Deck 3: Time Value of Money: an Introduction

Question 1

Stella deposits $5,000 in a savings account at a bank that offers interest of 5.5% on such accounts. What is the value of the money in her savings account in one year's time?

A) $4739
B) $5135
C) $7750
D) $5275

Answer 1

$5275

Question 2

A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a kilo for 10,000 kilos, if it also buys 5000 kilos of wheat at $16.00 per kilo. However, the manufacturer does not use any barley in its products, and currently needs 20,000 kilos of wheat. If the current market price of barley is $3.80 per kilo, and wheat is $15.80 per kilo, should this opportunity be taken, and why?

A) Because the company has no need of barley, the opportunity should not be taken.
B) Because the value of the opportunity is positive, the opportunity should be taken.
C) Because the value of the opportunity is negative, the opportunity should not be taken.
D) Because the opportunity does not meet the company's need for wheat, the opportunity should not be taken.

Answer 2

Because the value of the opportunity is positive, the opportunity should be taken.

Question 3

A company intends to install new management software for its warehouse. The software will cost $50,000 to buy and will cost an additional $150,000 to install and implement. It is anticipated that it will save the company $45,000 through reductions in staff and $65,000 in general inventory costs in the first year after installation. What is the benefit to the company in the first year if they choose to install the software?

A) $110,000
B) $45,000
C) $180,000
D) $90,000

Answer 3

$110,000

Question 4

Diwali Airlines has a contract that gives it the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.26 per gallon. Diwali believes it will only need 6,000,000 gallons of jet fuel. What is the value of this opportunity?

A) $1,040,000
B) $9,040,000
C) $2,600,000
D) $1,560,000

Question 5

Consider the following timeline: If the current market rate of interest is 8%, then the value as of year 1 is closest to:

A) $1003
B) $540
C) $0
D) $77

Question 6

What is a competitive market?

A) a market in which goods can be bought at the ask price and sold at bid price
B) a market in which a good can be bought and sold at the same price
C) a market in which a good is bought for a lower price than that for which it can be sold
D) a market in which a good is sold at a lower price than that for which it can be bought

Question 7

Why should you approach every problem by drawing a timeline?

A) Timelines identify events in a transaction or investment which might otherwise be easily overlooked.
B) Timelines eliminate the majority of flawed financial decisions.
C) Timelines allow you to quickly sum cash flows over time.
D) Timelines can be used to schedule events which are yet to occur.

Question 8

What is the future value (FV) of $20,000 in four years, assuming the interest rate is 12% per year?

A) $31,470.39
B) $28,292.66
C) $17,096.08
D) $32,020.64

Question 9

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the present value of this cash flow?

A) It will cause the present value to rise.
B) It will have no effect on the present value.
C) It will cause the present value to fall.
D) The effect cannot be determined with the information provided.

Question 10

Consider the following timeline: If the current market rate of interest is 9%, then the present value (PV) of this timeline as of year 0 is closest to:

A) $400
B) $600
C) $492
D) $637

Question 11

Which of the following is the overarching principal that a financial manager should follow when making decisions?

A) Decisions should be on behalf of the firm's owners that give the greatest benefit to those owners, the firm's employees and the firm's other stakeholders.
B) Decisions should provide benefit to the firm without incurring costs greater than those benefits to others.
C) Decisions should increase the value of the firm to its investors.
D) Decisions should generate the greatest benefits for the firm.

Question 12

A tenant wants to lease a building for $48,000 per year. She signs a five-year rental agreement that
states that she will pay $24,000 every six months for the next five years. Which of the following is
the timeline for her rental payments, assuming she makes the first payment immediately?

A) $$\begin{array} { | l | l | l | l | l | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (years) }\end{array} & 0 & 1 / 2 & 1 & 11 / 2 & 2 & 21 / 2 & 3 & 31 / 2 & 4 & 41 / 2 & 5 \\\hline \begin{array} { l } \text { Cash Flows } \\\text { (thousands) }\end{array} & - \$ 24 & - \$ 24 & - \$ 24 & - \$ 24 & - \$ 24 & - \$ 24 & - \$ 24 & - \$ 24 & - \$ 24 & - \$ 24 & 0 \\\hline\end{array}$$
B) $$\begin{array} { | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (years) }\end{array} & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \begin{array} { l } \text { Cash Flows } \\\text { (thousands) }\end{array} & - \$ 48 & - \$ 48 & - \$ 48 & - \$ 48 & - \$ 48 & - \$ 48 \\\hline\end{array}$$
C) $$\begin{array} { | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (years) }\end{array} & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \begin{array} { l } \text { Cash Flows } \\\text { (thousands) }\end{array} & \$ 48 & \$ 48 & \$ 48 & \$ 48 & \$ 48 & \$ 48 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | l | l | l | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (years) }\end{array} & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 31 / 2 & 4 & 41 / 2 & 5 \\\hline \begin{array} { l } \text { Cash Flows } \\\text { (thousands) }\end{array} & \$ 24 & \$ 24 & \$ 24 & \$ 24 & \$ 24 & \$ 24 & \$ 24 & \$ 24 & \$ 24 & \$ 24 & \$ 24 \\\hline\end{array}$$

Question 13

"If equivalent investment opportunities trade simultaneously in different competitive markets, thenthey must trade for the same price in both markets." What do we call the above statement?

A) the Net Present Value rule
B) the Valuation Principle
C) the Law of One Price
D) the time value of money

Question 14

You see on eBay that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?

A) Yes, because the market for a used XBOX 360 is a competitive market.
B) Yes, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.
C) No, because the market for a used XBOX 360 is a competitive market.
D) No, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.

Question 15

If the one-year discount factor is equal to 0.90909, the interest must be equal t?

A) 10.0%.
B) 5.0%.
C) 9.1%.
D) 9.5%.

Question 16

If the risk-free rate of interest (rf) is 6%, then you should be indifferent between receiving $250 today or

A) $250.00 in one year.
B) $265.00 in one year.
C) $235.85 in one year.
D) none of the above.

Question 17

Samantha enters a rent-to-own agreement for living room furniture. She will pay $60 per month
for one year. Which of the following shows the timeline for her payments if the first payment is one
month from now?

A) $$\begin{array} { | l | l | l | l | l | l | l | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (Months) }\end{array} & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 & 10 & 11 & 12 \\\hline \text { Cash } & - \$ 60 & - \$ 12 & - \$ 18 & - \$ 24 & - \$ 30 & - \$ 36 & - \$ 48 & - \$ 54 & - \$ 60 & - \$ 66 & - \$ 72 & - \$ 78 & - \$ 84 \\\text { Flows } & & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 & 0 \\\hline\end{array}$$
B) $$\begin{array} { | l | l | l | l | l | l | l | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (Months) }\end{array} & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 & 10 & 11 & 12 \\\hline \begin{array} { l } \text { Cash } \\\text { Flows }\end{array} & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 \\\hline\end{array}$$
C) $$\begin{array} { | l | l | l | l | l | l | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (Months) }\end{array} & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 & 10 & 11 & 12 \\\hline \begin{array} { l } \text { Cash } \\\text { Flows }\end{array} & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | l | l | l | l | l | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (Months) }\end{array} & 0 & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 & 10 & 11 & 12 \\\hline \begin{array} { l } \text { Cash } \\\text { Flows }\end{array} & 0 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 & - \$ 60 \\\hline\end{array}$$

Question 18

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 in fiveyears' time. Steve concludes that in five years' time he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision?

A) Costs and benefits must be in the same terms to be compared.
B) The value of the cash he has today is greater than the value of the cash he may have in the future.
C) There may be other investments that he can make that will offer even bigger benefits.
D) The investment may have hidden costs that will reduce the amount of benefit he receives.

Question 19

A lender lends $10,000, which is to be repaid in annual payments of $2000 for 6 years. Which of thefollowing shows the timeline of the loan from the lender's perspective?

A) $\begin{array} { | l | l | l | l | l | l | } \hline \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } & \text { Year 6 } \\\hline 0 & \$ 2000 & \$ 2000 & \$ 2000 & \$ 2000 & \$ 2000 \\\hline\end{array}$
B) $\begin{array} { | l | l | l | l | l | l | } \hline \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } & \text { Year 6 } \\\hline - \$ 10,000 & \$ 2000 & \$ 2000 & \$ 2000 & \$ 2000 & \$ 2000 \\\hline\end{array}$
C) $\begin{array} { | l | l | l | l | l | l | l | } \hline \text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } & \text { Year 6 } \\\hline - \$ 10,000 & \$ 2000 & \$ 4000 & \$ 6000 & \$ 8000 & \$ 10,000 & \$ 12,000 \\\hline\end{array}$
D) $\begin{array} { | l | l | l | l | l | l | l | } \hline \text { Year 0 } & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } & \text { Year 6 } \\\hline - \$ 10,000 & \$ 2000 & \$ 2000 & \$ 2000 & \$ 2000 & \$ 2000 & \$ 2000 \\\hline\end{array}$

Question 20

On the day Harry was born, his parents put $1000 into an investment account that promises to pay a fixed interest rate of 4 percent per year. How much money will Harry have in this account when he turns 18?

A) $4,806
B) $1,720
C) $2,026
D) $2,804

Question 21

You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Ausback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?

A) -$480
B) -$300
C) $280
D) -$540

Question 22

How can we convert the value of money from one point in time to another?

A) using the current interest rate
B) using the current exchange rate
C) using a cost-benefit analysis
D) using the Valuation Principle

Question 23

A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would be increased. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible countermoves by competitors. This example illustrates which of the following points about the role of financial managers?

A) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision.
B) Real-world decisions are complex and require information from many sources if the decisions are to be valid.
C) All of the costs and benefits associated with a decision can never be fully identified.
D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company.

Question 24

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the future value of this cash flow?

A) It will have no effect on the future value.
B) It will cause the future value to fall.
C) It will cause the future value to rise.
D) The effect cannot be determined with the information provided.

Question 25

What is the present value (PV) of $100,000 received five years from now, assuming the interest rate is 8% per year?

A) $82,609.42
B) $68,058.32
C) $73,502.99
D) $60,000.00

Question 26

Use the table for the question(s) below.
Consider the following prices from a McDonald's Restaurant:
$\begin{array} { l l } \hline \text { Big Mac } & \$ 2.99 \\\hline \text { Large Coke } & \$ 1.39 \\\hline \text { Large Fries } & \$ 1.09 \\\hline\end{array}$

-A McDonald's Big Mac value meal consists of a Big Mac, a large Coke, and a large fries. Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?

A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.68.
B) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.09.
C) No, no arbitrage opportunity exists.
D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.68.

Question 27

Sara wants to have $500,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $500,000 in 20 years' time?

A) $107,274
B) $144,616
C) $231,480
D) $180,884

Question 28

$$\begin{array} { | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (years) }\end{array} & 0 & 1 & 2 & 3 & 4 \\\hline \begin{array} { l } \text { Cash } \\\text { Flows }\end{array} & - \$ 3500 & \$ 1000 & \$ 1000 & \$ 1000 & \$ 1000 \\\hline\end{array}$$

A) Karen, who loans a friend $3500, and whose friend pays back the loan in four annual installments of $1000
B) Leo, who borrows $3500, and then pays back the loan in four annual payments of $1000
C) Joe, who puts down $3500 to buy a car, and then makes annual payments of $1000
D) Harry, who borrows $3500, and then receives an annual payment of $1000

Question 29

An investment will pay you $100 in one year and $200 in two years. If the interest rate is 5%, what is the present value of these cash flows?

A) $276.65
B) 258.32
C) $305.00
D) $285.71

Question 30

Which of the following statements is FALSE?

A) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time.
B) A dollar today and a dollar in one year are not equivalent.
C) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.
D) Finding the present value (PV) and compounding are the same.

Question 31

Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 7% per year?

A) one that pays $1,500 in five years
B) one that pays $1,000 now
C) one that pays $1,800 in ten years
D) one that pays $1,200 in two years

Question 32

Which of the following statements regarding the Law of One Price is INCORRECT?

A) At any point in time, the price of two equivalent goods trading in different competitive markets will be the same.
B) An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.
C) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets.
D) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets.

Question 33

What is the future value (FV) of $10,000 in eight years, assuming the interest rate is 10% per year?

A) $18,000.00
B) $18,756,22
C) $21,435.89
D) $16,212.78

Question 34

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company?

A) Both decisions should be made based upon the trade-off between benefits and costs across time.
B) Both decisions are vital to the financial health of the decision maker.
C) Both decisions involve the purchase of assets.
D) Both decisions will be made based on what provides the greatest long-term benefit.

Question 35

Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?

A) The posted prices of oats can vary widely between grocery stores, even within the same local area.
B) Grocery stores typically sell oats in different packaging, which results in different prices within the same store.
C) Grocery stores mark up the prices of their oats to make a profit.
D) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price.

Question 36

$\begin{array} { l l c c l } \text { Country } & \text { Chile } & \text { Iceland } & \text { New Zealand } & \text { South Africa } \\\hline \begin{array} { l } \text { Abalone Cost } \\\text { Exchange }\end{array} & \text { CLP 50,990,000 } & \text { ISK 5,400,000 } & \text { NZD 104,000 } & \text { ZAR 640,000 } \\\text { Rate: } \$ 1 \text { U.S. } = & 585 \text { CLP } & 61 \text { ISK } & 1.3 \text { NZD } & 7.8 \text { ZAR }\end{array}$

-Refer to the table above. An international seafood supplier is offered 9.45 million yen today for 1000 pounds of abalone frozen in the shell. The abalone can be sourced from various countries at the prices shown above. The current market exchange rates between Australia and the other relevant currencies are also shown. In addition, $1 AUD = 105 yen. What is the value of the best deal the international seafood supplier can make, in Australian dollars?

A) $5000
B) $10,000
C) $7000
D) $8000

Question 37

What is the future value (FV) of $60,000 in five years, assuming the interest rate is 5% per year?

A) $76,576.89
B) $72,674.86
C) $75,000.00
D) $62,500.00

Question 38

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one year's time. The investor decides to make the investment as there is a net difference between the cost and benefit. Which of the following is NOT a reason that the investor's decision may be flawed?

A) It does not consider the current market interest rate.
B) It does not consider the value of the $10,000 in one year's time if invested elsewhere.
C) It does not consider whether the $10,000 will be needed elsewhere.
D) It ignores the fact that the costs are incurred today, but the benefits occur in one year's time.

Question 39

Which of the following statements is INCORRECT?

A) We refer to (1 - rf) as the interest rate factor for risk-free cash flows.
B) We define the risk-free interest rate (rf) for a given period as the interest rate at which money can be borrowed or lent without risk over that period.
C) For most financial decisions, costs and benefits occur at different points in time.
D) In general, money today is worth more than money in one year.

Question 40

To compute the future value of a cash flow, you mus?

A) discount it.
B) double it.
C) arbitrage it.
D) compound it.

Question 41

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?

A) The State Bank would experience a fall in demand for deposits.
B) The Colonial Bank would experience a surge in demand for loans.
C) The State Bank would experience a surge in demand for loans.
D) The Colonial Bank would experience a surge in demand for deposits.

Question 42

You have a used CD store. At an estate sale, you can purchase 260 compact discs for $400. You believe you could sell the CDs for an average of $2.50 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?

A) $250
B) $400
C) $1050
D) $650

Question 43

Whenever a good trades in a competitive market, th?

A) cost
B) demand
C) supply
D) price

Question 44

Why are arbitrage opportunities short-lived?

A) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values.
C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.
D) Financial market regulations will kick in to restrict trade and effectively shut the opportunity down.

Question 45

Which of the following is the best statement of the Valuation Principle?

A) The value of a commodity or an asset to the firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
B) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks.
C) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.
D) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is the same across all banks.

Question 46

A firm has contracted to supply 500,000 gallons of propane fuel for $1.49 million to the local council. The council wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

A) greater than $2.98 per gallon
B) greater than $2.97 per gallon
C) greater than $3.00 per gallon
D) greater than $2.99 per gallon

Question 47

Which of the following statements is FALSE?

A) A dollar in the future is worth more than a dollar today.
B) The effect of earning interest on interest is known as compound interest.
C) It is only possible to compare or combine values at the same point in time.
D) The process of moving a value or cash flow forward in time is known as compounding.

Question 48

Which of the following is an example of arbitrage?

A) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.
B) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted.
C) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.
D) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%.

Question 49

Heavy Duty Inc., a manufacturer of power tools, decides to offer a rebate of $100 on its 16-inch mid-range chain saw, which currently has a retail price of $470. Heavy Duty's marketers estimate that, as a result of the rebate, sales of this model will increase from 50,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $150. Based on the given information, is the decision to give the rebate a wise one?

A) Yes, since the benefits are $0.2 million more than the costs.
B) No, since costs are $5.0 million more than benefits.
C) No, since costs are $3.5 million more than benefits.
D) Yes, since the benefits are $1.5 million more than the costs.

Question 50

Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?

A) They can be used to convert different services and commodities into equivalent cash values which can be compared.
B) They can be used to determine how much an asset can be sold for.
C) They allow all commodities and services to be assigned a fixed and unchanging value.
D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.

Question 51

What is the present value (PV) of $80,000 received ten years from now, assuming the interest rate is 5% per year?

A) $38,422.76
B) $76,000.00
C) $40,000.00
D) $49,113.06

Question 52

A company decides to close down its plastics division. It has on hand 20 tonnes of styrene monomer, a raw material that has a market price of $700 per tonne, which had been originally purchased at $650 per tonne. Given that the company has no use for the styrene monomer, and that it would cost the company $5000 to store it, what is the value of the 20 tonnes of styrene monomer to the company?

A) -$5000
B) $13,000
C) $0
D) $14,000

Question 53

Like other metals, uranium 308 is traded in competitive markets. Which of the following would most likely value a given weight of uranium 308 the most?

A) a speculator who buys and sells uranium 308 on the market without ever using the metal
B) a metals trader who stockpiles and sells actual physical quantities of uranium 308
C) a power station that uses uranium 308 to produce electrical energy
D) All buyers and sellers would have the same value for a given weight of uranium.

Question 54

Samantha has holdings of 250 ounces of platinum, currently valued at $815 dollars per ounce. She estimates that the price of platinum will rise to $850 per ounce in the next year. If the interest rate is 8%, should she sell the platinum today?

A) Yes, as the difference between selling now and selling in one year is $7550 dollars today.
B) Yes, as the difference between selling now and selling in one year is $5513 dollars today.
C) Yes, as the difference between selling now and selling in one year is $6991 dollars today.
D) No, as the difference between selling now and selling in one year is -$6988 dollars today.

Question 55

If $15,000 is invested at 10% per year, in approximately how many years will the investment double?

A) 7.3 years
B) 14.8 years
C) 10.6 years
D) 8.4 years

Question 56

$$\begin{array} { | l | l | l | l | l | l | l | } \hline \begin{array} { l } \text { Date } \\\text { (Months) }\end{array} & 0 & 1 & 2 & 3 & 4 & 5 \\\hline \begin{array} { l } \text { Cash } \\\text { Flows }\end{array} & - \$ 250 & - \$ 250 & - \$ 250 & - \$ 250 & - \$ 250 & - \$ 250 \\\hline\end{array}$$

A) You receive payments of $250 per month for five months.
B) You make payments of $250 per month for five months.
C) You receive payments of $250 per month for six months.
D) You make payments of $250 per month for six months.

Question 57

Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?

A) For an investment project to be considered, costs must have a higher dollar value from benefits.
B) Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest.
C) In most investment projects costs are incurred up front, but benefits are provided in the future.
D) For practical purposes, a dollar today may be considered to be equal to a dollar at some future time.

Question 58

Which of the following statements regarding arbitrage and security prices is INCORRECT?

A) The general formula for the no-arbitrage price of a security is Price(security) = PV(all cash flows paid by the security).
B) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
C) We call the price of a security in a normal market the no-arbitrage price for the security.
D) In financial markets it is possible to sell a security you do not own by doing a short sale.

Question 59

An elderly relative offers to sell you their used 1959 Jaguar Mark 9 saloon for $50,000. You note that very similar cars are selling on the open market for $90,000. You don't care for classic cars and would rather buy a new Subaru Outback for $35,000. What is the net value of buying the Jaguar?

A) $50,000, since the Jaguar could be bought for this price.
B) $35,000, since this is the value of the car that you really want to buy.
C) $90,000, since the Jaguar could be sold for this price.
D) $40,000, since this is the difference between purchase and resale price of the Jaguar.

Question 60

A metal fabrication company is pricing raw supplies of aluminium.The following are the costs to the company to receive one tonne of aluminium from various sources. Which source offers the best price for aluminium per tonne?

A) 4998 Brazilian reals per tonne, with $1 AUD = 1.282 BRL
B) 3206 US dollars per tonne, with $1 AUD = $1.05 USD
C) 121,756 Indian rupees per tonne, with $1 AUD = 47.619 INR
D) 3012 Australian dollars per tonne

Question 61

How can we make a financial decision with cash flows occurring at different points in time?

Question 62

How can we perform cost-benefit analyses in cases that are occurring in different currencies?

Question 63

Which of the following statements regarding the valuing of costs and benefits is NOT correct?

A) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.
B) The first step in evaluating a project is to identify its costs and benefits.
C) In the absence of competitive markets, we can use one-sided prices to determine exact cash values.
D) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker.

Question 64

Explain why a dollar today is worth more than a dollar tomorrow?

Question 65

If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.

Question 66

If the interest rate is 5%, the one-year discount factor is equal t?

A) 1.045.
B) 1.050.
C) 0.050.
D) 0.952.

Question 67

In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.

Question 68

A wholesale food retailer is offered $14 per carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $12.50 per carton. Shipping costs $1.50 per carton, for the first 1000 cartons, and $1.00 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer?

A) No. The costs and the benefits are the same.
B) No. The costs are $1200 more than the benefits.
C) Yes. The costs are $2000 less than the benefits.
D) Yes. The costs are $1000 less than the benefits.

Question 69

To calculate a cash flow's present value (PV), you must compound it?

Question 70

Why should interest rates be generally positive?

Question 71

Owen expects to receive $20,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 7.5%, how much money can he borrow from the bank on the basis of this information?

A) $15,000
B) $18,605
C) $11,428
D) $21,500

Question 72

An investment will pay $205,000 in one year's time for an investment of $183,000 today. If the market interest rate is 8% over the same period, should this investment be made?

A) Yes, because the investment will yield $7360 more than putting the money in a bank.
B) Yes, because the investment will yield $4280 more than putting the money in a bank.
C) No, because the investment will yield $6240 less than putting the money in a bank.
D) Yes, because the investment will yield $2360 more than putting the money in a bank.

Question 73

Is there a need to distinguish between cash inflows and outflows on a timeline?

Question 74

What is one of the main obstacles in cost-benefit analysis?

Question 75

If an analyst adds cash flows occurring at different points in time, what is the implied assumption in the process?

Question 76

What is one of the prerequisite conditions for the Valuation Principle to work?

Question 77

A backhoe can dig 150 feet of trench per hour and costs $500 per hour to hire and operate. A ditch digger can dig six feet of trench per hour. Based on this information, what is the most a ditch digger can charge per hour when digging ditches?

A) $20 per hour
B) $3.33 per hour
C) $25 per hour
D) $83.33 per hour

Question 78

How does arbitrage help the Law of One Price?

Question 79

In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

Question 80

Consider the following timeline: If the current market rate of interest is 12%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to:

A) $257.29
B) $78.71
C) -$78.71
D) $1.29