Econ Hw 9.1

6) Suppose you win a small lottery and you are given the following choice: You can (1) receive an immediate payment of $10,000 or (2) three annual payments, each in the amount of $3,600, with the first payment coming one year from now, the second two years from now, and the third three years from now. You would choose to take the three annual payments if the interest rate is a. 2 percent, but not if the interest rate is 3 percent. b. 3 percent, but not if the interest rate is 4 percent. c. 4 percent, but not if the interest rate is 5 percent. d. 5 percent, but not if the interest rate is 6 percent.

10,000 or 3600 - 1yr= 3600/1.03 3600- 2yr = 3600/1.03^2 3600-3yr = 3600/1.03^3 b. 3 percent, but not if the interest rate is 4 percent.

10) A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100,000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract. Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first? a. 7 percent b. 8 percent c. 9 percent d. 10 percent

a. 7 percent

5) Zoey wants to have about $750,000 when she retires in 10 years. She has $300,000 to deposit now. At which of the following interest rates would Zoey's deposit come closest to $750,000 after 10 years? a. 9.6 percent b. 9.9 percent 771 c. 10.2 percent 792 d. 10.5 percent

a. 9.6 percent

3) Braden says that $400 saved for one year at 4 percent interest has a smaller future value than $400 saved for two years at 2 percent interest. Lefty says that the present value of $400 to be received one year from today if the interest rate is 4 percent exceeds the present value of $400 to be received two years from today if the interest rate is 2 percent. a. Braden and Lefty are both correct. b. Braden and Lefty are both incorrect. c. Only Braden is correct. d. Only Lefty is correct.

a. Braden and Lefty are both correct. brady 400 at 4%- 1yr < 400 at 2%- 2 yrs 416 and 416.16 lefty 400 at 4% - lyr > 400 at 2% 2yr

1) In which of the following instances is the present value of the future payment the largest? a. You will receive $1,000 in 5 years and the annual interest rate is 5 percent. b. You will receive $1,000 in 10 years and the annual interest rate is 3 percent. c. You will receive $2,000 in 10 years and the annual interest rate is 10 percent. d. You will receive $2,400 in 15 years and the annual interest rate is 8 percent.

a. You will receive $1,000 in 5 years and the annual interest rate is 5 percent. 1000(1+.05)^5

14) Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate payment of $10,000 or (2) two annual payments, each in the amount of $5,200, with the first payment coming one year from now, and the second payment coming two years from now. You would choose to take the immediate payment of $10,000 if the interest rate is a. 2 percent, but not if the interest rate is 1 percent. b. 3 percent, but not if the interest rate is 2 percent. c. 4 percent, but not if the interest rate is 3 percent. d. 5 percent, but not if the interest rate is 4 percent.

b. 3 percent, but not if the interest rate is 2 percent.

13) On the Internet you find the following offers for opening an online account. Which of them is the best offer if you have $5,000 to save for two years? a. an interest rate of 5 percent, with the bank charging you a $50 processing fee at the time you open your account b. an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account c. an interest rate of 3.5 percent, with the bank giving you a $100 bonus to open your account d. an interest rate of 4.5 percent, with no processing fee and no bonus

b. an interest rate of 4 percent, with the bank giving you a $65 bonus at the time you open your account a. 5462.50 b. 5473 c. 5456.125 d. 5460.125

2) A manufacturing company is thinking about building a new factory. The factory, if built, will yield the company $300 million in 7 years, and it would cost $220 million today to build. The company will decide to build the factory if the interest rate is a. no less than 4.53 percent. b. no greater than 4.53 percent. c. no less than 5.81 percent. d. no greater than 5.81 percent.

b. no greater than 4.53 percent.

4) The price of a bond is equal to the sum of the present values of its future payments. Suppose a certain bond pays $50 one year from today and $1,050 two years from today. What is the price of the bond if the interest rate is 5 percent? a. $1,050.00 b. $1,045.35 c. $1,000.00 d. $945.35

c. $1,000.00

12) You could borrow $2,000 today from Bank A and repay the loan, with interest, by paying Bank A $2,125 one year from today. Or, you could borrow X dollars today from Bank B and repay the loan, with interest, by paying Bank B $2,200 two years from today. In order for the same interest rate to apply to the two loans, X = a. $1,853.55. b. $1,898.70. c. $1,948.79. d. $2,012.22.

c. $1,948.79. 2000 (1+ r)= r= 6.25 2125 in 1 yr X= x(1.0625)^2 = 2200 2200 in 2 yr

15) Suppose you win the lottery and one of your payment options is to receive $20,000 today, $20,000 one year from now, and $20,000 two years from now. If the interest rate is 5%, what is the present value of this option? a. $51,830.26 b. $54,464.96 c. $57,188.21 d. $58,237.71

c. $57,188.21

9) A firm has three different investment options. Option A will give the firm $10 million at the end of one year, $10 million at the end of two years, and $10 million at the end of three years. Option B will give the firm $15 million at the end of one year, $10 million at the end of two years, and $5 million at the end of three years. Option C will give the firm $30 million at the end of one year, and nothing thereafter. Which of these options has the highest present value? a. Option A b. Option B c. Option C d. The answer depends on the rate of interest, which is not specified here

c. Option C

11) Imagine that someone offers you $X today or $1,500 in 5 years. If the interest rate is 4 percent, then you would prefer to take the $X today if and only if a. X > 1,055.56. b. X > 1,120.89. c. X > 1,232.89. d. X > 1,338.26.

c. X > 1,232.89.

8) Ronaldo's Foods considered building a store in a new location. The owners and their accountants decided that this was not the profitable thing to do. However, soon after they made this decision, both the interest rate and the cost of building the store changed. In which case do these changes both make it more likely that they will now build the store? a. Interest rates rise and the cost of building the store rises. b. Interest rates rise and the cost of building the store falls. c. Interest rates fall and the cost of building the store rises. d. Interest rates fall and the cost of building the store falls.

d. Interest rates fall and the cost of building the store falls.

7) Other things the same, when the interest rate rises, the present value of future revenues from investment projects a. rises, so investment spending rises. b. falls, so investment spending rises. c. rises, so investment spending falls. d. falls, so investment spending falls.

d. falls, so investment spending falls.