Econ 100B HW 5

If the interest rate is 5%, in one period the future value of $1 today is: A) 20 cents. B) 95 cents. C) $1.20. D) $1.05. E) 5 cents.

$1.05

The PDV of a perpetuity with a yearly payment of $500 at an interest rate of 5% is A) $100. B) $5,000. C) $25,000. D) $10,000. E) $100,000.

$10,000

The "NPV Criterion" is that a firm should invest in a new capital project if: A) the present value of the expected future cash flows is larger than the present value of the cost of the investment. B) the future value of the expected future cash flows is larger than the cost of the investment. C) financing is not necessary because there are enough liquid assets in the company's portfolio to afford the investment. D) financing can be secured on the basis of new bonds. E) financing can be secured on the basis of new stocks. (see Lecture 15 slide 14)

The present value of the expected future cash flows is larger than the present value of the cost of the investment.

If a firm can earn a profit stream of $50,000 per year for 10 years, that profit stream is worth: A) nothing today B) less than $500,000 today, but a positive amount. C) $500,000 today. D) more than $500,000 today. E) some amount, but whether it is more, less or the same as $500,000 cannot be determined.

Less than $500,000 today, but a positive amount.

The formula for finding the present value of an amount M that will be received one year from now, when the interest rate is R, is A) M / R. B) M×(1+R/100). C) M / (1+R). D) M / (100R). E) M×(1+R).

M / (1+R).

When the interest rate is R, the formula for finding the future value of $M two years from now is A) M / (1+R^2) B) M (1+R)^2 C) M / (1+R)^2 D) M (1+R^2).

M / (1+R)^2

The real interest rate is: A) the nominal rate minus the rate of inflation. B) the nominal rate multiplied by the rate of inflation. C) the nominal rate plus the rate of inflation. D) the nominal rate divided by the rate of inflation. E) the nominal rate.

The nominal rate minus the rate of inflation.

You have won a contest and are allowed to choose between two prizes. One option is to receive $200 today and another $200 one year from now. The second option is $100 today and an additional $325 one year from now. At what interest rate (if any) is the present value of the two prizes identical? A) 0 percent B) 5 percent C) 25 percent D) 10 percent E) none of the above

25 percent