Question 1

The present value of a future payment:

Accepted Answer

A) decreases when the interest rate rises. 
B) decreases when the interest rate falls. 
C) decreases when the interest rate stays the same. 
D) never changes regardless of the interest rate. 
A) decreases when the interest rate rises. 
B) decreases when the interest rate falls. 
C) decreases when the interest rate stays the same. 
D) never changes regardless of the interest rate. A

Question 2

Use the following to answer questions:  
-(Table: Present Value of Projects A, B, C, and D) Look at the table Present Value of Projects A, B, C, and D. If the annual interest rate is 10%, which project do you choose?

Accepted Answer

A) A 
B) B 
C) C 
D) D 
A) A 
B) B 
C) C 
D) D B

Question 3

You have heard about a new light bulb that is costly to purchase but uses little electricity and thus allows you to save money on your utility bill. Suppose the new light bulb costs $10 today but next year your electricity bill will be $50 lower. If the interest rate is 10%, what is the net present value of buying this new light bulb and using it for one year?

Accepted Answer

A) $40 
B) -$45.45 
C) $55 
D) $35.45 
A) $40 
B) -$45.45 
C) $55 
D) $35.45 D

Question 4

The _____ the future payment, the _____ its present value, all other things held constant.

Accepted Answer

A) less; the more uncertain is 
B) more; less 
C) more; more 
D) sooner; less 
A) less; the more uncertain is 
B) more; less 
C) more; more 
D) sooner; less

Question 5

The present value of a future payment _____if the _____.

Accepted Answer

A) increases; wait period increases. 
B) decreases; future payment increases. 
C) increases; interest rate decreases. 
D) decreases; stock market rises. 
A) increases; wait period increases. 
B) decreases; future payment increases. 
C) increases; interest rate decreases. 
D) decreases; stock market rises.

Question 6

To finance your education, you borrow $10,000 from your aunt at an annual interest rate of 5%. If your cousin offers to lend you the same amount but suggests a lower interest rate and you take the offer, you will end up repaying your cousin _____ you would have to your aunt.

Accepted Answer

A) more than. 
B) less than 
C) the same amount as 
D) more now but less later than 
A) more than. 
B) less than 
C) the same amount as 
D) more now but less later than

Question 7

You have recently graduated from high school and are debating whether to attend college or get a job. Assume that you can spend $50,000 today for tuition and receive your college degree in only one year. When you graduate, you will receive a job that pays you $100,000 immediately and $100,000 the following year. If you begin working immediately, you can earn $35,000 today and each of the next two years. If the annual interest rate is 10%, should you go to college?

Accepted Answer

For each of these two options, compute t

Question 8

If a friend offers to pay you $1 five years from now, when the prevailing annual interest rate is 5%, what is the net present value of that $1 today?

Accepted Answer

A) $0.95 
B) $1.05 
C) $0.78 
D) $1.50 
A) $0.95 
B) $1.05 
C) $0.78 
D) $1.50

Question 9

A semiconductor firm is considering opening a new plant. The plant will generate profits of $100 million at the end of each of three years after the first year of production and then no profits after that. If the interest rate is 10%, what is the maximum cost (to the nearest million) the firm is willing to pay now for the plant?

Accepted Answer

A) $300 million 
B) $249 million 
C) $273 million 
D) $100 million 
A) $300 million 
B) $249 million 
C) $273 million 
D) $100 million

Question 10

Which of the following statements is INCORRECT?

Accepted Answer

A) The dollar amount of a future payment is more than its present value. 
B) The present value of a future payment is approximately the same as its future dollar amount. 
C) The present value of a future payment is less than its future dollar amount. 
D) The bigger the future payment, the more its present value, all other things held constant. 
A) The dollar amount of a future payment is more than its present value. 
B) The present value of a future payment is approximately the same as its future dollar amount. 
C) The present value of a future payment is less than its future dollar amount. 
D) The bigger the future payment, the more its present value, all other things held constant.

Question 11

The present value of a future payment increases if the:

Accepted Answer

A) period between the present and the future increases. 
B) future payment decreases. 
C) interest rate decreases. 
D) stock market falls. 
A) period between the present and the future increases. 
B) future payment decreases. 
C) interest rate decreases. 
D) stock market falls.

Question 12

Use the following to answer questions:  
-(Table: Present Value of Projects A, B, C, and D) Look at the table Present Value of Projects A, B, C, and D. If the annual interest rate is 2%, which project do you choose?

Accepted Answer

A) A 
B) B 
C) C 
D) D 
A) A 
B) B 
C) C 
D) D

Question 13

The present value of a painting that you expect to sell for $500 in three years is $405.22 if the annual interest rate is 5%.

Accepted Answer

A) True 
 B)False

Question 14

The _____ the period, the _____ is the present value of a given future payment, all other things held constant.

Accepted Answer

A) longer; less 
B) shorter; less 
C) longer; more 
D) shorter; the more uncertain 
A) longer; less 
B) shorter; less 
C) longer; more 
D) shorter; the more uncertain

Question 15

If the friend offers to pay you $1 five years from today, the present value will:

Accepted Answer

A) be higher than $1. 
B) depend upon the prevailing interest rate. 
C) be equal to zero, since you don't have the dollar. 
D) not be important in understanding the time value of money. 
A) be higher than $1. 
B) depend upon the prevailing interest rate. 
C) be equal to zero, since you don't have the dollar. 
D) not be important in understanding the time value of money.

Question 16

A firm is considering a new capital expenditure of $2 million. This expenditure is expected to yield $1 million in annual profits for each of two years. Given this information, the firm should _____ the project, _____

Accepted Answer

A) refuse; since the costs are not offset by the profits. 
B) undertake; since the profits will be greater than the costs. 
C) undertake; only if the interest rate is zero. 
D) undertake; regardless of the interest rate. 
A) refuse; since the costs are not offset by the profits. 
B) undertake; since the profits will be greater than the costs. 
C) undertake; only if the interest rate is zero. 
D) undertake; regardless of the interest rate.

Question 17

As the manager of a professional football team, you just offered the kicker a two-year contract that pays $2 million at the end of each of the next two years. The kicker refuses the contract, stating he wants $3 million at the end of this year. If you offer $3 million at the end of this year, about how much will you have to offer at the end of next year to keep the present value of the contract the same as your original offer? Assume a 10% annual interest rate.

Accepted Answer

A) $1 million 
B) $900,000 
C) $808,080 
D) $743,800 
A) $1 million 
B) $900,000 
C) $808,080 
D) $743,800

Question 18

A soft-drink bottling firm is thinking of opening a new distribution center. The center will cost $2.5 million to build today, and it will generate profits of $1 million one year from now, two years from now, and three years from now. The firm should build the distribution center if the interest rate is 9% or lower.

Accepted Answer

A) True 
 B)False

Question 19

Your grandmother has promised you $1,000 when you graduate in two years. At a 6% annual interest rate, you can borrow $890 and pay it all back with your grandmother's gift at graduation.

Accepted Answer

A) True 
 B)False

Question 20

Your friend wants to borrow $2,000 and pay it back in one year. She is someone who keeps her word. She agrees to repay you $2,080 in one year. The bank annual interest rate is 5%. Which of the following statements is TRUE?

Accepted Answer

A) You will be financially worse off if you make the loan rather than deposit $2,000 in the bank. 
B) You will be financially better off if you make the loan rather than deposit $2,000 in the bank. 
C) The present value of $2,080 payable in one year with an interest rate of 5% is $1,904.76, which is less than the value of the $2,000 you have been asked to lend. 
D) None of the statements is true. 
A) You will be financially worse off if you make the loan rather than deposit $2,000 in the bank. 
B) You will be financially better off if you make the loan rather than deposit $2,000 in the bank. 
C) The present value of $2,080 payable in one year with an interest rate of 5% is $1,904.76, which is less than the value of the $2,000 you have been asked to lend. 
D) None of the statements is true.

The present value of a future payment:

Use the following to answer questions: -(Table: Present Value of Projects A, B, C, and D) Look at the table Present Value of Projects A, B, C, and D. If the annual interest rate is 10%, which project do you choose?

The _ the future payment, the _ its present value, all other things held constant.

The present value of a future payment _if the _.

To finance your education, you borrow $10,000 from your aunt at an annual interest rate of 5%. If your cousin offers to lend you the same amount but suggests a lower interest rate and you take the offer, you will end up repaying your cousin _____ you would have to your aunt.

If a friend offers to pay you $1 five years from now, when the prevailing annual interest rate is 5%, what is the net present value of that $1 today?

Which of the following statements is INCORRECT?

The present value of a future payment increases if the:

Use the following to answer questions: -(Table: Present Value of Projects A, B, C, and D) Look at the table Present Value of Projects A, B, C, and D. If the annual interest rate is 2%, which project do you choose?

The present value of a painting that you expect to sell for $500 in three years is $405.22 if the annual interest rate is 5%.

The _ the period, the _ is the present value of a given future payment, all other things held constant.

If the friend offers to pay you $1 five years from today, the present value will:

A firm is considering a new capital expenditure of $2 million. This expenditure is expected to yield $1 million in annual profits for each of two years. Given this information, the firm should _ the project, _

Your grandmother has promised you $1,000 when you graduate in two years. At a 6% annual interest rate, you can borrow $890 and pay it all back with your grandmother's gift at graduation.

Your friend wants to borrow $2,000 and pay it back in one year. She is someone who keeps her word. She agrees to repay you $2,080 in one year. The bank annual interest rate is 5%. Which of the following statements is TRUE?

First Principles

Economic Models

Supply and Demand

International Trade 5

Macroeconomics: the Big Picture

Gdp and Cpi: Tracking the Macroeconomy

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending, and the Financial System

Fiscal Policy Appendix Taxes and the Multiplier

Money, Banking, and the Federal Reserve System

Monetary Policy

Inflation, Disinflation, and Deflation

Crises and Consequences

Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

Filters

Exam 21: toward a Fuller Understanding of Present Value

The present value of a future payment:

Use the following to answer questions: -(Table: Present Value of Projects A, B, C, and D) Look at the table Present Value of Projects A, B, C, and D. If the annual interest rate is 10%, which project do you choose?

The _____ the future payment, the _____ its present value, all other things held constant.

The present value of a future payment _____if the _____.

To finance your education, you borrow $10,000 from your aunt at an annual interest rate of 5%. If your cousin offers to lend you the same amount but suggests a lower interest rate and you take the offer, you will end up repaying your cousin _____ you would have to your aunt.

If a friend offers to pay you $1 five years from now, when the prevailing annual interest rate is 5%, what is the net present value of that $1 today?

Which of the following statements is INCORRECT?

The present value of a future payment increases if the:

Use the following to answer questions: -(Table: Present Value of Projects A, B, C, and D) Look at the table Present Value of Projects A, B, C, and D. If the annual interest rate is 2%, which project do you choose?

The present value of a painting that you expect to sell for $500 in three years is $405.22 if the annual interest rate is 5%.

The _____ the period, the _____ is the present value of a given future payment, all other things held constant.

If the friend offers to pay you $1 five years from today, the present value will:

A firm is considering a new capital expenditure of $2 million. This expenditure is expected to yield $1 million in annual profits for each of two years. Given this information, the firm should _____ the project, _____

Your grandmother has promised you $1,000 when you graduate in two years. At a 6% annual interest rate, you can borrow $890 and pay it all back with your grandmother's gift at graduation.

Your friend wants to borrow $2,000 and pay it back in one year. She is someone who keeps her word. She agrees to repay you $2,080 in one year. The bank annual interest rate is 5%. Which of the following statements is TRUE?

First Principles

Economic Models

Supply and Demand

International Trade 5

Macroeconomics: the Big Picture

Gdp and Cpi: Tracking the Macroeconomy

Unemployment and Inflation

Long-Run Economic Growth

Savings, Investment Spending, and the Financial System

Fiscal Policy Appendix Taxes and the Multiplier

Money, Banking, and the Federal Reserve System

Monetary Policy

Inflation, Disinflation, and Deflation

Crises and Consequences

Events and Ideas

Open-Economy Macroeconomics

Graphs in Economics

Filters

The _ the future payment, the _ its present value, all other things held constant.

The present value of a future payment _if the _.

The _ the period, the _ is the present value of a given future payment, all other things held constant.

A firm is considering a new capital expenditure of $2 million. This expenditure is expected to yield $1 million in annual profits for each of two years. Given this information, the firm should _ the project, _