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

Question 1

What is the present value of a payment of $5,000 at the end of one year and a second payment of $7,000 at the end of two years if the interest rate is 5 percent?

A)$10,985.14
B)$12,250.32
C)$11,111.11
D)$11,201.84

Answer 1

C

Question 2

What is the future value of $500 in 4 years that earns an annual interest rate of 3 percent?

A)$559.12
B)$568.67
C)$562.75
D)$560.25

Answer 2

C

Question 3

Given an annual interest rate of 4 percent, what is the present value of receiving $5,000 in 2 years?

A)$4,535.25
B)$4,619.23
C)$4,585.45
D)$4,622.78

Answer 3

D

Question 4

All of the following will lead to a smaller discount factor except which one?

A)the longer the period of time until the future sum of money is received
B)the more interest that can be earned
C)a larger discount rate
D)a smaller discount rate

Question 5

The greater the interest rate, the _ the present value and the _ _ the discount factor.

A)larger; larger
B)larger; smaller
C)smaller; larger
D)smaller; smaller

Question 6

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

A)$1950.25
B)$1980.19
C)$1,904.76
D)$1934.89

Question 7

If the present value of an individual's savings account is $100,000, what is its future value in 5 years if the account earns an annual interest rate of 2 percent?

A)$110,250.00
B)$110,408.08
C)$112,125.40
D)$109,582.03

Question 8

The discount factor _ the _ value to convert it to the _ value.

A)increases; future; present
B)reduces; future; present
C)reduces; present; future
D)increases; present; future

Question 9

Interest earned on funds compounds because in future years, interest is earned on .

A)future values
B)interest received in previous years only
C)the principal and interest received in previous years only
D)principal only

Question 10

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 present value of the entire stream of payments?

A)$9,800.14
B)$9,500.23
C)$10,500.56
D)$9,886.70

Question 11

Suppose a supplier has an agreement with a firm to be paid $3,500 in 2 years. If the annual interest rate is 4 percent, the supplier would be indifferent between receiving now and waiting 2 years to receive the $3,500.

A)$3,233.46
B)$3,235.95
C)$3,451.32
D)$3,450.45

Question 12

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.

A)different points; less
B)a single point; more
C)a single point; less
D)different points; more

Question 13

If the present value of an individual's savings account is $52,354, what is its future value in 3 years if the account earns an annual interest rate of 8 percent?

A)$66,580.89
B)$64,589.13
C)$65,950.96
D)$66,320.48

Question 14

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

A)$110.41
B)$105.50
C)$110.25
D)$102.25

Question 15

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 plus C (A + B +C)or the present value of the first three payments?

A)$4,100.50
B)$4,426.89
C)$3,998.12
D)$4,215.05

Question 16

Using capital budgeting, managers seek to answer which of the following questions?

A)What is the expected future cost?
B)Does the anticipated future profit cover the cost incurred in the current period?
C)What is the expected future profit?
D)Does the anticipated future cost exceed the profit enjoyed in the current period?

Question 17

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?

A)$970.87
B)$1,956.12
C)$2,256.98
D)$2,384.77

Question 18

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 plus C plus D (A + B + C +D)or the present value of the first four payments?

A)$6,200.50
B)$6,436.27
C)$6,225.32
D)$6,589.23

Question 19

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

A)$890.45
B)$112.16
C)$850.23
D)$103.67

Question 20

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.

A)$48,076.92
B)$49,550.22
C)$48,049.02
D)49,557.89

Question 21

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?

A)The manager of Big Farms should select Best Bank's offer as the present value of the payment plan is $95,477.75, which is lower than the payment plan offered by Big Bank.
B)The manager of Big Farms should select Big Bank's offer as the present value of the payment plan is $97,939.60, which is lower than the payment plan offered by Best Bank.
C)The manager of Big Farms should select Big Bank's offer because the total repayment is less than the total repayment at Best Bank.
D)The present value of the two payment plans is exactly the same, so the manager of Big Farms is indifferent between the two payment plans.

Question 22

The net present value (NPV)is .

A)present value of the future operating profits from an investment plus the present value of the cost of the investment
B)future operating profits from an investment plus the cost of the investment
C)future operating profits from an investment minus the cost of the investment
D)present value of the future operating profits from an investment minus the present value of the cost of the investment

Question 23

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 $200,000 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 $26,000. If the discount rate is 6 percent, what is the net present value of the dump truck?

A)- $744
B)$5,228
C)- $6,150
D)$3,583

Question 24

The annual interest rate that is used to calculate the discount factor is called the discount rate.

Question 25

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?

A)$44,854.77
B)$2,854.77
C)$3,599.22
D)$42,464.22

Question 26

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

Question 27

The longer the period of time until receiving a future amount of money, the more interest that can be earned, so the larger the discount factor.

Question 28

If the salvage value is positive the net present value of an investment and this the likelihood that managers will undertake the project.

A)decreases; increases
B)decreases; decreases
C)increases; decreases
D)increases; increases

Question 29

If the net present value is exactly equal to zero, the present value of the investment's stream of future operating profits is the present value of its cost.

A)greater than
B)exactly double
C)less than
D)equal to

Question 30

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 sum of money should be deposited today in an account that earns 3 percent interest to make each of the five payments above and, when the last payment is made, there will be no money left in the account?

A)$9,912.56
B)$11,000.00
C)$9,886.70
D)$9,723.45

Question 31

The annuity factor by the amount of the annual payment equals the value of payments for the specified number of years at the specified discount rate.

A)multiplied; present
B)divided; present
C)divided; future
D)multiplied; future

Question 32

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 4 percent and the cost of the investment is $40,000, what is the net present value of the investment?

A)$44,469.77
B)$5,815.32
C)$45,815.32
D)$6,221.77

Question 33

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?

A)$1,404.71
B)$1,396.78
C)$890.00
D)$1,825.36

Question 34

What is the present value of four payments of $5,000 at the end of each of the next four years if the interest rate is 2 percent?

A)$9,430.50
B)$18,358.12
C)$20,000.00
D)$19,038.64

Question 35

All else equal, when a manager is choosing between two payment plans, a profit- maximizing manager should chose the plan with the lowest present value.

Question 36

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?

A)- $1,074.48
B)$1,100.56
C)- $44,852.36
D)$43,925.52

Question 37

As long as the discount rate is the interest rate on a loan, the present value of the cost of an investment equals the initial cost of the investment.

A)greater than
B)less than
C)exactly double
D)equal to

Question 38

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

Question 39

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 $43,000, which of the following is true regarding a profit- maximizing manager?

A)The manager should not make the investment because the net present value is negative.
B)The manager should make the investment because the net present value is positive.
C)The manager should make the investment because the net present value is negative.
D)The manager should not make the investment because the net present value is positive.

Question 40

If the net present value is positive, the present value of the investment's stream of future operating profits is _ than the present value of its cost and profit- maximizing managers make the investment.

A)less; should not
B)less; should
C)greater; should
D)greater; should not

Question 41

Financing an investment with debt increases the net present value of the investment.

Question 42

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?

A)The manager should make the investment because the net present value is negative.
B)The manager should not make the investment because the net present value is negative.
C)The manager should make the investment because the net present value is positive.
D)The manager should not make the investment because the net present value is positive.

Question 43

When the maximum amount of interest is paid on a loan, the present value of the cost of the investment exceeds the initial cost of the investment.

Question 44

When a firm uses its own funds to self- finance an investment, the operating profit exceeds the taxable profit.

Question 45

Accountants consider depreciation allowance as profit before calculating the tax.and it from the firm's operating

A)profit; add
B)a cost; subtract
C)profit; subtract
D)a cost; add

Question 46

In a sensitivity analysis, managers should change _ variable(s)at a time to determine how sensitive the _ value of the investment is to the different variables used in the calculations.

A)all; future
B)one; present
C)one; future
D)all; present

Question 47

Salvage values are strictly positive.

Question 48

A firm is considering using its own funds to finance an investment, but needs an estimate of the discount rate. Currently the firm is earning 4 percent on funds held in a bank account and 6 percent on funds held in stocks. If the firm has 20 percent of its funds in the bank account and the remaining 80 percent in stocks, what is the firm's weighted average cost of capital?

A)5.6 percent
B)5.8 percent
C)4.4 percent
D)4.2 percent

Question 49

Depreciation allowance _ _ the profit subject to taxation, which the amount of tax the firm pays.

A)decreases; decreases
B)increases; increases
C)increases; decreases
D)decreases; increases

Question 50

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

A)decreasing; increases
B)increasing; decreases
C)increasing; increases
D)decreasing; decreases

Question 51

Economists consider economic depreciation to be the in market value from the use of the capital and measure this use in terms of cost.

A)decrease; opportunity
B)decrease; marginal
C)increase; opportunity
D)increase; marginal

Question 52

A manager is considering investing in a new piece of equipment. The equipment cost $50,000 and the manager will finance the full amount of the cost over three years at an interest rate of 4 percent. In the third year, the manager will repay the entire principal of the loan plus the year's annual interest, after making interest- only payments for the first two years. The equipment will generate $30,000 in future operating profit each of the three years and has a salvage value of zero at the end of the three years. The tax rate on the firm's profit is 8 percent each year. What is the net present value of the investment?

A)$32,598
B)$27,036
C)$20,589
D)$35,852

Question 53

Financing an investment with debt the net present value of the investment because interest payments tax deductible and the full amount of the principal is due in .

A)increases; are; present time
B)increases; are; the future
C)decreases; are; the present time
D)increases; are not; the future

Question 54

Operating profits omit interest payments.

Question 55

All of the following are tax shields except which one?

A)depreciation allowances
B)straight- line depreciation
C)an interest- only payment of a loan
D)a principal payment on a loan

Question 56

A make- or- buy decision examines whether a manager should incur - period costs in order to produce in the _ _ period(s).

A)future; inputs; present
B)present; inputs; future
C)present; outputs; future
D)future; outputs; present

Question 57

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?

A)- $2,581
B)$2,286
C)$3,569
D)$4,464

Question 58

A manager is considering investing in a new piece of equipment. The equipment cost $50,000 and the manager will finance the full amount of the cost over three years at an interest rate of 4 percent. In the third year, the manager will repay the entire principal of the loan plus the year's annual interest, after making interest- only payments for the first two years. The equipment will generate $30,000 in future operating profit each of the three years and has a salvage value of zero at the end of the three years. The tax rate on the firm's profit is 8 percent each year. What is the firm's interest- only payment in each of the three years?

A)$2,400
B)$4,000
C)$1,200
D)$2,000

Question 59

If the life span of a piece of equipment is 10 years and its current cost is $400,000, what is the straight- line depreciation allowance each year?

A)$40,000
B)$400
C)$4,000
D)$400,000

Question 60

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

A)lower; higher
B)higher; higher
C)lower; lower
D)higher; lower

Question 61

If a firm makes its own inputs rather than buying them, it need to be concerned about the hold- up problem and need to be concerned with contract compliance.

A)does; does not
B)does; does
C)does not; does not
D)does not; does

Question 62

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 .

A)transportation costs
B)trade secrets
C)quality control
D)economies of scale

Question 63

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 net present value of the equipment?

A)- $45,852
B)$31,520
C)$29,926
D)- $28,126

Question 64

Managers need all of the following information to determine if the firm should make or buy an input except which one?

A)the firm's discount rate
B)the quantity of the input the firm needs each year
C)the present value of the firm's current profit
D)the salvage rate of the equipment to make the input

Question 65

All else equal, if a firm has complex input specifications, it is likely cost saving for the firm to buy the input for another firm.

Question 66

Angelo's Pizza is famous for its secret tomato sauce. The managers of Angelo's Pizza are more likely to produce all of their inputs rather than buy them due to _ .

A)communication costs
B)trade secrets
C)transportation costs
D)economies of scale

Question 67

Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.082 × Q)- $200,000, where Q is the annual quantity of the input the firm needs. If the firm needs 175,000 units of the input each year, the manager buy the equipment because the NPV is _ .

A)should not; negative
B)should; negative
C)should; positive
D)should not; positive

Question 68

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.

A)buy; reduce
B)make; reduce
C)make; increase
D)buy; increase

Question 69

Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.052 × Q)- $250,000, where Q is the annual quantity of the input the firm needs. In order for the NPV to be positive, the firm needs at least units of the input each year.

A)220,890
B)237,643
C)115,960
D)259,600

Question 70

Economies of scale are achieved is the long- run average cost curve when output .

A)falls; falls
B)rises; rises
C)falls; rises
D)rises; remains constant

Question 71

Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.023 × Q)- $350,000, where Q is the annual quantity of the input the firm needs. If the firm needs 355,000 units of the input each year, the manager buy the equipment because the NPV is _ .

A)should not; positive
B)should not; negative
C)should; positive
D)should; negative

Question 72

If a firm has a long- run average cost of $2 when it produces 4,000 units of an input and has a long- run average cost of $1 when it produces $10,000 units and the firm needs 10,000 units of the input, the firm experience economies of scale, which makes the firm _ likely to make the input rather than buy it.

A)does; less
B)does not; less
C)does; more
D)does not; more

Question 73

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?

A)$459,250
B)$500,962
C)$623,850
D)$529,926

Question 74

A firm is more likely to produce its own input if all of the following are true except which one?

A)The firm experiences diseconomies of scale when producing the input.
B)The transportation cost of the input is expensive.
C)The firm is concerned about the hold- up problem.
D)The firm has trade secrets.

Question 75

A firm is more likely to produce its own input if all of the following are true except which one?

A)The firm is concerned about quality control.
B)The transportation cost of the input is inexpensive.
C)The firm experiences economies of scale when producing the input.
D)The firm has trade secrets.

Question 76

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. The discount rate is 6 percent. How many flour sacks does Fresh Flour need each year in order for the net present value to be positive?

A)377,416
B)412,369
C)259,666
D)352,589

Question 77

Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.19 × Q)- $1,000,000, where Q is the annual quantity of the input the firm needs. In order for the NPV to be positive, the firm needs at least units of the input each year.

A)369,566
B)952,260
C)890,562
D)840,337

Question 78

Suppose a manager is deciding whether or not to purchase a piece of equipment to make an input internally and has completed the majority of the net present value (NPV)calculations. The manager has correctly calculated the NPV to be equal to: NPV = ($1.023 × Q)- $350,000, where Q is the annual quantity of the input the firm needs. In order for the NPV to be positive, the firm needs at least units of the input each year.

A)153,985
B)342,131
C)350,369
D)289,526

Question 79

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. Which of the following statements is true?

A)Fresh Flour should invest in the equipment because the net present value is negative.
B)Fresh Flour should not invest in the equipment because the net present value is positive.
C)Fresh Flour should not invest in the equipment because the net present value is negative.
D)Fresh Flour should invest in the equipment because the net present value is positive.

Question 80

Production of a small quantity of an input is often as firms typically able to enjoy economies of scale.

A)unprofitable; are not
B)profitable; are
C)unprofitable; are
D)profitable; are not