Exam 33: Toward a Fuller Understanding

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.

Suppose the university offers the following payment plan: Either you pay $80,000 when enrolling as a freshman or you pay $25,000 at the beginning of your freshman year and $25,000 at the beginning of every year for the next three years. If the annual interest rate is 5%, then you should take option 1 and pay $80,000 at the beginning of your first year.

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

The net present value (NPV) of an activity or project is equal to the _____ value of all of the revenues minus the _____ value of all of the costs associated with it.

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?

The present value of a future payment will be smaller the:

Other things equal, the _____ the loan period, the _____ the present value.

You have won the lottery and have been given the choice of receiving $5 million today or $10 million after 10 years. Assume that the interest rate remains fixed at 10% per year for the entire 10-year period. You should choose:

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.

The net present value of a project is the difference between:

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?

You win a prize at your sorority, and you are given the following two payoff options: Option 1 is to receive $100 one year from today and $100 two years from today. Option 2 is to receive $180 today. If the annual interest rate is 10%, the present value of option 1 is:

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?

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?

If a firm considering the purchase of an asset determines that the asset's net present value is greater than zero, then _____ the asset will _____ profits.

The present value (PV) of a payment one year in the future (FV), given an interest rate (r), is given by the equation:

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, _____

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

The present value (PV) of a payment n years in the future (FV), given an interest rate (r), is given by the equation:

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.