Practice Exam Problems 1 - Cost Benefit & TVM

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SM132

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Economics

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Apr 3, 2024

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P RACTICE E XAM P ROBLEMS SM132 Cost Benefit and TVM 1. "If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets." What do we call the above statement? A) the Net Present Value rule B) the Law of One Price C) the Valuation Principle D) the time value of money 2. A candy company decides to close down its chocolate division. It has on hand 10 tons of cocoa beans, a commodity that has a market price of $200 per ton. The cocoa beans were originally purchased for $1400 per ton. Given that the company has no use for the cocoa beans, and that it would cost the company $3000 to store them, what is the value of the 10 tons of cocoa beans to the company today? Value of the 20 tons of cocoa today = 10 tons * $200 per ton = $2000 3. Your sister offers to sell you her used iPhone 5s for $150. You check eBay and notice that used iPhone 5s phones are selling for $210. You don’t like iPhones and are planning to buy a new Samsung Galaxy Note5 for $695. What is the net value of buying your sister’s iPhone 5s? A) $210 – the price you can get for the iPhone 5s on eBay B) $485 – the cost of the Galaxy Note5 less the price you will get for the iPhone 5s on eBay C) $635 – the cost of the Galaxy Note5 less the difference between the purchase and resale price of the iPhone 5s. D) $60 – the difference between purchase and resale price of the iPhone 5s. 4. Assume the interest rate is 4% Having $100 today is equivalent to having what amount in one year? $100*(1+4%) = $104 Having $100 in one year is equivalent to having what amount today? $100/(1+4%) = $96.15 5. Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money is he able to borrow from the bank on the basis of this information? $30,000/(1+8.2%) = $27,726
P RACTICE E XAM P ROBLEMS SM132 Answer key: 1. B 2. $2000 3. D 4. $104, $96.15 5. $27,726
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