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

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 6 percent and the cost of the investment is $45,000, 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. If the discount rate is 6 percent and the firm needs 400,000 flour sacks a year, what is the present value of the equipment?

All else equal, if a firm's long- run average cost curve increases as more of an input is produced and the firm requires a large quantity of the input, it is likely cost saving for the firm to buy the input from another firm.

If a project involves risk, managers can account for the risk by_______ the discount rate, which _______the present value of the future profits.

Given an annual interest rate of 12 percent, what is the present value of receiving $1,000 in 20 years?

The riskier the bond, the the discount rate_______ and the _______the price of the bond.