Chapter 2 Time value of money
1. Which of the following statements about opportunity cost is correct?
A. It is the value of the best alternative.
B. It is the value of all the forgone alternatives.
C. It is the highest-valued alternative forgone.
D. It is the highest-valued alternative chosen.
7. Richard is the owner of a toy manufacturing company. On Monday, he will go to a toy exhibition in London. He expects that this will bring him $1 million in orders. However, his wife wants him to travel to Australia with her next week. The journey will cost Richard $50,000. What is Richard’s opportunity cost if he chooses to travel to Australia?
A. $50,000
B. $1.05 million
C. $0.95 million
D. $1 million
11. The concept of the time value of money assumes that
A. money should be put in banks for safety and investment purposes.
B. money increases its value over time.
C. money loses its value over time.
D. None of the above
14. Edmond invested $6,000 for three years at an annual interest rate of 6%, compounded annually. How much will Edmond have after three years?
A. $6,742
B. $7,146
C. $7,080
D. $7,575
20. Nick wants to buy a second-hand car for $20,000 in three years. He is going to invest in a mutual fund, which guarantees an annual return of at least 8%. Assume that the annual return of the mutual fund is 8% over the three years. How much should Nick invest so that he can buy the car in three years?
A. $16,129
B. $15,877
C. $18,519
D. $25,194
24. Soil Bank has introduced an investment scheme. The scheme promises to pay $150,000 and $300,000 at the end of the first year and at the end of the third year respectively. Assume that the discount rate is 2%. What is the present value of the scheme?
A. $432,697
B. $435,409
C. $429,756
D. $450,000
25. If the future value (FV) is $2,000 and the present value interest factor (PVIF) is 0.500, calculate the present value (PV).
A. $2,000
B. $1,000
C. $4,000
D. None of the above
29. If Eric wants to invest in a savings plan which required a deposit of $1,000 at the end of each year for five years. If the interest rate is 8% compounded annually, how much will you get at the end of year 5?
A. $5,867
B. $8,657
C. $6,785
D. $10,000
31. John wants to buy an i-Pod after two years. He plans to save a fixed amount of money each year in a bank which gives him 5% annual interest. If the price of an i-Pod is $2,050 after two years. How much should he save each year?
A. $1,025
B. $1,050
C. $1,000
D. $1,100
32. If you want to invest in a savings plan which required a deposit of $3,000 per year, starting from the end of 2008. If the interest rate is 3% compounded annually, how much was the present value you get at the end of 2016?
A. $15,860
B. $21,060
C. $18,060
D. $20,350
34. Tom expects to receive $8,000 per year for five years from a pension funds. If discount rate is 15%, what was the present value of this pension funds.
A. $36,816
B. $26,816
C. $38,166
D. $40,000
36. If the net present value (NPV) and the initial outlay of an investment are $200,000 and $50,000 respectively, what is the present value (PV) of future cash inflows?
A. $250,000
B. $50,000
C. $150,000
D. $200,000
37. Roy is the sole proprietor of a small logistics company. He is considering whether he should buy a truck for his business. Suppose the truck costs $80,000. It is estimated that the truck will be used for three years and sold at the end of the third year for $20,000. The truck can generate a cash inflow of $30,000 each year during the three years it is in use. Assume that the opportunity cost of Roy’s capital is 8%. What is the net present value of purchasing the truck?
A. $17,312
B. $30,000
C. $13,190
D. -$10,629
38. Soil Bank has introduced an investment scheme. The scheme promises to pay $150,000 and $300,000 at the end of the first year and at the end of the third year respectively. Assume that the discount rate is 2%. What is the present value of the scheme?
A. $432,697
B. $435,409
C. $450,000
D. $429,756
41. Roy is the sole proprietor of a small logistics company. He is considering whether to buy a truck for his business. He applies the concept of net present value (NPV) to make this decision. Roy should buy the truck when the NPV is
A. negative.
B. equal to zero.
C. positive.
D. equal to the initial outlay of the truck.
44. Justin had an outstanding credit card balance of $25,000. The annual interest rate was 20%. Justin had not made any repayments. Assume the annual loan interest was calculated as compound interest. How much would Justin owe after five years?
A. $62,208
B. $25,000
C. $37,208
D. $50,000
52. The current price of a famous painting is $645,000. A scholar predicts that the price of the painting will appreciate by 35% in the first year but will depreciate by 25% in the second year. According to the prediction of the scholar, what will the value of the painting at the end of the second year be?
A. $597,222
B. $696,600
C. $653,063
D. $1,088,438
59. Mr. Wong had subscribed for the bond at a premium of 5%. One year later, he received a cheque for the 5% interest. As he tried to calculate the rate of return, he found that it was lower than 5%. Which of the following descriptions about the bond is correct?
A. The issue price is lower than its par value.
B. The issue price is equal to its par value.
C. The issue price is higher than its par value.
D. The issue price is net of interest.
60. Mr. Wong had subscribed for the bond at a premium of 5%. One year later, he received a cheque for the 5% interest but Mr. Wong found that the effective rate of return of the bond is lower than 5%. Which of the following is the best possible explanation for it?
A. The par value for the bonds is higher than the purchase price.
B. The market value of the bonds is higher than the purchase price.
C. The market value of the bonds is lower than the purchase price.
D. The par value for the bonds is lower than the purchase price.
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