2_practice_problems

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Boston University *

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132

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Finance

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Jan 9, 2024

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docx

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2

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P RACTICE E XAM P ROBLEMS SM132 Practice Exam Problems 2 Cost Benefit, TVM, Series of Cash Flows 1. You will receive $100 in 1 year. If the interest rate increases, what is the impact on the Present Value of the 100 that you will receive next year? A) It increases B) It decreases C) You would need to know the exact interest rate to answer the question 2. Marcela’s Bottles-2-Go (MB2G) is an outdoor outfitter specializing in merchandise with college logos. MB2G has agreed to sell sustainability@BU 10,000 water bottles in exchange for a $15,000 payment today and an additional $50,000 one year from today. The water bottles cost MB2G $3 each to manufacture. Assuming an annual interest rate of 4%, what is the net benefit today for MB2G? $33,077 3. North Woods Paper Company owns 600 acres of forest. The company plans to cut 100 acres of trees and sell them to a lumber yard. If it cuts the trees today, they will be able to sell them for $2.2 million. If the trees are allowed to grow for a further year, they will be able to sell them for 30% more, however, there will be additional costs of $528,000 incurred one year from today. If the interest rate is 7%, should North Woods cut the trees today or allow them to grow for another year and cut them one year from today? Why? Sell now - It is worth $20,561 more to sell the trees now. 4. Consider the following timeline: 0 1 2 3 4 5 6 $700 $800 If the current market rate of interest is 8%, what is the combined value of the cash flows on the timeline at year 1 ? $1144 At year 2 ? $1236 5. You are given two choices of investments, Investment A and Investment B. Both investments have the same cash flows and all future cash flows are positive. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which investment has the higher present value? Investment A 6. You have the opportunity to receive a lump-sum payment either now or in the future. Which of the following opportunities is the best, given that the interest rate is 7% per year? a. one that pays $900 now b. one that pays $1080 in three years c. one that pays $1350 in six years d. one that pays $1620 in eight years
P RACTICE E XAM P ROBLEMS SM132 7. 7 years ago you deposited 10,000 in the bank. If the bank pays 5% interest, how much do you have today? $14071 Answer key: 1. B (decreases) 2. $33,077 3. It is worth $20,561 more to sell the trees now. 4. $1,144 (year 1) $1,236 (year 2) 5. Investment A 6. D ($1620 in eight years) 7. $14,071
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