# ECON 30213 Chapter 13. Questions and Answers.

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794 Mark is currently considering spending $25,000 on a farm tractor that will increase his crop yield and bring additional revenues of $4,000 for each of the next seven years. Mark should: • bu y the tractor because its benefits of $28,000 outweigh its costs of $25,000. • buy the tractor because inflation will reduce the value of future cash flows. • use present discounted value analysis to decide whether the tractor is good investment. ( ) • not buy the tractor because the payback period extends beyond three years. 795 Tankim has $4,000 in his savings account that pays an annual interest rate of 2%. The value of his account at the end of eight years is: • $4,200. • $4,686.64. ( ) • $4,640. • $4,808.16. 796 If Vincent puts $344 into his saving account, his account will grow to $379.26 by the end of two years. What is the interest rate earned on Vincent's savings account? • 3.5% • 4.2% • 5% ( ) • 7% 797 The rule of 72 states that it will take ______ years for a savings account to double at a 9% annual interest rate. • 8 ( ) • 9 • 6.5 • 6.1 798 Which of the following describes the effect of compounding on the growth of an initial principal that is invested at a constant interest rate? • The value of the account will increase at an increasing rate over time. ( ) • The value of the account will increase at a constant rate over time. • The value of the account will increase at a decreasing rate over time. • The value of the account will increase at a linear rateover time. 799 Suppose that you deposit $2,828 in your savings account that pays 4% interest annually. What is your account balance at the end of four years? • $3,308.36 ( ) • $2,417.39 • $3,100.12 • $2,988.44 800 Which of the following statements is ? • The present discounted value of future cash flows is higher the further into the future the cash flows occur. • The present discounted value of future cash flows is higher when the interest rate is higher. • The present discounted value of future cash flows is lower when the interest rate is higher. ( ) • The present discounted value of future cash flows is lower the closer into the future the cash flows occur. 801 Todd, who just started college, is promised $10,000 by his grandmother at the end of four years if he graduates with honors. What is the present discounted value of this payment at a 6% interest rate? • $9,400.68 • $8,180.26 • $6,000.32 • $7,920.94 ( ) 802 Table 13.1 Time Period Cash Flow Today $800 One year $200 Two years $200 Three years $200 Reference: Ref 13-1 (Table 13.1) At a 7% annual interest rate, what is the present discounted value of the cash flows? • $1,688.08 • $1,324.86 ( ) • $1,275.33 • $1,109.70 803 Davey has the opportunity to buy an investment that pays $500 at the end of each of the next two years. If interest rates are 6.5%, what is the maximum price that Davey should pay for this investment? • $910.31 ( ) • $889.23 • $777.20 • $686.40 804 Donna purchased property and must now make an annual payment of $6,000 for the next 30 years. What is the present discounted value of the payment stream at a 5% interest rate? • $88,450.42 • $110,682.21 • $92,234.71 ( ) • $105,320.57 805 Suppose that a firm generates $40,000 of profit per year, and this profit will continue forever. At a 10% interest rate, what is the present discounted value of the firm's profit? • $400,000 ( ) • $4 million • $4.4 million • $360,000 806 A corporate bond has a $10,000 face value, five-year maturity, and an 8% annual coupon rate. If interest rates are 6%, what is the present discounted value of the bond? • $10,540.18 • $9,805.25 • $10,842.47 ( ) • $11,220.82 807 Suppose that a $1,000 face value bond, which matures in one year and pays a 10% coupon rate, is currently selling for $1,025. What is the bond's yield to maturity? • 9.8% • 7.3% ( ) • 11.1% • 10.2% 808 Suppose that a bond with a face value of $10,000 and coupon rate of 7% is currently selling for $9,880. The bond's yield to maturity is ______ and thus the bond isselling _______. • 7%; below par • less than 7%; below par • less than 7%; above par • greater than 7%; below par ( ) 809 What interest rate would make a person indifferent between receiving $1,250 today and $1,500 at the end of one year? • 16.7% • 12.5% • 24% • 20% ( ) 81 0 Table 13.2 Period Costs Benefits 0 $2,000 $0 1 $0 $800 2 $0 $500 3 $0 $1,000 Reference: Ref 13-2 (Table 13.2) The table depicts the costs and benefits of an investment. Which of the following statements is ? I. Based on an 8% interest rate, the investment is worthwhile. II. Based on a 6% interest rate, the investment's net present value is $79.26. III. Based on a 4% interest rate, the investment is worthwhile. • II and III • I, II, and III • II only • III only ( ) 81 1 Conrad has $10,000; he is considering whether to (1) invest in a mutual fund with an 8% annual interest rate or (2) remodel his kitchen. If he remodels the kitchen, he will be able to sell his home for an additional $13,000 when he moves at the end of five years. Which of the following statements is ? I. The net present value of remodeling the kitchen is –$1,152.42. II. Conrad is better off investing his money in the mutual fund. III. If Conrad invests in the mutual fund, his money will grow to $10,800 at the end of five years, making this a worse investm

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