Question 1

What would the interest rate need to be in order to earn $100 on an investment of $1,000 over two years? Assume interest compounds annually.

Accepted Answer

1100 = 1000(1 + r)² 1.1 = (1+r)² Ö1.1 = 1 + r 1.049 - 1 = r r = 4.9%

Question 2

If the real interest rate is 7.5% and the rate of inflation is 3%,what is the nominal interest rate?

Accepted Answer

A)  4.50% 
B)  4.57% 
C)  10.50% 
D)  10.73% 
A)  4.50% 
B)  4.57% 
C)  10.50% 
D)  10.73% D

Question 3

The NPV criterion states that an investment project is profitable when its NPV is ______ and unprofitable when its NPV is ______.

Accepted Answer

A)  Positive, positive 
B)  Positive, negative 
C)  Negative, positive 
D)  Negative, negative 
A)  Positive, positive 
B)  Positive, negative 
C)  Negative, positive 
D)  Negative, negative B

Question 4

The amount of time required before a project's total inflows match its total outflows is the

Accepted Answer

A)  Break-even period 
B)  Payback period 
C)  Duration 
D)  Yield to maturity 
A)  Break-even period 
B)  Payback period 
C)  Duration 
D)  Yield to maturity

Question 5

Using a carefully-labeled graph,explain the Life Cycle Hypothesis.What are some of the implications of the Life Cycle Hypothesis?

Accepted Answer

The Life Cycle Hypothesis is based on tw

Question 6

Suppose you have put $5,000 into a project that should generate cash inflows of $1,250 for each of the next 5 years.How long will it take to recover your initial investment?

Accepted Answer

A)  3 years 
B)  3.5 years 
C)  4 years 
D)  4.2 years 
A)  3 years 
B)  3.5 years 
C)  4 years 
D)  4.2 years

Question 7

What happens to borrowing when interest rates rise?

Accepted Answer

A)  It increases 
B)  It decreases 
C)  It can increase or decrease 
D)  It is impossible to tell 
A)  It increases 
B)  It decreases 
C)  It can increase or decrease 
D)  It is impossible to tell

Question 8

Suppose you have put $5,000 into a project that should generate cash inflows of $1,250 for each of the next 5 years.If the interest rate is 8% is this a good investment?

Accepted Answer

A)  Yes, because you will earn a profit of $1,250 dollars in 5 years 
B)  Yes, because the internal rate of return is higher than the interest rate 
C)  No, because the internal rate of return is higher than the interest rate 
D)  No, because the net present value is negative 
A)  Yes, because you will earn a profit of $1,250 dollars in 5 years 
B)  Yes, because the internal rate of return is higher than the interest rate 
C)  No, because the internal rate of return is higher than the interest rate 
D)  No, because the net present value is negative

Question 9

-Refer to Figure 10.1.For an individual that prefers a stable living standard,which line represents the best feasible consumption path?

Accepted Answer

A)  a 
B)  b 
C)  c 
D)  h 
A)  a 
B)  b 
C)  c 
D)  h

Question 10

-Table 10.1 shows the cash flows and discounted cash flows for three mutually exclusive projects available to a company.Assume an interest rate of 5%.Which project has the shortest payback period?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Project C 
D)  Cannot be determined 
A)  Project A 
B)  Project B 
C)  Project C 
D)  Cannot be determined

Question 11

Which of the following statements about nominal interest and real interest is true?

Accepted Answer

A)  Nominal interest is a yearly rate and real interest is a monthly rate 
B)  Nominal interest does not adjust for inflation, whereas real interest does 
C)  Nominal interest is what the lender receives and real interest is what the borrower pays 
D)  Nominal interest and real interest are two ways of saying the same thing 
A)  Nominal interest is a yearly rate and real interest is a monthly rate 
B)  Nominal interest does not adjust for inflation, whereas real interest does 
C)  Nominal interest is what the lender receives and real interest is what the borrower pays 
D)  Nominal interest and real interest are two ways of saying the same thing

Question 12

Joe has just retired and would like to convert some of his savings into an annuity that will pay him an equal amount each year for the next 5 years.If the current interest rate is 5.75%,how much money will he have to invest in order to receive $30,000 a year?

Accepted Answer

PDV = ($30,000/(1 + 0.575))+ ($30,000/(1

Question 13

Suppose you invest $5,000 for 5 years.The interest rate for the first 2 years is 4.7%,5.2% for year 3 and 5.4% for the final 2 years.Assuming interest compounds annually,what would your investment have returned in those 5 years?

Accepted Answer

Y₂ = $5000(1 + 0.047)² = $5481.0

Question 14

If you were to invest $10,000 for two years and the interest rates for each of those years are 4.5% and 4.65% respectively,how much interest would you earn from the end of year one until the end of year two? Assume interest compounds annually.

Accepted Answer

Y₁ = $10,000(1 + 0.045)= $10,45

Question 15

Durable,marketable skills that generate higher income are also known as

Accepted Answer

A)  Physical capital 
B)  Investment capital 
C)  Human capital 
D)  Education capital 
A)  Physical capital 
B)  Investment capital 
C)  Human capital 
D)  Education capital

Question 16

Suppose the interest rate is 8%.If a project requires an initial investment of $5,000 and returns $5,500 in a year,what is its internal rate of return?

Accepted Answer

A)  2% 
B)  8% 
C)  10% 
D)  18% 
A)  2% 
B)  8% 
C)  10% 
D)  18%

Question 17

If a project has an initial investment of $20,000 and consecutive yearly cash inflows of $5,000,$8000,$10,000 and $7,000,respectively,what is its payback period?

Accepted Answer

A)  2 years 
B)  2.5 years 
C)  2.7 years 
D)  3 years 
A)  2 years 
B)  2.5 years 
C)  2.7 years 
D)  3 years

Question 18

-Refer to Scenario 10.1.Jennifer should invest in college when the net present value of that investment is ______ and the internal rate of return is ______ the current interest rate.

Accepted Answer

A)  Positive, greater than 
B)  Negative, greater than 
C)  Positive, less than 
D)  Negative, less than 
A)  Positive, greater than 
B)  Negative, greater than 
C)  Positive, less than 
D)  Negative, less than

Question 19

The Table 10.2 below shows net cash flows for 3 mutually exclusive projects from which a company can choose.Each project requires an investment in the first year,then produces a positive net cash flow for each of the following four years.Assuming an interest rate of 5%,which project would the company choose? Does the best project have the highest total net cash flow? The shortest payback period?

Accepted Answer

The NPV of each project is calculated in

Question 20

-Refer to Figure 10.1.Which line represents earnings?

Accepted Answer

A)  b 
B)  h 
C)  f + i 
D)  d 
A)  b 
B)  h 
C)  f + i 
D)  d

What would the interest rate need to be in order to earn $100 on an investment of $1,000 over two years? Assume interest compounds annually.

If the real interest rate is 7.5% and the rate of inflation is 3%,what is the nominal interest rate?

The NPV criterion states that an investment project is profitable when its NPV is and unprofitable when its NPV is .

The amount of time required before a project's total inflows match its total outflows is the

Using a carefully-labeled graph,explain the Life Cycle Hypothesis.What are some of the implications of the Life Cycle Hypothesis?

Suppose you have put $5,000 into a project that should generate cash inflows of $1,250 for each of the next 5 years.How long will it take to recover your initial investment?

What happens to borrowing when interest rates rise?

Suppose you have put $5,000 into a project that should generate cash inflows of $1,250 for each of the next 5 years.If the interest rate is 8% is this a good investment?

-Refer to Figure 10.1.For an individual that prefers a stable living standard,which line represents the best feasible consumption path?

-Table 10.1 shows the cash flows and discounted cash flows for three mutually exclusive projects available to a company.Assume an interest rate of 5%.Which project has the shortest payback period?

Which of the following statements about nominal interest and real interest is true?

Joe has just retired and would like to convert some of his savings into an annuity that will pay him an equal amount each year for the next 5 years.If the current interest rate is 5.75%,how much money will he have to invest in order to receive $30,000 a year?

Suppose you invest $5,000 for 5 years.The interest rate for the first 2 years is 4.7%,5.2% for year 3 and 5.4% for the final 2 years.Assuming interest compounds annually,what would your investment have returned in those 5 years?

If you were to invest $10,000 for two years and the interest rates for each of those years are 4.5% and 4.65% respectively,how much interest would you earn from the end of year one until the end of year two? Assume interest compounds annually.

Durable,marketable skills that generate higher income are also known as

Suppose the interest rate is 8%.If a project requires an initial investment of $5,000 and returns $5,500 in a year,what is its internal rate of return?

If a project has an initial investment of $20,000 and consecutive yearly cash inflows of $5,000,$8000,$10,000 and $7,000,respectively,what is its payback period?

-Refer to Scenario 10.1.Jennifer should invest in college when the net present value of that investment is and the internal rate of return is the current interest rate.

-Refer to Figure 10.1.Which line represents earnings?

Introduction

Supply and Demand3

Balancing Benefits and Costs

Principles and Preferences

Constraints, Choices, and Demand

Rom Demand to Welfare

Technology and Production

Cost

Rofit Maximization

Choices Involving Risk

Choices Involving Strategy

Behavioral Economics

Equilibrium and Efficiency

Market Intervention

General Equilibrium, Efficiency, and Equity

Monopoly

Pricing Policies

Oligopoly

Externalities and Public Goods

Filters

Exam 10: Choices Involving Time

What would the interest rate need to be in order to earn $100 on an investment of $1,000 over two years? Assume interest compounds annually.

If the real interest rate is 7.5% and the rate of inflation is 3%,what is the nominal interest rate?

The NPV criterion states that an investment project is profitable when its NPV is ______ and unprofitable when its NPV is ______.

The amount of time required before a project's total inflows match its total outflows is the

Using a carefully-labeled graph,explain the Life Cycle Hypothesis.What are some of the implications of the Life Cycle Hypothesis?

Suppose you have put $5,000 into a project that should generate cash inflows of $1,250 for each of the next 5 years.How long will it take to recover your initial investment?

What happens to borrowing when interest rates rise?

Suppose you have put $5,000 into a project that should generate cash inflows of $1,250 for each of the next 5 years.If the interest rate is 8% is this a good investment?

-Refer to Figure 10.1.For an individual that prefers a stable living standard,which line represents the best feasible consumption path?

-Table 10.1 shows the cash flows and discounted cash flows for three mutually exclusive projects available to a company.Assume an interest rate of 5%.Which project has the shortest payback period?

Which of the following statements about nominal interest and real interest is true?

Joe has just retired and would like to convert some of his savings into an annuity that will pay him an equal amount each year for the next 5 years.If the current interest rate is 5.75%,how much money will he have to invest in order to receive $30,000 a year?

Suppose you invest $5,000 for 5 years.The interest rate for the first 2 years is 4.7%,5.2% for year 3 and 5.4% for the final 2 years.Assuming interest compounds annually,what would your investment have returned in those 5 years?

If you were to invest $10,000 for two years and the interest rates for each of those years are 4.5% and 4.65% respectively,how much interest would you earn from the end of year one until the end of year two? Assume interest compounds annually.

Durable,marketable skills that generate higher income are also known as

Suppose the interest rate is 8%.If a project requires an initial investment of $5,000 and returns $5,500 in a year,what is its internal rate of return?

If a project has an initial investment of $20,000 and consecutive yearly cash inflows of $5,000,$8000,$10,000 and $7,000,respectively,what is its payback period?

-Refer to Scenario 10.1.Jennifer should invest in college when the net present value of that investment is ______ and the internal rate of return is ______ the current interest rate.

-Refer to Figure 10.1.Which line represents earnings?

Introduction

Supply and Demand3

Balancing Benefits and Costs

Principles and Preferences

Constraints, Choices, and Demand

Rom Demand to Welfare

Technology and Production

Cost

Rofit Maximization

Choices Involving Risk

Choices Involving Strategy

Behavioral Economics

Equilibrium and Efficiency

Market Intervention

General Equilibrium, Efficiency, and Equity

Monopoly

Pricing Policies

Oligopoly

Externalities and Public Goods

Filters

The NPV criterion states that an investment project is profitable when its NPV is and unprofitable when its NPV is .

-Refer to Scenario 10.1.Jennifer should invest in college when the net present value of that investment is and the internal rate of return is the current interest rate.