Ch15

What formula shows the present value of the amount Catherine would save on cigarette purchases over her lifetime

$14600 (1+1/1.03...1/1.03^60)

What formula shows the present value of the amount Catherine will lose in income over her working lifetime

$1500 (1+1/1.03...+1/1.03^45)

The net present value of the purchase is

$200 (1/1.06+1/1.06^2+...1/1.06^9)-$800

The present value of the electricity bill savings you will receive over the next 10 years

$200(1+/1.06 + 1/1.06^2+...1/1.06^9)

The expected NPV of the computer purchase is approximately

$3200

In terms of this year's dollars this "fifty million dollar" contract is worth approximately

$37.9 million

If Catherine stopped smoking then what is the total Catherine will save on life insurance premiums over the rest of her expected lifespan?

$42,000

What is the total amount Catherine will lose in earnings by being a smoker, if she works now and continues until age 65

$67,500

What formula shows the present value of the amount Catherine would save on life insurance premiums over her lifetime by stopping smoking

$70" (1+1/1.03 + 1/1.03^60)

If Catherine's life expectancy is 80 as a non smoker and no inflation is expected to occur throughout her lift (so that cigarettes stay at $2 per pack) then amount would she save by not buying cigarettes

$87,600

The tuition bond is redeemable in 18 yeas for an amount of money equal to the cost of the university's tuition at the time. Which of the following would deduct the market price of these bonds

- an increase in the rate of interest - the passage of legistration increase in college tuition to the rate of inflation

What formula shows the dollar stream expected from this purchase

-$4000+$0+$2500+$2500+$2500+$2500

A 130k investment in new equipment this year will increase your firm's profits by 50k in each of the next 3 years. What is the net present value of this investment if your firm's opportunity cost of capital is 10%

-5657

If average Americans start to pay off the huge credit card debt they now hold, then

A shift in the demand for loanable fund will cause interest rates to fall

If technological breakthroughs in the internet cause a large numbers of firms to consider investment projects they hadn't previously thought of

A shift in the demand for loanable funds will cause interest rates to rise

If the US government retires the national debt

A shift in the demand of loanable funds will cause interest rates to fall

If we start to think that Medicare will pay all our medical needs as we age, then as a result of our likely actions

A shift in the supply of loanable funds will cause interest rates to risw

At what rate will the consumer who is certain she will subscribe to the magazine for the next 2 years decide to "buy now and save"

Any interest rate under 50%

Bond A lays $10 per year and bond B pays $15 per year. Which bond will sell for a higher price

B

The interest rate R in an NPV calculation should always

Be the return that the firm could earn on a similar investment

$X would be higher if Ms. Querty's

Income were higher and interest rate were lower

The real discount rate and the nominal discount rate differ in their treatment of

Inflation

The prime rate

Is charged by banks to high quality corporations

The difference between a Treasury bull and a treasury bond is that the bill

Is short term, and the bond is long term

Which of the following is NOT true about commercial paler

It pays at a rate about double the Treasury bill

If you expect the price to be $21 you should

Keep the wine if the interest rate are below 5%

If a firm can earn a profit stream of $50,000 per year for 10 years, that profit stream is worth

Less than $500,000 today but a positive amount

Interest rates are determined by the supply and demand for

Loanable funds

Which of the following would raise $X

Lower interest rate

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

M / (1+R)^2

When the interest rate is R the formula for finding the value of a a current amount of $M one year from now is

M(1+R)

What the is "Hotelling rule" for a monopolist

Marginal revenue minus marginal cost must rise at exactly the rate of interest

If Len chooses solar power it will cost him more today, but he will recover these costs over the next 7 years in savings on his natural gas bill. The solar heated is expected to last 12 years.

More likely to install the solar heater the lower the discount rate

If the interest rate were 2% Furry Software should

Move to Southern California

The first term in a NPV calculation is usually

Negative, Bc the cost of the project is immediate but the revenue streams from the project come later

If a project's only risk is diversifiable

No risk premium should be attached to the discount rate

Which kind of risk affects the opportunity cost of capital

Nondiversifiable risk

If an asset's beta is high, it's

Nondiversifiable risk and expected return are high

Another name for diversifiable risk

Nonsymmetrical risk

The current price of wine is $20 per bottle and it costs $2 per bottle to get the wine from barrels to bottles

Not do anything until you find out what the interest rate is

Which no other information available it is

Not possible to tell which payment stream is most valuable to Furry

What is the "hotelling rule" for a situation in which a producer can determine when a good is sold

Price minus marginal cost must rise at exactly the rate of interest

If inflation falls and nomic interest rates are unchanged

Real interest rates rises

If the interest rate were 20% Furry Software should

Require the network

An asset's beta can be used to compute its discount rate for an NPV calculation, because the discount rate if equal to

Rf + b(Rm - Rf)

If the interest rate is expected to fall to 5% in years 4 and 5, in terms of current dollars the value of the Muckrakers payments will

Rise

As the stock of a deplorable resource falls, it's user cost

Rises

If the rate of return on the stock market is Rm and the rate of return on a risk free asset is Rf, then

Rm-Rf measures the risk, all of its nondiversifiable, one has to accept in the stock market

If the interest rate is 5% in one period the value of $1 today is

$1.05

The PDV of a perpetuity of $500 at an interest rate of 5% is

$10,000

From the hotelling rule, we would expect that a perfectly competitive industry selling an exhaustible resource would

Sell more of it than a monopolist would in each period

If individuals are convinced that the government will take care of all their medical needs after they retire,

Supply of loanable funds will shift leftward

If the interest rate falls

The present value of this contract will rise

Which is the best example of a nondiversifiable risk for Stalwart Shoes

The state of the US ceremony

If individuals decided to save more for retirement

The supply of loanable funds will shift tightward

A bond has a current market value of $800. The holder of the bond will receive a single payment of $1000 one year from now. The interest rate is 10%. The effective yield on the bond is

25%

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 unrest rate of the present value of the two prizes indentical

25%

If an individual has 10k in a savings account paying 3% and the inflation rate is 2% the nominal interest rate is

3% and the real rate is 1%

A perpetuity for sale at $100000 that promises a yearly payment of $5000 has an effective yield of

5%

A perpetual payment of $10000 offered for sale at 125000 is being offered at an effective yield of

8%

If the interest rate is 10% the present value of $1 next year is

91 cents

According to the economics of exhaustible resources, if the interest rate increases

An exhaustible resource will be used up sooner

Which is a stock variable

Capital

A risky asset will earn a rate of return close to that of risk less assets if its risk is

Diversifiable

The demand for loanable funds slopes

Downward because NPV falls as interest rates rise

The marginal revenue product of input purchase is not a complete picture in the case of capital because capital is

Durable

Of all the below endeavors of Happy Home Insurance Company of CA which involves the most nondiversifiable risk

Earthquake insurance

If the payment stream of a bond remains the same and the price of the bond goes down,

Effective yield rise

The "capital asset pricing model" measures the risk premium for a capital investment by comparing the expected return on that investment with the

Expected return on the entire stock market

Her family sued the typewriter company for the value of the income loss her death represented. $X would her higher if

Her income were higher and she were younger

Which of the following questions is addressed when hiring capital but not addressed when hiring labor

How much are future profits worth today

The asset beta in the capital asset pricing model is a moderate number that measures

How sensitive the asset's return is to market movements

As firms expected profit from new capital projects falls

The demand for loanable funds will shift leftward

If individuals start paying off the large amount of credit card debt they now hold

The demand for loanable funds will shift leftward

If technological breakthroughs in the computer and software industry causes the numbers of firms to consider investment projects they hadn't previously thought of

The demand for loanable funds will shift rightward

When the government runs a large deficit

The demand for loanable funds will shift rightward

If a coupon bond has a face value of 1k it means that

The holder will be paid $1000 when the bond matures

In the consumer's NPV decision, the correct value for the interest rate R is

The interest rate chargers for the loan when the consumer must borrow to finance the purchase

The higher the beta

The larger the nondiversifiable risk

The team interest rate is

The nominal rate minus the rate of inflation

The user cost of an exhaustible resource is

The opportunity cost of using the resource today rather than saving it for the future

The present value formulae makes it apparent that

The present value of a fixed sum decreases as the time until it is to be paid increases

The NPV criterion is that the firm should've invest in a New capital project if

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

Over the long term, the ultimate determinant of the price of a depletable resource is the

User cost

As interest rates fall

Values of bonds rise

The decision firms make about new capital projects is most likely the decision consumers make when they decide

Whether to buy a new housse

You are the owner of a rare bottle of wine valued at $332. There are no costs associated with storing or selling the wine. Next year you expect the wine to increase in value to $350. If the interest rate is 10%

You should sell the wine today