Big Farms wants to purchase a large piece of farm equipment. The manager has two financing options from two different banks. Big Bank will allow the manager to make five equal payments of $22,000 at the end of each of the next five years. Best Bank will allow the manager to make a payment of $10,000 at the end of the next four years and then make a balloon payment of $72,000 at the end of the fifth year. If the interest rate is 4 percent, which of the following statements is true?

If a bond offers $1,000 in interest payments at the end of each of next 5 years and a repayment of $10,000 also at the end of the 5 years and the current discount rate is 3 percent, what is the present value of the bond?

Under current U.S. tax laws, the interest paid on any debt- financed investment_______ tax deductible and the interest expense _______the net present value of an investment.

What is the present value of ten payments of $200 at the end of each of the next ten years if the interest rate is 7 percent?

The above table shows a 5 year payment plan. Each payment is made at the end of the year, so after one year, a payment of $ made, after two years another payment of $1,500 is made and so on. The interest rate is 3 percent. -Refer to the table above. What is the value of A plus B (A +B)or the present value of the first two payments?

If a firm has a long- run average cost of $4 when it produces 5,000 units of an input and has a long- run average cost of $2 when it produces $12,000 units, the firm is experiences economies of scale.

What is the future value of $100 in 2 years that earns an annual interest rate of 5 percent?

Health Bars markets their snack bars as gluten and nut allergy free. If consumers with gluten or nut allergies become sick due to consuming gluten or nuts in Health Bars snacks, the managers of Health Bars face heavy legal fees. As a result, managers of Health Bars are more likely to produce all of their inputs rather than buy them due to issues with_______ .

Super Haulers is a hauling company and delivers large and heavy materials to construction job sites. Super Haulers is considering purchasing a new dump truck that costs $185,000 and the managers of Super Haulers have estimated that the new dump truck will generate $50,000 a year in future operating profit for the next four years. At the end of four years, Super Haulers can sell the dump truck at a salvage price of $20,000. If the discount rate is 5 percent, which of the following is true if the managers of Super Haulers are profit- maximizing?

An annuity factor can be used when payments change each year.

Suppose a manager of a firm is considering investing in a piece of equipment that will generate $20,000 in future operating profit each year for the next three years. The discount rate is 5 percent and the salvage value of zero. The equipment's current cost is $50,000 and this cost will be financed by the firm. If the tax rate on the firm's profit is 4 percent each year, what is the net present value of the equipment?

Suppose a supplier has an agreement with a firm to be paid $50,000 in 4 years. If the annual interest rate is 1 percent, the supplier would be indifferent between receiving _______now and waiting 4 years to receive the $50,000.