Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

Junk bonds sell for higher prices than non- junk bonds.

Accepted Answer

A) True 
 B)False  False

Question 3

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 ________ .

Accepted Answer

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

Question 4

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.

Accepted Answer

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

Question 5

An increase in the discount rate ________ the present value of a bond and_______ the price of the bond.

Accepted Answer

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

Question 6

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?

Accepted Answer

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

Question 7

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

Accepted Answer

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 8

Health Bars is considering a two- year advertising campaign. The campaign will cost $50,000 at the end of the first year and $60,000 at the end of two years. The managers of Health Bars have estimated that the campaign will generate $40,000 a year in additional profit for the next three years. If the discount rate is 5 percent, what is the net present value of the advertising campaign?

Accepted Answer

A)  $2,542
B)  $6,889
C)  $12,582
D)  $5,200

Question 9

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

Accepted Answer

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

Question 10

Operating profits omit interest payments.

Accepted Answer

A) True 
 B)False

Question 11

Economies of scale are achieved is the long- run average cost curve _______when output_______ .

Accepted Answer

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

Question 12

An immediate depreciation allowance is referred to as _______and it_______ _ the tax shield.

Accepted Answer

A)  straight- line depreciation; decreases
B)  straight- line depreciation; increases
C)  expensing the investment; decreases
D)  expensing the investment; increases

Question 13

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.

Accepted Answer

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

Question 14

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.

Accepted Answer

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

Question 15

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

Accepted Answer

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

Question 16

When profits and costs occur in the future, the _ the profit occurs and the the cost occurs, the likely the net present value will be .

Accepted Answer

A)  sooner; later; more; negative
B)  later; sooner; more; positive
C)  sooner; later; less; positive
D)  sooner; later; more; positive

Question 17

All else equal, the sooner a depreciation allowance is taken, ________ .

Accepted Answer

A)  the more likely the net present value of the investment will be positive
B)  the less likely the net present value of the investment will be positive
C)  the more likely the net present value of the investment will be negative
D)  the less likely the net present value of the investment will be affected

Question 18

If a bond offers $400 in interest payments at the end of each of next 3 years and a repayment of $2,000 also at the end of the 3 years and the current discount rate is 5 percent, what is the market price for the bond?

Accepted Answer

A)  $2,256
B)  $2,817
C)  $3,589
D)  $2,593

Question 19

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?

Accepted Answer

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 20

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.

Accepted Answer

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

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

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

Junk bonds sell for higher prices than non- junk bonds.

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 ________ .

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.

An increase in the discount rate __ the present value of a bond and_ the price of the bond.

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

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

Operating profits omit interest payments.

Economies of scale are achieved is the long- run average cost curve _when output_ .

An immediate depreciation allowance is referred to as _and it_ _ the tax shield.

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.

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

When profits and costs occur in the future, the _ the profit occurs and the the cost occurs, the likely the net present value will be .

All else equal, the sooner a depreciation allowance is taken, ________ .

If a bond offers $400 in interest payments at the end of each of next 3 years and a repayment of $2,000 also at the end of the 3 years and the current discount rate is 5 percent, what is the market price for the bond?

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.