Exam 3: The Valuation Principle: the Foundation of Financial Decision Making

On the day Justine was born,her grandparents put $10,000 into a savings account that pays interest of 6% per year.How much money will Justine have in her account when she turns 18?

A wholesale food retailer is offered $14 per two-layer carton for 5000 cartons of peaches.The wholesaler can buy peaches from its growers at $12.50 per carton.Shipping costs $1.50 per carton,for the first 1000 cartons,and $1.00 per carton for every carton over that.Will taking this opportunity increase the value of the wholesale food retailer?

How does arbitrage help the Law of One Price?

Suppose the price of gold in New York is $1750 per ounce,while the price of gold in London is $1760.If there are transaction costs of 0.5% when buying or selling in either market,what is the net effect of buying one ounce of gold in New York and selling it in London?

What is the present value (PV)of $1 million received 100 years from now,assuming the interest rate is 5% per year?

If $476 invested today yields $500 in one year's time,what is the discount rate?

A firm has contracted to supply 500,000 gallons of propane fuel for $1.49 million to the local municipality.The municipality wants to break the contract.What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?

Costs and benefits must be put in common terms if they are to be compared.

An investment will pay $205,000 at the end of next year for an investment of $183,000 at the start of the year.If the market interest rate is 8% over the same period,should this investment be made?

An investment will pay you $100 in one year and $200 in two years.If the interest rate is 5%,what is the present value of these cash flows?

How can we perform cost benefit analysis in case they are occurring in different currencies?

A backhoe can dig 150 feet of trench per hour and costs $500 per hour to hire and operate.A ditch digger can dig six feet of trench per hour.Based on this information,what is the most a ditch digger can charge per hour when digging ditches?

To compute the future value of a cash flow,you must:

Explain why a dollar today is worth more than a dollar tomorrow.

Heavy Duty Inc.,a manufacturer of power tools,decides to offer a rebate of $100 on its 16-inch mid-range chain saw,which currently has a retail price $470.Heavy Duty's marketers estimate that,as a result of the rebate,sales of this model will increase from 50,000 to 80,000 units next year.The profit margin for Heavy Duty before the rebate is $150.Based on the given information,is the decision to give the rebate a wise one?

"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?

In order to distinguish between inflows and outflows,different colours are assigned to each of these cash flows when constructing a timeline.

You have a used CD store.At an estate sale,you can purchase 260 compact discs for $400.You believe you could sell the CDs for an average of $2.50 each.What is the net benefit of buying the CDs at the estate sale and selling them in your store?

Diwali Airlines has a contract that gives them the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon.The current market price of jet fuel is $2.26 per gallon.Diwali believes they will only need 6,000,000 gallons of jet fuel.What is the value of this opportunity?

Use the information for the question(s)below. As an oil refiner,you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS)crude oil.Because of its lower sulfur content,you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI)crude. -Assuming you currently have 10,000 Bbls of WTI crude,the total benefits to you if you were to sell the 10,000 Bbls of WTI crude and use the proceeds to purchase and refine ANS crude is closest to: