Exam 27: The Basic Tools of Finance

Thompson Corporation is considering the purchase of a new piece of machinery. Thompson expects the new machinery to increase its revenues by $70,000 at the end of year 1, $60,000 at the end of year 2, and $50,000 at the end of year 3 at which point the machinery will have exhausted its useful life. If the interest rate is 4%, what is the most Thompson should be willing to pay today for this piece of machinery?

What is the present value of a payment of $100 one year from today if the interest rate is 5 percent?

What is the future value of $750 one year from today if the interest rate is 2.5 percent?

A person with diminishing marginal utility of wealth is risk averse.

Recently, Lisa's wealth increased by $500. If her wealth were to increase by another $500 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, Lisa's utility function

James offers you $1,000 today or $X in 7 years. If the interest rate is 4.5 percent, then you would prefer to take the $1,000 today if and only if

Economists have developed models of risk aversion using the concept of

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?

How does adverse selection affect the insurance market?

Other things the same, an increase in the interest rate makes the quantity of loanable funds supplied

Diversification cannot reduce market risk.

Write the formula to find the present value of $750 to be paid in 5 years if the interest rate is 3 percent.

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?

What is the present value of a payment of $100 to be made one year from today if the interest rate is 6 percent?

A person's subjective measure of well­being or satisfaction is called aversion.

If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years is $735.03.

Fundamental analysis shows that stock in Garske Software Corporation has a present value that is higher than its price.

Ellen deposited $500 into an account and two years later she had $561.80 in the account. What interest rate was paid on Ellen's deposit?

The present value of a payment of $500 to be made two years from today is greater if the interest rate is 7% than if it is 6%.

If your research leads you to believe that the present value of a stock's dividend stream and future price is less than its price then you believe the stock is