AGEC 330 Final KP

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Why is the internal rate-of-return method generally considered a superior method for evaluating an investment?

It takes into account the time value of money

The party to which control over the right to use an asset is transferred via a lease agreement is known as the __________.

Lessee

In most scenarios, the ________________ approach is more likely to be reliable.

POA

Large corporate firms may consider sales of preferred or common stock as a means of:

Raising new equity capital

How much money will be in a savings account in 15 years if $150 is deposited today and it earns 6% compounded quarterly?

$366.48

Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.

Suppose that the marginal tax rate is 20%. If a farmer decides to purchase a new tractor, it will increase the operating receipts $7,500 per year but it will cost $1,500 a year for maintenance. What is the annual after-tax net return generated by this investment for each year?

$4,800

Constant -growth series indicates the payment series experience a constant rate of growth.

Financial management involves the acquisition and use of financial resources.

Interest can be deducted from taxable income.

Nominal cash flows should be discounted with the nominal discount rate.

One of the key components of financial investing is that there is no expected high return without bearing high risk.

Portfolio risk can be reduced with a mix of securities and by investing in stocks with different characteristics.

Proforma Statements can be used to create a business plan.

A tractor with a cost of $75,000 has a depreciable life of 12 years. There is a marginal tax rate of 15%, and interest rate of 8%, and a pretax discount rate of 10%. What is the tax savings from depreciation?

$937.50

The maturity of debt securities traded in the money market is less than 1 year.

Assets, liabilities and equity is generally recorded on a firm's __________.

Balance Sheet

Payback period is described by the following mathematical expression.

I/E

What is the real price of a truck in 15 years if the nominal price is $30,000, and the inflation rate is 3%?

$19,255.86

$19,699

Suppose that the marginal tax rate is 20%. If a farmer decides to purchase a new tractor, it will increase the operating receipts $6,800 per year but it will cost $1,100 a year for maintenance. Before the purchase, the current operating expenses are $1,200. What is the annual after-tax net return generated by this investment for each year?

$4,560

What is the present value of $1,250 that is to be received 7 years form today and interest rates are 14% compounded annually?

$500

Assume that the terminal value of an investment is $55,000. This purchase has a cost of $75,000 with a marginal tax rate of 20%. This investment has an annual depreciation of $2,500. What is the present value of the after-tax value after 10 years?

$54,000

Suppose that the marginal tax rate is 20%. If a farmer decides to purchase a new tractor, it will increase the operating receipts $7,500 per year but it will cost $1,500 a year for maintenance. What is the annual pre-tax net return generated by this investment for each year?

$6,000

A bank has agreed to lend you $627,000 for a home loan. The loan will be fully amortized over 25 years at 15.49%, with .41 points. The loan payments will be monthly. The closing cost is estimated to be $2,237 and you plan to refinance the mortgage in 5 years. Calculate the book value at the end of the 5th year.

$615,871.65

Suppose you have the opportunity to purchase a 7-year annuity that pays you $2,000 per year starting in one year for each of the next seven years and you can purchase the annuity for $11,000. Suppose you take the 7-year annuity and put this money in a bank account paying 6% interest for 10 years. How much money will you have in your bank account at the end of 10 years? (Hint: (1) Calculate how much money you have in your bank account at the end of 7 years. (2) Then, calculate how much money you have in your bank account at the end of 10 years.)

$19,994

How much interest is gained if $175 is deposited in your bank account at the end of the year for each of the next 5 years? Savings account pays 10% compounded annually.

$193.39

Suppose you plan to replace a truck in 7 years and it will cost you $27,000. How much money would you need to put into your savings account at the end of the next 7 years to achieve this goal if the interest rate is 10%?

$2,846

You put $2,000 in an IRA account at Wells Fargo. This account pays a fixed interest rate of 8% compounded quarterly. How much money do you have in five years?

$2,972

What is the NPV of an investment that costs $95, promises to pay $125 in one year, and the rate of return on comparable investments is 8%.

$20.74

Assume that the terminal value of an investment is $27,500. This purchase has a cost of $50,000 with a marginal tax rate of 13%. This investment has an annual depreciation of $4,000. What is the after-tax terminal value after 4 years?

$28,345

If you could buy an investment now and six years later sell it for $43,000, what would you be willing to buy it for, assuming a 7% discount rate and no other cash flows?

$28,653

Suppose you are considering the purchase of a special livestock trailer for $15,000. It can be financed over five years with no down payment. Calculate the monthly debt payments if the annual interest rate is 6% compounded monthly and the payments are uniform (equal monthly payments including principal and interest).

$290

How much money would you have in your bank account in 10 years if $200 is deposited at the end of the year for each of the next 10 years? Suppose that savings account pays 10% compounded annually.

$3,187.48

What is the future value of $1,250 today if it draws interest at 6% compounded annually for 17 years?

$3,366

David plans to fund his individual retirement account with the maximum contribution of $2,500 at the end of each year for the next 30 years. If Shannon can earn 10% of his contributions, how much will he have at the end of the 10th year?

$39,844

What would be the future value of a CD of $1,000 for two years if the bank offered a 10% interest rate compounded semi-annually? Pick the closest answer.

$1,720

A five-year project, if undertaken, will require an initial investment of $500,000. The discount rate is 5% and The expected end-of-year cash flows are: 1-120000 2-120000 3-150000 4-150000 5-180000 The NPV is:

$117,145

Rebecca Smith just graduated from college and received a job managing a ranch. Her salary will be $35,000 per year. If she is guaranteed a 5% raise each year, what will the salary be in 25 years?

$118,522

If you borrowed $175,000 to buy a house and financed it at 8% annual interest for 25 years, what is your annual mortgage payment assuming that you make equal year-end payments?

$16,394

Suppose Mr. Agirich of Agirich Farms has made a good profit on his cotton this year and wants to put $10,000 in a savings account to pay for his son's education. The bank pays 4% compounded annually on money in savings accounts. How much will Mr. Agirich have in his savings account in thirteen years if $10,000 is put in the account today?

$16,650.74

If you invest $150 and earn a rate of return of 12%, how much money will you have in 1 year?

$168

Suppose that the marginal tax rate is 25%. If a farmer decides to purchase a combine it will increase his revenue by $7,500 per year, but it will also increase his expenses by $1,500 per year. The before tax rate on this investment is 30%. The life of this investment is 10 years. What is the present value of the after tax net return?

$17,371

Chad deposits $2,000 per year at the end of the year for the next 20 years into an IRA account that pays 6%. How much will Chad have on deposit at the end of 20 years?

$73,572

Consider a bond with a Par Value of $1,000. It pays a coupon of 8% and the coupon is paid semiannually. It matures in 10 years. Calculate the market value of the bond if the market rate is 12%.

$770.60

Rebecca Smith just graduated from college and received a job managing a ranch. Her salary will be $30,000 per year. If she is guaranteed a 5% raise each ear, what will her salary be in 20 years?

$79,599

Suppose that the inflation rate is 4% and the real terminal value of an investment is expected to be $70,000 in 4 years. Calculate the nominal terminal value of the investment at the end of year 4.

$81,890

Suppose you can put your money in a savings account that pays 5%, compounded annually. How much money would you have in your savings account in 23 years if you invested $2,500 today?

$7,679

How many years would it take to at least double your investment in your bank account if you deposited $40,000 today in a bank that pays 5.79% Compounded annually?

Calculate the after-tax discount rate if the before tax discount rate is 20% and the marginal tax rate is 30%

14%

Consider a bond with a Par Value of $1,000. It pays a coupon of 12% and the coupon is paid monthly. It matures in 10 years. Calculate the annual yield on the bond if the price of the bond is $892.66.

14%

What is the rate of return on an investment that costs $100 and promises to return $115 in one years?

15%

A farmer is considering the purchase of additional land to expand operations. The marginal tax rate is 18% and He requires at least a 15% pre-tax, risk free return on capital and a 4% risk premium on projects on comparable risk. What is the after-tax, risk adjusted discount rate? r=[rbt +PREM](1-m)

15.58%

Assume a project can be purchased for $655,358.38 ans the semi-annual cash inflows are $150,000 and $200,000 in year 1, and $250,000 and $200,000 in year 2. Calculate the annual IRR of the project.

16.06%

What is the rate of return on an investment that costs $150 and promises to return $175 in one year?

16.67%

How many years would it take before you had $484,012 in your bank account if you deposited $40,000 today in a bank that pays 12% interest annually?

What is the yield on an investment that costs $125, and promises to pay $275 in three years?

30.06%

What is the yield on an investment that costs $115, and promises to pay $200 in two years?

31.9%

Parents want to save $250,000 for their child's college education. They plan to make fifteen equal year-end payments and expect to earn an 8 percent annual interest rate. How much will they have to invest annually to accumulate the $250,000?

$9,207

Suppose you buy a tractor for $45,000 and sell it for $5,000 in 7 years. What is the annualized cost (capital recovery) if interest rates are 12%?

$9,365

Consider a bond with a Par Value of $1,000. It pays a coupon of 7% and the coupon is paid monthly. It matures in 2 years. Calculate the NPV if the yield on the bond is 5% and the price of the bond is $1,100.

-$62.01

Consider a project with the following stream of cash flows. Year: Cash Flow o: +80 1: -388 2: +700 3: -557 What's the IRR of the project?

0%, 10%, 25%, 50%

When solving for the future value of an amount deposited now, which one of the following factors would not be a part of the calculation?

1 divided by the sum of 1 plus the interest rate

The life cycle effect uses information about past, present, and expected business performance comes in part from a financial accounting system that reports the firm's profitability, liquidity, and solvency positions.

The terminal value that should be used in calculating depreciation for capital budgeting is the sale price of the investment.

The theory of accounting is the concern with how individuals and firms allocate resources through time.

The uniform series future value factor [USFV(PV,N)] is based on beginning of period cash flows. With PV being the present value and N being the number of periods.

The uniform series future value factor [USFV(r,N)] is based on beginning of period cash flows. With r being the rate and N being the number of periods.

The yield on an investment is always equal to the discount rate used to calculate the NPV.

There are several types of rates that are discussed in terms of determining cost of debt, some of which include: simple rate, compound rate, agency rate, real rate, actuarial rate, annual percentage rate, effective rate and contractual rate.

When finding the after-tax net return it is not important to discount with the after-tax discount rate.

he compound annual return on a project is known as its:

IRR

Which of the following is a characteristic of farmland?

Legal Restriction on Use

Which party covers direct costs associated with operating an asset under an operating lease?

Lessee

Farmer Joe is evaluating three investment opportunities with the following IRR values, 8%, 10% and 12%.

Not enough information

Financial investments can be made by investing money in

Both A & B (Real goods, financial goods)

The interest rates respond to changes in _________ for alternative financial assets

Both A & B: Supply and Demand

Sensitivity analysis provides information on:

Both A and B: (whether the NPV should be trusted and may provide a false sense of security if all NPVs are positive, the need for additional information as it tests each variable in isolation.)

The four stages that a farm business passes through its life cycle include

Both A and C: Establishment and Consolidation

Which of the following investment evaluation methods account for the time value of money?

Both B and C: Net present value and Internal rate-of-return

The capital budgeting methods that directly account for the time value of money are

Both B and C: Pay-back period & Internal rate of return

_____ is the risk that a business will experience a period of poor earnings from poor yield or low commodity prices.

Business Risk

A dollar's value today is lessor than when compared to its value tomorrow.

A leveraged Lease is a form of leasing that combines the hiring of labor services with the use of the tangible asset.

Accounting Methods are used to evaluate the future directions of a firm.

An enterprise budget helps farm owners/managers evaluate the financial effect of incremental changes.

An income statement and a cash flow budget can be used to measure the firm's financial performance at a specific point in time.

An income statement and a cash flow budget can be used to measure the firm's financial position at a specific point in time.

An investment is unacceptable if IRR is greater than required rate of return.

Annual Depreciation (D) is multiplied by (1-marginal tax rate) to get the tax savings from depreciation.

Assuming that an annual interest rate is 8%, an investor would be indifferent between $700 today and $15,000 in 55 years from today. Holding everything else constant.

Both interest and principal amounts can be deducted from taxable income.

Businesses are net Demanders of securities.

Capital Budgeting is the process of planning asset expenditures whose returns are expected to extend within one year.

High risk reaps a high return is not one of the keys to financial investing.

Human Resource management involves the protection of equity capital from risk.

If the before tax discount rate is 12% and the marginal tax rate is 28%, the after tax discount rate should be 3.36%.

If the conversion period of alternative loans are different, then one can use the APR rate to determine which loan has the least cost.

Incremental cash flows are taxed at one's average tax rate.

Inflation is the decrease in the general price level.

Net returns to land have an inflation premium and are expected to increase at the rate of inflation.

Nominal Prices are the prices with the general price level effect removed.

Payback Period is the time span needed to make an appropriate decision for the first period (the amount of time an organization will look into the future when preparing a strategic plan).

People use money to invest in real goods and financial goods only.

Portfolio risk cannot be reduced with a mix of securities and by investing in stocks with different characteristics.

Real cash flows can be discounted by either a nominal discount rate or a real discount rate. However, nominal cash flows must be discounted by a nominal discount rate only.

Risk Aversion means the subjective tendency of investors to seek out unnecessary risk.

Risk Premium only depends on an individual's risk/return preference.

Suppose an investment has a life of 5 years, an after-tax discount rate of 12%, and an after-tax terminal value of $75,000. The present value of the after-tax terminal value is $132,176.

The Net Cash Flow is calculated as the after-tax net returns minus the annual depreciation multiplied by the marginal tax rate.

The Tax savings from Depreciation is subtracted from the cash flows when calculating the NPV using the component method

The after-tax discount rate is the before tax discount rate multiplied by one plus the marginal tax rate.

The after-tax discount rate is the before tax discount rate multiplied by the marginal tax rate.

The conversion period is the length of time it takes to retire the principal of a loan.

The correct Internal Rate of Return is found when the Net Present Value is equal to 1.

The effective rate is calculated before the APR.

The first step of the strategic management process is to formulate objectives.

Sensitivity of the investment to a variable can be measured by the steepness of the slope (negative or positive)

Stock investors are in a residual position in regards to claims on income and assets.

The APR is calculated after the actuarial rate.

The Net Cash Flow is calculated as the after-tax net returns plus the annual depreciation multiplied by the marginal tax rate.

The future value of $100 deposited today for 10 years at 10% compounded annually is $259.37

The future value of a $100 ordinary annuity deposited for 10 years at 10% is $1,593.74.

The future value of a single sum can be found with VN=V0(1+r)N. V0 is the present value, VN is the future value in N periods, r is the rate, and N is the number of periods.

The modified internal rate-of-return uses the cost of capital explicitly as the reinvestment rate for the project's cash flows.

The present value of cost is equal to the initial cost.

The present value will be greater if the number of payments in a uniform annuity is longer, holding everything else constant.

The price of bond and the interest rate are inversely related.

The primary market is the part of the capital market that deals with issuing of new securities.

The terminal value that should be used in calculating depreciation for capital budgeting is zero

The uniform series future value factor [USFV(r,N)] is based on end of period cash flows. With r being the rate and N being the number of periods.

When calculating IRR with a trial and error process, discount rates should be raised when NPV is positive.

When comparing loans based on the least cost when the conversion periods are the same, one can compare the actuarial or annual percentage rate.

When finding the after-tax net return it is important to discount with the after-tax discount rate.

With unrestricted access to equity and debt, firms should choose the leverage that gives the lowest cost of capital.

Yield is calculated as the discount rate that makes the present value of cash inflows equal to the present value of cash outflows.

Which of the followings is not a component of an NPV according to the Component Method?

Tax Savings from Financial Activities

A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount is $88,000. The loan will be fully amortized in 3 years at 12%. Marginal tax rate is 20%. (i) What is the total interest payment for this loan? a. $25,514.24 b. $26,413.77 c. $18,318.02 d. $21,916.13 ENTER RESPONSE HERE: [i] (ii) What is the total amount of tax savings from interest on this loan? a. $4,383.23 b. $5,382.58 c. $3, 593.60 d. None of the answers are correct ENTER RESPONSE HERE: [ii]

d a

Simple Rate-of-return (SRR) is the rate-of-return expresses the ____ profits generated each year by an investment as a percent of either the original or the average investment over the investment's expected life.

average

An options contract is a contingent claim. It gives holders the right to buy or sell something at a specific price during a period of time.

Being taxed on capital gains that predominately come from inflationary increases and not because of real changes in wealth is called the inflationary tax.

Bonds promise a fixed period payment and returns principal at maturity.

Budgeting Methods are used to evaluate the future directions of a firm.

If a loan is fully amortized it will have an equal periodic payment including principal and interest.

If the before tax discount rate is 12% and the marginal tax rate is 28%, the after tax discount rate should be 8.64%.

If the net present value is negative then you have made an unacceptable investment.

In an efficient market, prices are adjusted for information.

Life Insurance Companies make loans to farmers.

Mutual funds are a pool of funds from investors. These funds are invested in a portfolio of securities.

Required Rate-of-return (RRR) is the _____ expected yield by investors requires in order selecting a particular investment.

minimum

If the IRR for a project is 15%, then the project's NPV would be:

negative at a discount rate of 10%.

If $1,000 invested for eight years is worth $1,594 at the end of the eighth year, what is the annual compound growth rate for this investment?

Consider a bond with a Par Value of $1,000. It pays a coupon of 6% and the coupon is paid semiannually. It matures in 20 years. Calculate the annual yield on the bond if the price of the bond is $723.98.

Consider a bond with a Par Value of $1,000. It pays a coupon of 8% and the coupon is paid semiannually. It matures in 5 years. Calculate the annual yield on the bond if the price of the bond is $960.44.

What interest rate would a bank have to pay on a $15,000 deposit if you wanted to withdraw $64,915 from your bank account in 17 years? Assuming that interest is compounded yearly.

Farmer Joe is considering the purchase of a new tillage implement, which if bought would reduce the number of labor hours and fuel costs used during spring cultivation. This investment would fall under which of the following categories?

Adoption of cost-reducing investment to produce a given volume of output

Investment analysis is also known as __________________?

Capital Budgeting

Nominal cash flows can be discounted by either a nominal discount rate or a real discount rate. However, real cash flows must be discounted by a real discount rate only.

One of the capital budgeting methods is the Component Method. In this method, we calculate net cash flow for each period & then calculate the NPV for the investment.

Operating Lease is a long-term contractual arrangement in which the lessee acquires control of an asset in return for rental payments to the lessor.

When finding the prepaid interest the points are divided by the loan principal.

The growth phase of the farm business life cycle refers to growth in ______________.

Income generation

Future Value is how much a current sum of money will be worth at a future date assuming a certain ____ rate.

Interest

The basic price that equates the demand and supply for loanable funds in financial markets is the

Interest Rate

An investment in fixed, highly specific, illiquid assets that cannot easily be liquidated or redeployed to other uses is considered _______________.

Irreversible

"Income Generating," "Cost Reduction," and "Maintenance and Replacement" are categories of alternative investments.

A partial budget helps farm owners/managers evaluate the financial effect of incremental changes.

Accounting tools consist of the balance sheet, income statement, and cash flow statement.

Although local businesspersons, such as lenders, real estate agents, professional managers, extension personnel, lawyers, and farmers, may have good, timely impressions of the land market, but their information is largely based on opinions, observations, and judgments.

An efficient information system aids in financial control, risk management, the meeting of legal requirements and financial planning.

An income statement and a cash flow budget can be used to measure the flow effects of the firm's financial performance over each period of time.

An income statement is a financial statement that reports a company's financial performance over a specific accounting period.

Interest is compensation for foregone investments or consumption.

Investment is the addition of durable assets to a business.

Consider a bond with a par value of $1,125. It pays a coupon of 8% (annual) and the coupon is paid semiannual. It matures in 10 years. What is the coupon payment?

$45

How much interest is gained if $250 is deposited in your bank account at the end of the year for each of the next 7 years? Savings account pays 8% compounded annually.

$480.70

Suppose you are considering the purchase of an investment. The Net Returns for this investment is $5,000. Given the marginal tax rate is 28%, what is the pre-tax net returns?

$5,000

How much money will be in a savings account in 20 years if $750 is deposited today and it earns 10% compounded monthly?

$5,496.06

Stephen deposits $2,000 per year at the end of the year for the next 15 years into an IRA account that currently pays 7%. How much will Stephen have on deposit at the end of the 15 years? Pick the closest answer.

$50,258

When you retire, you want to have $875,000 saved. If you plan to retire in 35 years, and you can receive 7% interest annually on a savings account, what is the fixed amount you have to save each year?

$6,330

When you retire, you want to have $750,000 saved. If you plan to retire in 30 years, and you can receive 8% interest annually on a savings account, what is the fixed amount you have to save each year?

$6,621

Suppose you are considering the purchase of an investment. The Cash Revenues for this investment is $10,000 and the Cash Expenses in $3,000. Given the marginal tax rate is 23%, what is the pre-tax net returns?

$7,000

As a graduate at 29 from Texas A&M, you will receive a signing bonus of $12,000 to go to work for a large investment company. If you save the money until you retire at 65 what would the value be at the time assuming a 12% rate of return?

$709,627

Suppose you buy a truck for $37,000 and sell it for $5,700 in 5 years. What is the annualized cost (capital recovery) if interest rates are 7%?

$8,033

When you retire, you want to have a million dollars saved. If you plan to retire in 40 years, and you can receive 5% interest annually on a savings account, what is the fixed amount you have to save each year?

$8,278

Future Semiconductors is evaluating a new etching tool. The equipment costs $1.0m and will generate after-tax cash inflows of $0.4m per year for six years. Assume the firm has a 15% cost of capital. What's the NPV of the investment?

$0.51m

Suppose an investment costs $10,000 with expected cash flows of $3,000 for 5 years. The discount rate is 15.2382%. The NPV is ___ and the IRR is ___ for the project.

$0; 15.2382%

Consider a bond with a Par Value of $1,000. It pays a coupon of 10% and the coupon is paid quarterly. It matures in 5 years. The market rate is 12%. Calculate the book value of the bond.

$1,000.00

What would you be willing to pay for an annuity that paid you $150 at the end of each of the next 15 years? Assume savings account pays 12% compounded annually.

$1,022

Consider a bond with a Par Value of $1,000. It pays a coupon of 12% and the coupon is paid annually. It matures in 10 years. Calculate the market value of the bond if the market rate is 10%.

$1,122.89

Suppose you buy a tractor for $55,000 and sell it for $10,000 in 10 years. What is the annualized cost (capital recovery) if interest rates are 10%?

$8,324

he future value at the end of 11 years of $500 invested today at an interest rate of 8% is

$1,165.92

If you borrow $8,000 and pay it back in 9 equal annual payments (principal and interest) at 7% interest. What are the annual payments?

$1,228

Suppose you can put your money in a savings account that pays 7%, compounded annually. How much money would you have in your savings account in 27 years if you invested $1,350 today?

$8,389

If it costs $80,000 to put a student through Texas A&M today, how much will it cost in 8 years if costs increase at an annual rate of 5 percent?

$118,196

A rancher is interested in purchasing land the initial cost of the land is $60,000. The IRS is going to allow the rancher to depreciate his investment using straight-line over 10 years with a marginal tax rate of 20%. What is the tax savings from depreciation?

$1200

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for three years, and the cost of capital is 9%?

$126,565.00

How much money would you have in your bank account in 20 years if $400 is deposited at the end of the year for each of the next 20 years? Suppose that savings account pays 5% compounded annually.

$13,226.38

Suppose that the inflation rate is 2% and the real terminal value of an investment is expected to be $82,500 in 4 years. Calculate the nominal terminal value of the investment at the end of year 4.

$89,301

Consider a bond with a Par Value of $1,000. It pays a coupon of 12% and the coupon is paid semiannually. It matures in 5 years. Calculate the market value of the bond if the market rate is 15%.

$897.04

What would you be willing to pay for an annuity that paid you $250 at the end of each of the next 5 years? Assume savings account pays 12% compounded annually.

$901

An entrepreneur is offered a service contract that will cost him $600,000 initially. The contract has a 5 years of life and will generate a cash inflow of $160,000 per year. The cost of capital of this project is 12%. What's the NPV of the project? Should the entrepreneur accept the contract?

-$23,236; reject

You are analyzing a project and have prepared the following data (assume the discount rate is 15%): Year Cash Flow 0 -87 1 12 2 24 3 36 4 48 (i) Based on the net present value of _____ for this project, you should _____ the project.

-$7.3; reject

A rancher is considering the purchase of additional land. Given the present value of after-tax net return of $16.15, a marginal tax rate of 14%, a terminal value of $670.80, and an after-tax discount rate of 10.97%. This rancher is planning on selling the land in 15 years. What is the maximum price this rancher should be willing to pay for an acre of land?

$141.37

Suppose a parcel of land promises to return $750 per year per acre. What is the capitalized value of the land if the interest rate is 5%?

$15,000

Suppose you have been hired by Aggie-Business. They are willing to pay you a signing bonus of $2,000 per year starting in one year for each of the next seven years (7-year annuity) or a lump-sum bonus today of $11,000. Suppose you take the 7-year annuity and put this money in a bank account paying 6% interest for 10 years. How much money will you have in your bank account at the end of 10 years? (Hint: (1) Calculate how much money you have in your bank account at the end of 7 years. (2) Then, calculate how much money you have in your bank account at the end of 10 years.)

$19,994

If you borrow $15,000 and pay it back in 13 equal annual payments (principal and interest) at 9% interest. What are the annual payments?

$2,004

How much money will be in a savings account in 10 years if $1,000 is deposited today and it earns 8% compounded monthly?

$2,219.64

What is the future value of $750 today if it draws interest at 10% compounded annually for 12 years?

$2,354

If $2000 is invested today at 6%, in 3 years the future value would be

$2,382

Tyler would like to send his parents on a cruise for their 50th wedding anniversary. He expects the cruise will cost $15,000 and he has 5 years to accumulate this money. How much must Lance deposit at the end of each year in an account paying 10 percent interest in order to have enough money to send his parents on the cruise? Pick the closest answer.

$2,457

What would you be willing to pay for an annuity that paid you $575 at the end of each of the next 7 years? Assume savings account pays 8% compounded annually.

$2,994

Suppose that the inflation rate is 2.5% and the real terminal value of an investment is expected to be $20,000 in 2 years. Calculate the nominal terminal value of the investment at the end of year 2.

$21,013

Suppose that the firm Aggie Alfalfa has a hay field that they are willing to sell today. The net annual returns to the hay ield are expected to be $35,000 per year for the next 15 years. At the end of 15 years, it is expected that the land will sell for $25,000. Calculate the Market Value of the orchard if the market rate of return on comparable investments is 14%.

$218,478

Suppose that the firm Aggie Alfalfa has a hay field that they are willing to sell today. The net annual returns to the hay yield are expected to be $35,000 per year for the next 15 years. At the end of 15 years, it is expected that the land will sell for $25,000. Calculate the Market Value of the orchard if the market rate of return on comparable investments is 14%.

$218,478

Calculate the present value of a retirement fund if you put $1,750 in your savings account at the beginning of each of the next 35 years? Assume that your savings account pays 8% compounded annually.

$22,027.13

If you invest $200 and earn a rate of return of 10%, how much money will you have in 1 years?

$220

The present value of an annuity of $5,000 to be received at the end of every six months for 6 years at a 4% annual rate would be (Pick the closest answer.):

$26,210

If you could buy a bond now and five years later sell it for $40,000, what would you be willing to buy it for, assuming an 8% discount rate and no other cash flows?

$27,223

What is the present value of $750 received 10 years from now if the interest rate compounded annually is 10%?

$289

Suppose that the firm CherryBlossom has an orchard they are willing to sell today. The net annual returns to the orchard are expected to be $50,000 per year for the next 20 years. At the end of 20 years, it is expected the land will sell for $30,000. Calculate the Market Value of the orchard if the market rate of return on comparable investments is 16%

$297,984

A rancher purchased a new trailer for $10,000. The bank is willing to loan him $6,000. The terminal value of this investment is $3,500. There is a marginal tax rate of 15%, a growth rate of 4%, and a discount rate of 12%. What is the after-tax terminal value of this investment?

$3,575

Rick plans to fund his individual retirement account with the maximum contribution of $2,000 at the end of each year for the next 10 years. If Rick can earn 10% of his contributions, how much will he have at the end of the 10th year?

$31,875

What is the NPV of an investment that costs $175, promises to pay $250 in two years, and the rate of return on comparable investments is 10%.

$31.61

How much money will be in a savings account in 15 years if $150 is deposited today and it earns 6% compounded monthly?

$368.11

Consider a bond with a par value of $1,500. It pays a coupon of 10% (annual) and the coupon is paid quarterly. It matures in 8 years. What is the coupon payment?

$37.50

A farmer is taking out a 20-year loan of $30,000 with equal principal annual payments and an interest rate of 12%. Growth rate of farm returns are expected to be 4% per year. What is the total payment in the 5th year?

$4,380

You have just won a lottery! You will receive $50,000 a year beginning one year from now for 20 years. If your required rate of return is 10%, what is the present value of your winning lottery ticket? Pick the closest answer.

$425,700

A rancher is interested in purchasing land the initial cost of the land is $43,000. The IRS is going to allow the rancher to depreciate his investment using straight-line over 12 years with a marginal tax rate of 12%. What is the tax savings from depreciation?

$430

The focal point of financial management in a corporate firm is

The creation of value for shareholders

A farmer is considering borrowing money from a bank. Given the following information: Initial loan amount is $250,000. The loan will be fully amortized in 3 years at 14%. Marginal tax rate is 15%. (i) What is the principal payment in the 1st year? a. $61,780.44 b. $54,208.66 c. $72,682.87 d. None of the answers are correct ENTER RESPONSE HERE: [i] (ii) What is the principal payment in the 2nd year? a. $65,910.60 b. $82,858.47 c. $8,294.83 d. None of the answers are correct ENTER RESPONSE HERE: [ii]

c b

The net present value method uses the ____________ formulas for a non-uniform or a uniform series of payments to value the projected cash flows for each investment alternative at one point in time.

discounting

The process of finding present values from future payments is often referred to as _________. It is the opposite of the ______________ process used to determine future values.

discounting, compounding

Modified Internal Rate-of-return (MIRR) is the rate of interest that equates the present value of all outflows with the ____ value of all inflows.

future

When the NPV of an investment is positive, then the IRR will be:

greater than the opportunity cost of capital.

Which of the following accurately describes the calculation for the weighted average cost of capital?

id (1-t)*D/A +ie*E/A

The costs of both debt and equity eventually _________ as leverage __________.

increase/increases

The yield (interest rate) on a bond is 8% and the inflation is expected to be 3%. What's the real interest rate on the bond?

4.85%

How many years would it take to at least double your investment in your bank account if you deposited $20,000 today in a bank that pays 15% Compounded annually?

What interest rate would a bank have to pay on a $25,000 deposit if you wanted to withdraw $56,305 from your bank account in 12 years? Assuming that interest is compounded yearly.

The basic future and present value equations contain four variables. Which one of the following is not included?

inflation rates (I)

Tax basis is equal to:

initial cost basis - accumulated depreciation

The primary market is facilitated by

investment banking

An annuity:

is a level stream of equal payments through time.

Which one of the following has the largest future value if $1,000 is invested today?

8 years with a compound annual interest rate of 8%

Operating Lease are short-term rental arrangements (hourly, daily, weekly, monthly) in which the rental charge is calculated in a time basis. The ____ owns the asset and performs nearly all the functions of ownership, including maintenance. The ____ pays the direct costs, such as fuel and labor.

lessor;lessee

A/An _______________ for land is the purchase price that would yield a break-even or zero net present value for a land investment.

maximum bid price

An analysis of what happens to the estimate of the net present value when you examine a number of different likely situations is called _____ analysis

scenario

The tax on capital gains or loss on an investment is

terminal gain or loss on an investment times the marginal tax rate.

The taxable gain or loss on the terminal value of an investment is

the terminal value of the investment minus the tax basis

One method that can be used to increase the NPV of a project is to decrease the:

time until receipt of cash inflows.

Internal Rate-of-return (IRR) is the yield of an investment, i.e., the rate of interest that equates the net present value of the projected series of cash flow payments to ____.

zero

The internal rate-of-return represents the interest rate necessary to make the net present value _______________.

zero

____ Series is the payment series that their payment and interest rates are equal in each conversion period.

Uniform

Annual Percentage Rate (APR) is the interest rate per year. It is found by expressing the _____on an annual basis.

actuarial interest rate

The investment decision process includes

all of the above: (Identify Alternative Investments, Collect Relevant Information, Layout Cash Flows, Analysis)

The land value is influenced by special factors such as

all of the above: (excell machinery capacity, environmental concerns)

Which of the following is not a participant in financial markets?

all of the answers are participants: (individuals, government, institutional powers, businesses)

Truth in Lending requires creditors to inform borrowers precisely and explicitly of the total amount of the finance charge that they must pay and the______.

annual percentage rate of interest

For an investment project, if NPV=8.77 when using 11% discount rate, NPV=4.13 when using 12% discount rate and NPV=-1.55 when using 13% discount rate, then the IRR must be

between 12% and 13%

The written summary by a qualified individual setting forth an estimated value of a specific asset or group of assets, usually used in reference to real estate.

Appraisal

Comparing beginning and year-end balance sheets allows the firm manager to assess growth in all but the following.

Cash flows

Which of the following represent a financial risk?

Changes in interest rates

The costs incurred by borrowers and sellers in completing a loan transaction.

Closing Cost

A balance is a minimum balance that must be maintained by borrower in savings account to offset a portion of the cost that a bank faces when extending a loan to a business.

Compensating

A discount rate must account for the followings:

Cost of capital, Return on alternative investments, Risk, and Taxes

Which of the following is not a method frequently suggested for or used by business planners to evaluate investment opportunities?

Depreciation schedule

How many years would it take before you had $86,307 in your bank account if you deposited $25,000 today in a bank that pays 10% interest annually?

Edelman Engineering is considering including two pieces of equipment, truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $17,100, and that for the pulley system is $22,430. The firm's cost of capital is 14%. Cash flows are as follows: years 1-5: Truck- $5,100 Pulley- $7,500 Calculate the IRR and the NPV for Pulley:

20%; $3,318

Suppose a particular investment project will require an initial cash outlay of $1,000,000 and will generate a cash inflow of $500,000 in each of the next three years. What is the project's IRR? Suppose a company's hurdle rate is 15%, should it accept the project?

23%; accept the project

Cash Flow Budgeting is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth the funding of cash through the firm's capitalization structure.

Choice of discount rate is controlled by the financial market.

Compound Interest means each time interest is paid, it is added to or compounded into the principal but does not earn interest.

Discounting converts a present amount into an equivalent future amount.

Efficient Markets mean that it is possible to forecast future values of stock prices.

Financing gaps are not common early on in the farm land investing process.

If the before tax discount rate is 12% and the marginal tax rate is 28%, the after tax discount rate should be 15.36%.

If the net present value is less than zero, be indifferent.

If the net present value is negative then you have made an acceptable investment.

If there are restraints on equity capital but no restraints on debt capital, we could finance with debt as long as returns were lower than the cost of debt.

In general, greater expected profits require less risk when making financial decisions.

In the context of profitability, an investment is acceptable if the Net Present Value is zero or less.

Interest payments on a fully amortized loan increase over the life of the loan.

Investment is the addition of non-durable assets to a business.

Lease analysis is generally applied solely to real estate and no other type of asset.

Principal payments on a fully amortized loan decrease over the life of the loan.

Production management involves the acquisition and use of financial resources.

Risk and return characteristics of an individual portfolio does not depend on the individual's risk/return preference.

Securities give you the title to underlying real assets only.

Suppose a farmer has financed all assets with equity. If the farmer uses debt to add assets (increase leverage), the weighted cost of capital will initially go up.

Suppose an investment has a life of 3 years, an after-tax discount rate of 10%, and an after-tax terminal value of $60,800. The present value of the after-tax terminal value is $60,800.

Suppose an investment has a life of 3 years, an after-tax discount rate of 10%, and net returns of $12,800 per year. The present value of the after-tax net returns is $38,400.

Suppose an investment has a life of 3 years, an after-tax discount rate of 10%, and tax savings from depreciation of 1,067 per year. The present value of tax savings from depreciation is $3,201.

Suppose an investment has a life of 5 years, an after-tax discount rate of 12%, and tax savings from depreciation of 1,500 per year. The present value of tax savings from depreciation is $8,400.

The IRR approach may be best carried out by performing calculations by hand.

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital.

The Net Cash Flow is calculated as Cash Revenues minus Cash Expenses plus the marginal tax rate times the taxable income.

The annuity equivalent method provides the annual annuity over the economic life of the investment that results in a present value equal to the future value of its projected cash flow stream of the investment.

The book value of a contract is the present value of future payments of any contract discounted at the market rate.

The calculation for payback period is the same regardless of whether the projected cash flows are uniform or non-uniform.

The future value is higher if one dollar today is compounded annually rather than monthly, holding everything else constant.

The future value of a single sum can be found with V0=VN(1+r)-N. V0 is the present value, VN is the future value in N periods, r is the rate, and N is the number of periods.

The future value will be greater if the number of payments in a uniform annuity is shorter, holding everything else constant.

The future value will be smaller if the number of payments in a uniform annuity is longer, holding everything else constant.

The impacts of time and risk are not important in financial management.

The last step of the strategic management process is to establish the future direction of the firm and to articulate a mission statement.

The market interest rate is the interest rate stated on a bank promissory note.

The market value of a contract is the future value of the remaining payments of a contract compounded at the market rate.

The maturity of debt securities traded in the money market is more than 1 year.

The only way to measure inflation is with the Gross Domestic Product (GDP) Deflator.

The present value of the after-tax savings from depreciation is obtained by discounting the annual tax savings from depreciation using the marginal tax rate as the discount rate.

The present value will be greater if the interest rate in a uniform annuity is greater, holding everything else constant.

The present value will be smaller if the number of payments in a uniform annuity is longer, holding everything else constant.

The price of a bond goes down as interest rates go down.

The price of bond and the interest rate are positively correlated.

The return provided by a $100 ordinary annuity deposited for 10 years that results in a future value of $1,593.74 is 15%.

The secondary market is the part of the capital market that deals with issuing of new securities.

This interest rate per conversion period is called the effective interest rate.

When finding the present value of tax savings from depreciation it is important to use the before- tax discount rate.

When using straight-line depreciation to calculate depreciation for tax purposes, you should divide the cost basis by the planned life of the investment.

With compounded interest only the original principal, or amount of money borrowed, earns interest over the life of the transaction.

Capital leases are also sometimes referred to as ___________________.

Finance Leases

The combination of debt and equity reflects the firm's capital structure or _____________?

Financial leverage

Investment analysis considers all of the following except _________.

Fixed expenses

What kind of loan is set up with equal payment composed of principal payments and interest and is used to fully repay the loan and interest during its period to maturity?

Fully amortized

In order to accept an investment per the IRR evaluation method the IRR must be _____________ the required rate-of-return.

Greater than

Which is the second stage of the firm's life cycle?

Growth

The internal rate of return (IRR): I. rule states that a typical investment project with an IRR that is less than the required rate should be accepted. II. is the rate generated solely by the cash flows of an investment. III. is the rate that causes the net present value of a project to exactly equal zero. IV. can effectively be used to analyze all investment scenarios.

II and III only

What is the first step that produces relevant information to an investment choice?

Identification of investment alternatives

A procedure for evaluating the effects of investment choices on a business's profitability, risk, and liquidity is known as __________.

Investment analysis

The payback period method may be most appropriate for firms with _____________.

Low liquidity

Which of the following is not a characteristic unique to agricultural finance?

Low technology usage

Manager Bob oversees the operation of a cotton ginning facility in South Texas. One of the gins is 30+ years old and needs to be phased out, this represents which of the following types of investment?

Maintenance and replacement of depreciable capital items

Identification of investment alternatives is a responsibility that generally falls to the ___________ of the firm?

Manager

The internal rate of return can also be referred by the following names EXCEPT

Marginal utility of capital

The long run objective of financial management in a corporation is to

Maximize the value of firm's common stock

Which of the following is not another name for the internal rate-of-return?

Modified simple rate-of-return

The trading of debt securities with maturities less than 1 year is the

Money Market

Collecting relevant information is important in capital budgeting. Which of the following is least important?

Money in your retirement account

When comparing two investments like a used squeeze chute and a new squeeze chute, this would be referred to as:

Mutually exclusive investment

The internal rate-of-return is found by setting the ___________________ equal to 0.

NPV

Which of the following does not characterize NPV?

NPV does not explicitly incorporate risk into the analysis.

Collecting relevant information is important in capital budgeting. Which of the following is least important?

Name of your Bank

Collecting relevant information is important in capital budgeting. Which of the following is least important?

Name of your bank

The investment decision process includes

None of the above: Maintenance, Replacement, Bond Selection

An investment that can be readily put-off or deferred to a later period is ____________.

Postponable

Discounting is the process of finding ____ values.

Present

The time value concept/calculation used in amortizing a loan is

Present Value of an annuity

A good decision criterion to use when comparing investments is the annuity equivalent.

Annual Depreciation (D) is multiplied by the marginal tax rate to get the tax savings from depreciation.

Assuming that an annual interest rate is 4%, an investor would be indifferent between $1,000 today and $3,243 in 30 years from today. Holding everything else constant.

Assuming that an annual interest rate is 7%, an investor would be indifferent between $750 today and $4,071 in 25 years from today.

Assuming that an annual interest rate is 9%, an investor would be indifferent between $750 today and $6,467 in 25 years from today. Holding everything else constant.

Businesses are net Suppliers of securities.

Certainty-equivalent is defined by the certain amount of cash return that gives the same utility as a risky amount of cash return.

Compounding converts a present amount into an equivalent future amount.

Compounding implies that interest is added to principal and interest is paid on earned interest thereafter.

Efficient markets mean that stock prices have adjusted for all information available and there are no sure bargains.

External form of capital rationing involves restricted access to Equity and Debt capital.

Financial Management evaluates the future directions of a firm. For agricultural firms, emphasis is typically placed on enterprise budgets, cash flow budgets, and capital budgets.

Financial management involves the acquisition and use of financial resources and the protection of equity capital from all kinds of risk.

Financing refers to the means of acquiring control of assets: ownership by cash purchase or borrowing or leasing.

Identification of investment opportunities is a crucial function of management.

If you have already purchased bonds, you want interest rates (market rates) on bonds to decrease, holding everything else constant.

In compound interest, at the end of the transaction period, the total principal amount is called the compound amount.

In financial management, the emphasis is on the cash flow budgets and the capital budgets.

In general, greater expected profits require greater risk when making financial decisions.

In terms of accountability for taxes and financial feasibility, nominal cash flows are more accurate than real cash flows.

It is best to layout cash flows using a time line

Low asset liquidity is one the of the structural characteristics of the agricultural production sector.

Net Cash Flow is the stream of cash that the owner can withdraw for consumption or reinvestment elsewhere, which includes all cash flows relating to an enterprise and all cash outflows for operating expenses, capital expenditures, and income taxes.

Principal payments on a fully amortized loan increase over the life of the loan.

Prior to evaluating any investment opportunity, data must be gathered to support the calculations.

Projected Cash Flow Statement can be used to determine if an investment is financially feasible.

Rate of Inflation is the percentage rate of increase in inflation.

Risk and return characteristics of an individual portfolio depend on the individual's risk/return preference.

Securities give you the title to common stock and treasure bonds.

Simple Interest means only the original principal, or amount of money borrowed, earns interest over the life of the transaction.

Suppose an investment has a life of 3 years, an after-tax discount rate of 10%, and an after-tax terminal value of $60,800. The present value of the after-tax terminal value is $45,680.

Suppose an investment has a life of 3 years, an after-tax discount rate of 10%, and tax savings from depreciation of 1,067 per year. The present value of tax savings from depreciation is $2,653.

Suppose an investment has a life of 5 years, an after-tax discount rate of 12%, and an after-tax terminal value of $75,000. The present value of the after-tax terminal value is $42,557.

Suppose an investment has a life of 5 years, an after-tax discount rate of 12%, and tax savings from depreciation of 1,500 per year. The present value of tax savings from depreciation is $5,407.

Suppose and investment has a life of 5 years, an after-tax discount rate of 15%, and net returns of $15,000 per year. The present value of the after-tax net returns is $50,282.

The Market Value of any contract is the present value of the remaining payments discounted at the market rate.

The Net Cash Flow is calculated as Cash Revenues minus Cash Expenses minus the marginal tax rate times the taxable income.

The Net Present Value can be calculated as the PV(Cash Inflows)-PV(Cash Outflows) where cash flows are discounted at the required rate of return on an investment.

The Net Present Value is an investments profit over the required return to capital.

The Tax savings from Depreciation is added to the cash flows when calculating the NPV using the component method

The USPV factor assumes a finite number of periods.

The actuarial rate can be the same as the APR.

The addition of durable assets to a business is known as investment.

The balance sheet can be used to measure the firm's financial position at a specific point in time.

The book value of an investment is the present value of the remaining payments discounted by the contract rate.

The conversion period is the period of time that the principal accrues interest before interest is added to principal

The conversion period is the time that principal accrues interest before interest is added to principal.

The cost of an investment does not need to be discounted.

The first step of the strategic management process is to establish the future direction of the firm and to articulate a mission statement.

The future value will be greater if the interest rate in a uniform annuity is greater, holding everything else constant.

The future value will be greater if the number of payments in a uniform annuity is longer, holding everything else constant.

The inherent characteristics of agricultural enterprises cause different timings of return.

The internal rate of return and marginal efficiency of capital are equivalent.

The present value of a single sum can be found with V0=VN(1+r)-N. V0 is the present value, VN is the future value in N periods, r is the rate, and N is the number of periods.

To check financial feasibility, we only need to look at NCF (net cash flow before debt).

Utilizing a wait-and-see strategy may be particularly effective if the investment is both irreversible and postponable.

With compounded interest each time interest is paid, it is added to or compounded into the principal and earns interest over the life of the loan.

With an initial cost of $850,000, after tax net return of $764,500, tax savings depreciation of $225,000, and a after-tax terminal value of $575. What is the Net Present Value?

$140,075

How much money will be in a savings account in 20 years if $750 is deposited today and it earns 10% compounded quarterly?

$5,407.18

What is the present value of $1,000 that is to be received 5 years from today and interest rates are 12% compounded annually?

$567

Pasture land in the Brazos County is selling for $3,000 per acre. If the value increases 4% per year, what will the value be in 20 years?

$6,573

If a farmer is granted a loan for $3,000, with a 6 years of fully amortized monthly payments of $75. What is actuarial rate?

1.82%

Real estate debt consistently comprises around ___________ of total farm debt.

50%

What is the yield on an investment that costs $110, and promises to pay $115 in one year?

4.5%

The cash flow statement is broken down into _________ activities

All of the above: (operating, financing, investing)

____________ : An actuarial representation of the total financing cost of credit expressed as a percent per annum.

Annual percentage rate (APR)

Formulating objectives involves interpreting the ___________________ in terms of specific targets.

Mission Statement

A famous basketball player is awarded a contract that stipulates equal payments to be made monthly over a period of five years. To determine the value of the contract today, you would need to use

Present value of an annuity

What is not a reason liquidity problems may arise from acquiring farm land?

The terminal land value typically increases as the asset ages

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

accepted because the profitability index is greater than 1.

Given the following information : Nominal Initial Cost = $30,000; Nominal Before-tax Net Return = $4,000 Marginal Tax Rate = 15%; Required rate of return = 10% Real Terminal Value = $20,000; Investment Life = 8 years Suppose that IRS will allow the investor to depreciate the investment using straight-line over 10 years and the inflation rate is 4%. (i) What is the annual depreciation expense? a. $3,450 b. $3,750 c. $3,120 d. $3,000 enter response here: [i] (ii) What are the tax savings from depreciation? a. $450 b. $300 c. $120 d. $600

d a

Risk premium does not depend on :

individuals budget

_______________ is a technique that indicates how much NPV will change in response to a given change in an input variable, other things held constant.

sensitivity analysis

The IRR method assumes that the reinvestment rate of cash flows is

the IRR

Accepting positive NPV projects benefits the stockholders because:

the present value of the expected cash flows are greater than the cost.

The present value of an ordinary annuity of $350 each year for five years, assuming an opportunity cost of 4 percent, is: Pick the closest answer.

$1,558.14

What would you be willing to pay for an annuity that paid you $175 at the end of each of the next 20 years? Assume savings account pays 8% compounded annually.

$1,718

What would you be willing to pay for an annuity that paid you $200 at the end of each of the next 30 years? Assume savings account pays 10% compounded annually.

$1,885

What would you be willing to pay for an annuity that paid you $450 at the end of each of the next 6 years? Assume savings account pays 10% compounded annually.

$1,960

Assume a lender offers you a $25,000, 10%, three-year loan that is to be fully amortized with three annual payments. The first payment will be due one year from the loan date. How much will you have to pay each year? Pick the closest answer.

$10,053

$97,768

What is the NPV of an investment that costs $150, promises to pay $350 in three years, and the rate of return on comparable investments is 12%.

$99.12

You are analyzing a project and have prepared the following data: 0 -169,000 1 46,200 2 87,300 3 41000 4 39000 (i) Based on the internal rate of return of _____ for this project, you should _____ the project.

10.75%; accept

You are analyzing a project and have prepared the following data: Year: Cash Flow 0: -$169,000 1: $46,200 2: $87,300 3: $41,000 4: $39,000 (i) Based on the internal rate of return of _____ for this project, you should _____ the project.

10.75%; accept

A farmer is considering the purchase of additional land to expand operations. The marginal tax rate is 15% and He requires at least an 11% pre-tax, risk free return on capital and a 2.5% risk premium on projects on comparable risk. What is the after-tax, risk adjusted discount rate? r=[rbt +PREM](1-m)

11.48%

You are analyzing a project and have prepared the following data: Year Cash Flow 0 -87 1 12 2 24 3 36 4 48 (i) Based on the internal rate of return of _____ for this project, you should _____ the project.

11.54%; accept

Farmer Joe is evaluating three investment opportunities with the following IRR values, 8%, 10% and 12%. Farmer Joe's required rate-of-return is 9% which investment should he pursue?

12%

If a farmer is granted a loan that will be paid over 3 years of fully amortized quarterly payments and there is a contractual rate of 12%. What is the APR?

12%

A bank has agreed to lend you $127,800 for a home loan. The loan will be fully amortized over 57 years at 12.98%, with .13 points. The loan payments will be monthly. The closing cost is estimated to be $2,168. Calculate the APR.

13.2184%

The figure below shows the NPV profile for two investment projects. (sorry) Refer to NPV Profile. What's the IRR for project 2?

18%

The magnitude of the compound amount in a compound interest is determined by

All of the above: (Amount of the original principal, The number of compound or the conversion periods, The rate of interest per conversion period)

The major institutional sources of loan funds for US agriculture include

All of the above: (Life insurance companies, Government agencies, Commercial banks, Farm Credit Services)

The methods used for capital budgeting includes

All of the above: (Simple rate-of-return, Pay-back period, Internal rate of return)

Information flows can be obtained from the financial statements that reports _______ of a firm.

All of the above: (profitability, liquidity, solvency)

Which of the following describes financing in order to acquire control of assets?

All of the above: Cash purchase, Borrowing, Leasing

Why might some investment analysts penalize the payback period method for evaluating a potential investment?

All of the above: It fails to take into account the time value of money, It disregards cash flows occurring after the payback date, It fails to measure total profitability

The ways of identifying alternative investments include

All of the above: Maintenance and Replacement, Cost Reduction, Income generating

The net present value method accounts for both the ___________________ of projected cash flows.

All of the above: Timing, Magnitude, Time value

The steps for making investment decisions include

All of the above: collect relevant information, layout cash flows, analysis

The capital budgeting process involves

All of the above: identifying potential investments, analyzing the set of investment opportunities, and identifying those that will create shareholder value, implementing and monitoring the selected investment projects

Sacramento Paper is considering two mutually exclusive projects. Project A has an internal rate of return (IRR) of 12 percent, while Project B has an IRR of 14 percent. The two projects have the same risk, and when the cost of capital is 7 percent the projects have the same net present value (NPV). Assume each project has an initial cash outflow followed by a series of inflows. Given this information, which of the following statements is most correct?

All of the statements above are correct: (If the cost of capital is 13 percent, Project B's NPV will be higher than Project A's NPV. If the cost of capital is 9 percent, Project B's NPV will be higher than Project A's NPV. If the cost of capital is 9 percent, Project B's modified internal rate of return (MIRR) will be less than its IRR.)

___________ is the orderly sequence of steps that produces information relevant to an investment choice.

Capital Budgeting

The __________ (sometimes called finance lease) is a long-term contractual arrangement in which the lessee acquires control of an asset in return for rental payments to the lessor.

Capital Lease

Unrealized changes in asset values are often referred to as ___________________.

Capital gains/losses

Budgeting Methods are used to evaluate the future directions of a firm. For agricultural firms, emphasis is typically placed on enterprise budgets, ______ budgets, and capital budgets.

Cash Flow

The manager must generate sufficient investment opportunities primarily to___________?

Efficiently utilize all retained income

One method of simplifying the analysis between ownership and leasing is accomplished by eliminating __________________.

Elements that are similar between the two (i.e. maintenance & labor)

What phase of the strategic management process might be aided by the use of a SWOT analysis?

Evaluating the environment

"Maintenance and Replacement," "Bond Selection," and "Income Generating" are categories of alternative investments.

A futures contract is a contingent claim. It gives holders the right to buy or sell something at a specific period during a period of time.

A primary market is a market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.

Annuity is a series of payments of changing amounts for a specified number of periods.

Bonds promise an uncertain payment per period and returns principal at maturity.

Capital Budgeting is a chronological overview of expected cash income and expenses over a given period of time.

Capital Budgeting is a series of payments of a fixed amount for a specified number of periods.

A contract the gives the holder the right to buy or sell something at a particular price during a period in time is

Options contract

Finance function comprises

Procurement and efficient use of funds

The figure below shows the NPV profile for two investment projects. (sorry) Refer to NPV Profile. The NPV of which project is more sensitive to the discount rate?

Project 1

Which of the following is true about the NPV and IRR techniques?

The NPV and IRR techniques explicitly consider the cost of capital and the time value of money.

Which of the following is an IRS guideline given to qualify a transaction as a lease for tax purposes?

The asset is not expected to be useable to the lessor except for the purposes of continued leases or transfer to the lessee.

Which of the following accurately expresses the calculation for simple rate-of-return?

Y/I

Suppose you can buy a mechanical post hole digger for $500. It is projected that the digger will save you $150 a year over the next four years (end of year). If your required rate of return is 6%, should you buy the digger?

Yes, since NPV = $19.77 > 0.

Suppose you want to borrow $220,000 to purchase a house. Two banks, Wells Fargo and Bank of America, are willing to lend you the money. Both Banks will amortize the loan over 30 years and the payments will be monthly. Wells Fargo will lend you the money at 4.5% with 0.5 Points. Bank of America will lend you the money at 4.25% but will charge 2 Points. i. Which Banks should you choose if the loan is refinanced in 5 years? a. Wells Fargo b. Bank of America Enter Response Here:[i] ii. Which Bank should you choose if the loan is refinanced in 20 years? a. Wells Fargo b. Bank of America Enter Response Here:[ii] iii. What is the APR on the Bank of America loan if the loan is refinanced in 20 years. a. 4.62% b. 4.55% c. .385% d. None of the answers are correct Enter Response Here:[iii]

a a a

If it is given that the loan amount is $320, the percent stock requirement is .08, and the credit fee is 10.81. (i) Calculate the loan principal. a. $359.57 b. $361.23 c. $360.97 d. $360.34 Enter Response Here: [i] (ii) Calculate the required stock purchase. a. $30.38 b. $28.77 c. $29.57 d. $28.21 Enter Response Here: [ii]

a b

Suppose a farmer requires a pre-tax rate of return of 15%, has a marginal tax rate of 25%, assigns a 2% risk premium to investments, and expects inflation to be 3% per year over the next 10 years. This farmer calculates the NPV of his new investment to be -$50,000 based on an investment life of 10 years. (i) Calculate the real discount rate. a. 9.47% b. 12.75% c. 7.74% d. None of the answers are correct Enter Response Here:[i] (ii) Calculate the real annuity equivalent. a. $9,492 b. $5,298 c. $7,953 d. None of the answers are correct Enter Response Here:[ii]

a c

A farmer is thinking about investing in a center pivot irrigation system to irrigate 80 acres of land in Fresno. With an irrigation system, operating expenses would increase by $75 per acre due to electricity, maintenance and additional labor. It is estimated that the irrigation will increase yields and thus operating receipts by $150 per acre. The cost for drilling a well would be $8,200 and the cost for the center pivot irrigation system would be $31,000. The irrigation system would be ¼ mile long and would irrigate 80 acres. Suppose that the farmer wants to evaluate this investment over a five-year period of time. The farmer believes that if he sold the farm in five years, the irrigation system would add $31,000 to the sale price. The farmer anticipates that his marginal tax rate over the next six years will be 15%. The IRS will allow the farmer to depreciate the investment using straight line over 15 years. Assume that the terminal value of this investment is $31,000 at the end of five years. The farmer requires a 10% return to capital (pretax). (i) Calculate the Initial Cost a. $39,200 b. $22,800 c. $31,000 d. $8,200 Enter your response here[a] (ii) Calculate the after-tax net returns a. $10,200 b. $12,000 c. $5,100 d. $75 Enter your response here[b] (iii) Calculate the tax savings from depreciation a. $310 b. $392 c. $2,221 d. $2,613 Enter your response here[c] (iv) Calculate the after-tax terminal value a. $29,450 b. $33,320 c. $26,350 d. $30,270 Enter your response here[d] (v) Suppose that the discount rate is 8.5%. Using information from your answers above, what is the NPV for the investment? a. $1,835.39 b. $4,680.59 c. $2,572.93 d. $4,104.83 Enter your response here[e]

a c b d c

Mr. Agirich has the opportunity to purchase some farm land at $3,000/acre. He expects that real land prices will increase at 5% per year and inflation will be 2%. His pretax risk adjusted discount rate is 16%. Assume that the land will be sold in 20 years and the marginal tax rate is 23%. The effective interest rate on land loans is 3%. (i) Calculate the after-tax risk adjusted discount rate. a. 12.3% b. 10.7% c. 3% d. 2.3% e. None of the answers are correct Enter Response Here: [i] (ii) Calculate the real price of land in 20 years. a. $4,458 b. $5,418 c. $7,960 d. $30,529 e. None of the answers are correct Enter Response Here: [ii] (iii) Calculate the nominal price of land in 20 years. a. $6,624 b. $45,364 c. $8,051 d. $11,828 e. None of the answers are correct Enter Response Here: [iii] (iv) Calculate the after-tax terminal value of the land. a. $11,828 b. $9,798 c. $7,960 d. $3,000 e. None of the answers are correct Enter Response Here: [iv] (v) Calculate the Present Value of the after-tax terminal value. a. $1,162 b. $782 c. $963 d. $294 e. None of the answers are correct Enter Response Here: [v] (vi) What is the approximate maximum bid price for this land? a. $4,162 b. $3,294 c. $3,782 d. $3,963 e. None of the answers are correct Enter Response Here: [vi]

a c d b c d

A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement: New Outback MAX Guidance System Outback MAX™ with Outback ConnX™ — introducing the next generation Outback Guidance® system that redefines simplicity in precision farming. The farmer believes that the guidance system that can be purchased for $5,500 will improve corn production by 220 bushels per year. He plans to keep the Guidance system for 8 years. At the end of 8years he believes he can sell it for $1,000. The farm's accountant has done some preliminary work. The marginal tax rate is 25%, the pre-tax risk adjusted discount rate is 8% and inflation is assumed to be zero. The account calculates the present value of the tax savings from depreciation to be $1,067.31, and the present value of the after-tax terminal value to be $470.56. The price of corn is expected to be $4.30/bushel over the 8 years. (i) Calculate the additional after-tax net returns from corn production if the farmer purchases the guidance system. A. $900 B. $709 C. $270 D. $750 E. None of these answers Enter Response Here: [i] (ii) Calculate the after-tax risk adjusted discount rate. A. 6.0% B. 12% C. 3.6% D. 1.25% E. None of these answers Enter Response Here: [ii] (iii) Calculate the present value of the additional after-tax net returns from corn production if the farmer purchases the guidance system. A. $5,932 B. $1,779 *C. $4,406 D. $2,963 E. None of these answers Enter Response Here: [iii] (iv) Calculate the NPV of the guidance system. A. $156 B. $1100 C. $445 D. $444 E. None of these answers Enter Response Here: [iv] (v) Calculate the break-even improvement in corn production (yield) if the farmer purchases the guidance system. A. $150 B. $198 C. $140 D. $170 E. None of these answers Enter Response Here: [v]

b a c d b

A farmer is considering the option to lease a new module builder. Inflation is assumed to be zero. Assume that the lease payment is constant through the lease agreement. Assume that the lease payments would be made at the beginning of the year and the lease ends at the end of the 12th year. This lessor will pay for repairs and maintenance. The operating expenses for this tractor will be $3,500 with a marginal tax rate of 20% and an after tax discount rate of 7%. (i) Calculate the net present value of the lease investment. a. -$20,996 b. -$23,796 c. -$2,800 d. None of the answers are correct Enter Response Here:[i] (ii) Calculate the annuity equivalent of this lease arrangement. a. -$3,793 b. -$2,800 c. -$2,995 d. None of the answers are correct Enter Response Here:[ii]

b c

Suppose you invest $100 today, your return for the year is $10, and your tax rate is 20%. (i) What is your before tax rate of return? a. 8% b. 10% c. 20% d. None of the answers are correct. Enter Response Here [a] (ii) How much money did you earn after taxes? a. $10 b. $2 c. $8 d. None of the answers are correct. Enter Response Here [b] (iii) What is your after-tax rate of return? a. 8% b. 2% c. 10% d. None of the answers are correct. Enter Response Here [c] (iv) If your before tax rate of return was 10% and your marginal tax rate was 20%, calculate the after-tax rate of return. a. 8% b. 2% c. 10% d. None of the answers are correct. Enter Response Here [d]

b c a a

A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement: New Outback MAX Guidance System Outback MAX™ with Outback ConnX™ — introducing the next generation Outback Guidance® system that redefines simplicity in precision farming. Outback MAX leads the way with simplicity in design and operation, a powerful mapping engine, excellent screen clarity, seamless connectivity, and a rugged design that can operate in rough environments—features that are critical to achieving the benefits of precision farming. What makes MAX the smart choice for you and your business? • Compatible with eDriveX™ with eTurns™ - taking advantage of the most precise and feature rich automated steering available. • Has excellent screen clarity and rugged design that can operate in rough environments • Provides a powerful mapping engine that stacks imagery and data layers • Delivers seamless connectivity via the Outback ConnX data management system to deliver real-time data access and management. The farmer believes that the guidance system will add the value of improved farming, more uniform treatments, less driver skill needed and extended hours of operation. He believes improved yields and reduction in operating costs will increase his profits by $1,000 per year. He plans to keep the Guidance system for 10 years. At the end of 10 years he believes he can sell it for $500. Calculate the market value of this investment if the market rate of return on comparable investments is 12% a.$5,650 b. $5,811 c. $17, 549 d. $18,049 e. None of the above ENTER RESPONSE HERE: [a] ii. Calculate the Net Present Value if the price of this investment is $4,799 and the farmer's required rate of return is 12% (discount rate) and state if this investment is acceptable. -$1,012; Unacceptable $5,701; Acceptable $1,012; Acceptable $5,811; Acceptable None of the above ENTER RESPONSE HERE: [b] iii. Calculate the yield on this investment if the price of this investment is $4,799 and state if this investment is acceptable if the required rate of return is 12%. 16.7%; Acceptable 16.2%; Acceptable 20.8%; Acceptable 12%; Acceptable None of the above ENTER RESPONSE HERE: [c] iv. After the farmer has used this Guidance system for 10 years, he discovers that the increase in profits was only $900 and the 10 year old guidance system was antiquated and he couldn't sell it. Given he paid $4799 for the guidance system, what was the true yield? 16.7% 14.1% 12.0% 13.4% None of the above ENTER RESPONSE HERE: [d]

b c a d

A farmer has the opportunity to purchase an advanced guidance system for precision farming. This is the advertisement: New Outback MAX Guidance System Outback MAX™ with Outback ConnX™ — introducing the next generation Outback Guidance® system that redefines simplicity in precision farming. Outback MAX leads the way with simplicity in design and operation, a powerful mapping engine, excellent screen clarity, seamless connectivity, and a rugged design that can operate in rough environments—features that are critical to achieving the benefits of precision farming. What makes MAX the smart choice for you and your business? • Compatible with eDriveX™ with eTurns™ - taking advantage of the most precise and feature rich automated steering available. • Has excellent screen clarity and rugged design that can operate in rough environments • Provides a powerful mapping engine that stacks imagery and data layers • Delivers seamless connectivity via the Outback ConnX data management system to deliver real-time data access and management. The farmer believes that the guidance system will add the value of improved farming, more uniform treatments, less driver skill needed and extended hours of operation. He believes improved yields and reduction in operating costs will increase his profits by $950 per year. He plans to keep the Guidance system for 12 years. At the end of 12 years he believes he can sell it for $400. (i) Calculate the market value of this investment if the market rate of return on comparable investments is 9% a.$5,206 b. $6,945 c. $15,146 d. $3,202 e. None of the above ENTER RESPONSE HERE: [a] (ii) Calculate the Net Present Value if the price of this investment is $5,250 and the farmer's required rate of return is 9% (discount rate) and state if this investment is acceptable. a. -$44; Unacceptable b. $9,896; Acceptable c. $1,695; Acceptable d. -$2,048; Acceptable e. None of the above ENTER RESPONSE HERE: [b] (iii) Calculate the yield on this investment if the price of this investment is $5,250 and state if this investment is acceptable if the required rate of return is 9%. a. 14.9%; Acceptable b. 11.79%; Acceptable c. 14.9%; Unacceptable d. 8.20%; Unacceptable e. None of the above ENTER RESPONSE HERE: [c] (iv) After the farmer has used this Guidance system for 12 years, he discovers that the increase in profits was only $900 and the 12 year old guidance system was antiquated and he couldn't sell it. Given he paid $5,250 for the guidance system, what was the true yield? a. 14.9% b. 14.5% c. 12.0% d. 13.3% e. None of the above ENTER RESPONSE HERE: [d]

b c a d

Given the following information: Loan amount: $561.48 Contractual Rate: 14.87% Conversion Periods: 1 Life of Loan (years): 2 Method of Payment: Equal Prin. Fee: no Stock Requirements: no (i) Calculate the total loan payment in year 1. a. $345.08 b. $364.23 c. $364.90 d. $344.80 Enter Response Here: [i] (ii) Calculate the total loan payment in year 2. a. $344.85 b. $322.93 c. $322.49 d. $344.80 Enter Response Here: [ii] (iii) Calculate the actuarial rate. a. 14.87% b. 14.87% c. 15.55% d. 14.65% Enter Response Here: [iii]

b c b

If it is given that the loan amount is $470, the percent stock requirement is .13, and the credit fee is $11.04. (i) Calculate the loan principal. a. $553.34 b. $552.92 c. $553.14 d. $553.54 Enter Response Here: [i] (ii) Calculate the required stock purchase. a. $70.98 b. $72.64 c. $72.64 d. $71.88 Enter Response Here: [ii]

b d

Loan Amount: A-670800... B-679800 Contractual Rate: A-8.59%... B-8.55% Conversion Periods: A-12...B-12 ...That should be enough (i) Calculate the amount of loan payments of Bank A. a. $5,064.33 b. $5,153.01 c. $5,060.55 d. $5,017.80 e. None of the answers are correct Enter Response Here: [i] (ii) Calculate the amount of loan payments of Bank B. a. $5,125.27 b. $5,085.65 c. $5,088.12 d. $5,027.66 e. None of the answers are correct Enter Response Here: [ii] (iii) Calculate the actuarial rate of Bank B. a. 1.6377% b. 1.4388% c. 0.5980% d. 0.7246% e. None of the answers are correct Enter Response Here: [iii] (iv) Calculate the APR of Bank A. a. 8.6456% b. 9.3489% c. 8.0429% d. 9.2732% e. None of the answers are correct Enter Response Here: [iv] (v) Calculate the APR of Bank B. a. 7.9570% b. 9.2086% c. 9.4942% d. 8.6957% e. None of the answers are correct Enter Response Here: [v] (vi) Which bank would you choose? a. A b. B Enter Response Here: [vi]

c b d a d a

A farmer expects irrigation system will increase real operating receipts by $32,000 per year but will also increase real operating expenses by $8,000. Suppose that the inflation rate is 5% and the marginal tax rate is 20%. (i) What is the nominal net return at the end of year 3? a. $29,172 b. $22,800 c. $27,783 d. $24,000 enter response here:[i] (ii) Calculate the nominal after-tax net return at the end of year 4. a. $28,800 b. $27,360 c. $34,560 d. $23,338 enter response here:[ii]

c d

Suppose a rancher wants to borrow $163,835.00 to buy a tract of land. The BCS bank will make a 26-year loan fully amortized at 10.84% (annual payments). A $476.00 loan fee and stock purchase is required. The borrower stock requirement is the lesser of $1,000 or 4.00% of loan amount. (i) Calculate the loan principal. a. $171,157.29 b. $165,337.10 c. $165,311.00 d. $170,791.04 Enter Response Here: [i] (ii) Calculate the required stock purchase. a. $6,598.10 b. $1,596.76 c. $6,612.44 d. $1,000.00 Enter Response Here: [ii] (iii) Calculate the annual loan payments. a. $19,251.61 b. $19,932.45 c. $19,254.65 d. $19,889.80 Enter Response Here: [iii]

c d a

Suppose Rich Frugal Jones graduates from TAMU and gets a job. Suppose that he has $1,200 in disposable income that he can use to make house and car payments after all other living expenses and this is the way it will be until retirement. Rich decides to buy a new car and he will make a $200/month car payment (assume that this will be his car payment until he retires). He and his wife decide to borrow $80,000 to buy a house. The bank will lend them the $80,000 for 40 years at 6% annual interest rate using a fully amortized loan. Rich will pay back the loan with monthly payments. Rich will invest his monthly disposable income ($1,200 - car payment - house payment) in a mutual fund that promises to pay 8% annually. (Assume that Rich will put this amount in the mutual fund until he retires) (i) Calculate how much money Rich has to pay monthly on his house loan. a. $479 b. $443 c. $440 d. $679 e. None of the above ENTER RESPONSE HERE: [a] (ii) How much money can Rich put in the mutual fund monthly after paying the car and house payment? a. $521 b. $557 c. $321 d. $560 e. None of the above ENTER RESPONSE HERE: [b] (iii) How much will Rich have in his mutual fund at the end of 40 years when Rock plans to retire? Assume the car payment of $400/month is for 40 years. a. $1,954,368 b. $1,818,815 c. $1,944,491 d. $1,120,614 e. None of the above ENTER RESPONSE HERE: [c] (iv) Suppose that after retirement in 40 years, Rich plans to live another 20 years. Rich will use the money he has in the mutual fund to buy a monthly annuity. That is he will give an investor the money in his mutual fund and in turn the investor will promise to pay Rich a fixed monthly amount of principal and interest. How much money will he have to live on each month assuming that the interest rate for the annuity is 5% annually? (hint: Remember that the annuity is monthly so you need to use a monthly rate) a. $12,003 b. $12,898 c. $12,833 d. $7,396 e. None of the above ENTER RESPONSE HERE: [d]

c d a b

A farmer is thinking about investing in a center pivot irrigation system to irrigate 100 acres of land in Fresno. With an irrigation system, operating expenses would increase by $175 per acre due to electricity, maintenance and additional labor. It is estimated that the irrigation will increase yields and thus operating receipts by $300 per acre. The cost for drilling a well would be $10,200 and the cost for the center pivot irrigation system would be $42,000. The irrigation system would be ¼ mile long and would irrigate 100 acres. Suppose that the farmer wants to evaluate this investment over a five-year period of time. The farmer believes that if he sold the farm in five years, the irrigation system would add $20,000 to the sale price. The farmer anticipates that his marginal tax rate over the next six years will be 20%. The IRS will allow the farmer to depreciate the investment using straight line over 15 years. Assume that the terminal value of this investment is $20,000 at the end of five years. The farmer requires a 11% return to capital (pretax). (i) Calculate the Initial Cost a. $31,000 b. $42,000 c. $39,200 d. $52,200 Enter your response here [a] (ii) Calculate the after tax- net returns a. $12,500 b. $10,000 c. $24,000 d. $14,000 Enter your response here[b] (iii) Calculate the tax savings from depreciation a. $696 b. $52,000 c. $3,480 d. $382 Enter your response here[c] (iv) Calculate the after-tax terminal value a. $20,000 b. $16,000 c. $4,000 d. $30,744 Enter your response here[d] (v) Which discount rate should be used for calculating the NPV of this investment? a. 8.8% b. 11% c. 11.6% d. 20% Enter your response here[e]

d b a d a

Leveraged Lease is an extension of capital leasing whose main feature is the formal involvement of a lender in providing _____ to finance the lessor's purchase of the leased asset.

debt capital

Net Present Value is the ____ present value of cash inflows and cash outflows associated with an investment.

AGEC 330 Final KP

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