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