The Basic Tools of Finance 6601
118. Which, if any, of the present values below are computed correctly?
a. A payment of $100 to be received one year from today, with a 2 percent interest rate,
has a present value of $98.81.
b. A payment of $200 to be received two years from today, with a 3 percent interest
rate, has a present value of $188.52.
c. A payment of $300 to be received three years from today, with a 4 percent interest
rate, has a present value of $234.34.
d. None of the above are correct to the nearest cent.
119. Suppose the interest rate is 8 percent. Consider three payment options.
1. $300 today.
2. $330 one year from today.
3. $360 two years from today.
Which of the following is correct?
a. 1 has the highest present value and 2 has the lowest.
b. 2 has the highest present value and 3 has the lowest.
c. 3 has the highest present value and 1 has the lowest.
d. None of the above is correct.
6602 The Basic Tools of Finance
120. Which, if any, of the present values below are correctly computed?
a. A payment of $1,000 to be received one year from today, with a 8 percent interest
rate, has a present value of $945.45.
b. A payment of $1,000 to be received one year from today, with a 9 percent interest
rate, has a present value of $911.11.
c. A payment of $1,000 to be received one year from today, with a 10 percent interest
rate, has a present value of $905.06.
d. None of the above are correct to the nearest cent.
121. Which of the following has a present value of $100?
a. $109.12 in two years when the interest rate is 4 percent
b. $113.98 in two years when the interest rate is 6 percent
c. $116.64 in two years when the interest rate is 8 percent
d. $123.17 in two years when the interest rate is 10 percent
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122. You have a choice among three options. Option 1: receive $900 immediately. Option 2:
receive $1,200 one year from now. Option 3: receive $2,000 five years from now. The
interest rate is 15 percent. Rank these three options from highest present value to lowest
present value.
a. Option 1; Option 2; Option 3
b. Option 3; Option 2; Option 1
c. Option 2; Option 3; Option 1
d. Option 3; Option 1; Option 2
123. Suppose you win a small lottery and you are given the following choice: You can (1)
receive an immediate payment of $10,000 or (2) three annual payments, each in the
amount of $3,600, with the first payment coming one year from now, the second two
years from now, and the third three years from now. You would choose to take the
three annual payments if the interest rate is
a. 2 percent, but not if the interest rate is 3 percent.
b. 3 percent, but not if the interest rate is 4 percent.
c. 4 percent, but not if the interest rate is 5 percent.
d. 5 percent, but not if the interest rate is 6 percent.
6604 The Basic Tools of Finance
124. A judge requires Harry to make a payment to Sally. The judge says that Harry can pay
her either $10,000 today or $12,000 two years from today. Of the following interest
rates, which is the highest one at which Harry would be better off paying the money
today?
a. 4 percent
b. 6 percent
c. 9 percent
d. 11 percent
125. A judge requires Harry to make a payment to Sally. The judge says that Harry can pay
her either $10,000 today or $11,000 two years from today. Of the following interest
rates, which is the lowest one at which Harry would be better off paying $11,000 two
years from today?
a. 2 percent
b. 3 percent
c. 4 percent
d. 5 percent
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126. You have a contract with someone who has agreed to pay you $20,000 in four years.
She offers to pay you now instead. For which of the following interest rates and
payments would you take the money today?.
a. 8 percent, $15,000
b. 7 percent, $16,000
c. 6 percent, $17,000
d. All of the above are correct.
127. Which of the following is correct if the interest rate is 6 percent?
a. $215 to be received a year from today has a present value of over $200; $420 a year
from now has a present value over $400.
b. $215 to be received a year from today has a present value of over $200; $420 a year
from now has a present value under $400.
c. $215 to be received a year from today has a present value of under $200; $420 a year
from now has a present value over $400.
d. $215 to be received a year from today has a present value of under $200; $420 a year
from now has a present value under $400.
6606 The Basic Tools of Finance
128. Other things the same, when the interest rate rises, the present value of future revenues
from investment projects
a. rises, so investment spending rises.
b. falls, so investment spending rises.
c. rises, so investment spending falls.
d. falls, so investment spending falls.
129. Mixster Concrete Company is considering buying a new cement truck. The owners and
their accountants decide that this is the profitable thing to do. Before they can buy the
truck, the interest rate and price of trucks change. In which case do these changes both
make them less likely to buy the truck?
a. Interest rates rise and truck prices rise.
b. Interest rates fall and truck prices rise.
c. Interest rates rise and truck prices fall.
d. Interest rates fall and truck prices fall.
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130. Ronaldo’s Foods considered building a store in a new location. The owners and their
accountants decided that this was not the profitable thing to do. However, soon after
they made this decision, both the interest rate and the cost of building the store changed.
In which case do these changes both make it more likely that they will now build the
store?
a. Interest rates rise and the cost of building the store rises.
b. Interest rates rise and the cost of building the store falls.
c. Interest rates fall and the cost of building the store rises.
d. Interest rates fall and the cost of building the store falls.
131. Black Oil Company considered building a service station in a new location. The owners
and their accountants decided that this was the profitable thing to do. However, soon
after they made this decision, both the interest rate and the cost of building the station
changed. In which case do these changes both make it less likely that they will now build
the station?
a. Interest rates rise and the cost of building the station rises.
b. Interest rates rise and the cost of building the station falls.
c. Interest rates fall and the cost of building the station rises.
d. Interest rates fall and the cost of building the station falls.
6608 The Basic Tools of Finance
132. HydroGrow is considering building a new greenhouse in which to grow tomatoes. The
board meets and decides that this is the right thing to do. Before they can put their plans
into action, the interest rate increases. The present value of the returns from this
investment project
a. is now lower than it was before, and so Hydro Grow is less likely to build the building.
b. is now lower than it was before, and so HydroGrow is more likely to build the building.
c. is now higher than it was before, and so HydroGrow is less likely to build the building.
d. is now higher than it was before, and so HydroGrow is more likely to build the
building.
133. Happy Trails, a bicycle rental company, is considering purchasing three additional
bicycles. Each bicycle would cost them $249.66. At the end of the first year the increase
to their revenues would be $140 per bicycle. At the end of the second year the increase
to their revenues again would be $140 per bicycle. Thereafter, there are no increases to
their revenues. At which of the following interest rates is the sum of the present values
of the additional revenues closest to the price of a bicycle?
a. 5 percent
b. 6 percent
c. 7 percent
d. 8 percent
The Basic Tools of Finance 6609
134. Halvorson Construction has an investment project that would cost $150,000 today and
yield a one-time payoff of $167,000 in three years. What is the highest interest rate at
which Halvorson would find this project profitable?
a. 7%
b. 6%
c. 5%
d. It is not profitable at any of these interest rates.
135. Dobson Construction has an investment project that would cost $150,000 today and
yield a one-time payoff of $167,000 in three years. Among the following interest rates,
which is the highest one at which Dobson would find this project profitable?
a. 5 percent
b. 4 percent
c. 3 percent
d. 2 percent
6610 The Basic Tools of Finance
136. The K-Nine dog food company is considering the purchase of additional canning
equipment. They expect that adding the equipment will yield $200,000 at the end of the
first year and $250,000 at the end of the second year and then nothing after that. At
which of the following prices and interest rates would K-Nine buy the equipment?
a. $415,000 if the interest rate is 5%
b. $419,000 if the interest rate is 4%
c. K-Nine would buy the equipment in both cases.
d. K-Nine would not buy the equipment in either case.
137. Sometimes On Time (SOT) Airlines is considering buying a new jet. SOT would be
more likely to buy a new jet if there were either
a. a decrease in the price of a new jet or a decrease in the interest rate.
b. a decrease in the price of a new jet or an increase in the interest rate.
c. an increase in the price of a new jet or a decrease in the interest rate.
d. an increase in the price of a new jet or an increase in the interest rate.
The Basic Tools of Finance 6611
138. A firm has three different investment options, each costing $10 million. Option A will
generate $12 million in revenue at the end of one year. Option B will generate $15
million in revenue at the end of two years. Option C will generate $18 million in revenue
at the end of three years. Which option should the firm choose?
a. Option A
b. Option B
c. Option C
d. The answer depends on the rate of interest, which is not specified here.
139. A firm has three different investment options. Option A will give the firm $10 million at
the end of one year, $10 million at the end of two years, and $10 million at the end of
three years. Option B will give the firm $15 million at the end of one year, $10 million at
the end of two years, and $5 million at the end of three years. Option C will give the firm
$30 million at the end of one year, and nothing thereafter. Which of these options has
the highest present value?
a. Option A
b. Option B
c. Option C
d. The answer depends on the rate of interest, which is not specified here.
6612 The Basic Tools of Finance
140. A firm has four different investment options. Option A will give the firm $10 million at
the end of one year, $10 million at the end of two years, and $10 million at the end of
three years. Option B will give the firm $5 million at the end of one year, $10 million at
the end of two years, and $15 million at the end of three years. Option C will give the
firm $15 million at the end of one year, $10 million at the end of two years, and $5
million at the end of three years. Option D will give the firm $21 million at the end of
one year, nothing at the end of two years, and $9 million at the end of three years. Which
of these options has the highest present value if the rate of interest is 5 percent?
a. Option A
b. Option B
c. Option C
d. Option D
141. Allen Steel Company is considering whether to build a new mill. If the interest rate
rises,
a. the present value of the returns from the mill will fall, so Allen will be less likely to
build the mill.
b. the present value of the returns from the mill will fall, so Allen will be more likely to
build the mill.
c. the present value of the returns from the mill will rise, so Allen will be less likely to
build the mill.
d. the present value of the returns from the mill will rise, so Allen will be more likely to
build the mill.
The Basic Tools of Finance 6613
142. A University of Iowa basketball standout is offered a choice of contracts by the New
York Liberty. The first one gives her $100,000 one year from today and $100,000 two
years from today. The second one gives her $132,000 one year from today and $66,000
two years from today. As her agent, you must compute the present value of each
contract. Which of the following interest rates is the lowest one at which the present
value of the second contract exceeds that of the first?
a. 7 percent
b. 8 percent
c. 9 percent
d. 10 percent
143. A car salesperson gives you four alternative ways to pay for your car. The first is to pay
$18,000 today. The second is to pay $19,000 one year from today. The third is to pay
$20,300 two years from today. The fourth is to pay $21,500 three years from today. If
the interest rate is 6 percent, which payment option has the lowest present value and
which has the highest?
a. The first is lowest; the second is highest.
b. The second is lowest; the third is highest.
c. The third is lowest; the fourth is highest.
d. The fourth is lowest; the first is highest.
6614 The Basic Tools of Finance
144. The You Look Marvelous! cosmetic company is considering building a new shampoo
factory. Its accountants and board of directors meet and decide that it is not a good idea
to build the factory. If interest rates fall after the meeting
a. the present value of the factory rises. It’s more likely the company will build the
factory.
b. the present value of the factory rises. It’s less likely the company will build the
factory.
c. the present value of the factory falls. It’s more likely the company will build the
factory.
d. the present value of the factory falls. It’s less likely the company will build the
factory.
145. Markovich Corporation is considering building a new plant. It will cost $1 million today to
build it and it will generate revenues of $1.121 million three years from today. Of the
interest rates below, which is the highest interest rate at which Markovich still would be
willing to build the plant?
a. 3 percent
b. 3.5 percent
c. 4 percent
d. 4.5 percent
The Basic Tools of Finance 6615
146. Yoyo‘s Frozen Yogurt, Inc. is thinking of building a new warehouse. They believe that
this will give them $50,000 of additional revenue at the end of one year, $60,000
additional revenue at the end of two years, and $70,000 in additional revenue at the end
of three years. If the interest rate is 5 percent, Yoyo would be willing to pay
a. $140,000, but not $150,000.
b. $150,000, but not $160,000.
c. $160,000, but not $170,000.
d. $170,000, but not $180,000.
6616 The Basic Tools of Finance
147. The concept of present value helps explain why
a. investment decreases when the interest rate increases, and it also helps explain why
the quantity of loanable funds demanded decreases when the interest rate increases.
b. investment decreases when the interest rate increases, but it is of no help in explaining
why the quantity of loanable funds demanded decreases when the interest rate
increases.
c. the quantity of loanable funds demanded decreases when the interest rate increases,
but it is of no help in explaining why investment decreases when the interest rate
increases.
d. None of the above are correct; the concept of present value is of no help in explaining
why either investment or the quantity of loanable funds demanded decreases when
the interest rate increases.
148. Which of the following concepts is most helpful in explaining why investment increases
when the interest rate falls?
a. deadweight loss
b. present value
c. economic growth
d. financial intermediation
The Basic Tools of Finance 6617
149. Other things the same, an increase in the interest rate makes the quantity of loanable
funds demanded
a. rise, and investment spending rise.
b. rise, and investment spending fall.
c. fall, and investment spending rise.
d. fall, and investment spending fall.
150. Other things the same, an increase in the interest rate makes the quantity of loanable
funds supplied
a. rise, and investment spending rise.
b. rise, and investment spending fall.
c. fall, and investment spending rise.
d. fall, and investment spending fall.
6618 The Basic Tools of Finance
151. Which of the following is the largest?
a. the future value of $250 with 3% interest for 2 years
b. the future value of $250 at 2% interest for 3 years
c. the present value of $250 to be paid in two years when the interest rate is 3%
d. the present value of $250 to be paid in three years when the interest rate is 2%
152. If the interest rate is r percent, then the rule of 70 says that your savings will double
about every
a. 70/(1 – r) years.
b. 70/(1 + r) years.
c. 70/r years.
d. 70(1 + r)/r years.
153. Rita puts $10,000 into each of two different assets. The first asset pays 10 percent
interest and the second pays 5 percent. According to the rule of 70, what is the
approximate difference in the value of the two assets after 14 years?
a. $12,000
b. $14,000
c. $15,500 d. $20,000
The Basic Tools of Finance 6619
6620 The Basic Tools of Finance
154. The rule of 70 can be stated as follows: A variable with a growth rate of X percent per
year
a. doubles every 70/X years.
b. doubles every 70(1 – 1/X) years.
c. doubles every 70/X2 years.
d. doubles every 70/(1 – X) years.
155. According to the rule of 70, if the interest rate is 10 percent, about how long will it take
for the value of a savings account to double?
a. about 6.3 years
b. about 7 years
c. about 7.7 years
d. about 10 years