# Break-even, future value, time value of money

1. Break-even is the point where:

a. revenue equals total manufacturing costs

b. revenue equals cost of goods sold

c. revenue equals total variable costs

d. revenue equals total variable costs plus total fixed costs

e. none of the above

2. Future value can also be described as ____________ while present value can also be described as ____________.

a. compounding, discounting

b. discounting, compounding

c. cash flow, an annuity

d. an annuity, cash flow

e. none of the above

3.You deposited $1,000 in a savings account that pays 6% interest, compounded annually, planning to use it to fund your education at UOP. Four years later, you decide to join the Mesquite Rodeo to become a bull rider rather than earn your degree, so you close your account. How much money will you receive?

a.$1,265

b.$1,262

c.$4,375

d. $6,633

4.If you have $200 at the end of 5 years and the discount rate is 8%, what is the present value?

a.$293.87

b.$798.54

c.$1173.32

d.$136.12

5.A bond sells at a _________ when current rates are less than the coupon rate.

a. discount

b. premium

c. par value

d. required return

6.A major disadvantage of the payback period method is that it

a. is useless as a risk indicator

b. ignores cash flows beyond the payback period

c. it only considers the time value of money

d. statements b and c are correct

e. all of the above

7.Which of the following is not a relevant cash flow to be considered when evaluating whether or not to accept a capital project?

a. initial investment

b. operating cash inflow

c. sunk costs

d. opportunity costs

e. terminal cash flow

8.Which of the following statements is incorrect?

a. NPV is the present value of all cash inflows plus the initial investment

b. IRR is the discount rate that equates the present value of cash inflows with the initial investment associated with a project

c. IRR is the discount rate where the NPV of an investment opportunity equals $0

d. all of the above

9.The Presidents of two different companies have just signed 5-year contracts. The first President (A) will get a $4 million dollar signing bonus plus $1 million dollars a year for a total of $9 million. The second President (B) will get $2 million a year for a total of $10 million. What is the value of each contract given a 7% discount rate?

a. A = $8,100,197 B = $8,200,395

b. A = $4,100,197 B = $8,200,395

c. A = $14,517,073 B = $15,330,257

d. none of the above

Use the following information to answer problems 10, 11 and 12.

The Blow Hard Bubble Gum Company is considering replacing one of its gumball making machines with either of two new machines, A or B. A is very automated and high output while B uses traditional gumball technology. Use the table below, which indicates initial investments and relevant, incremental cash flows associated with each machine.

Machine A Machine B

Initial Investment$10,000$4,000

Year Cash Flows

1$3,000$2,000

2$4,500$2,000

3$2,500$2,500

4$6,500$3,500

10.Calculate the payback period of each option.

a. A = 2.0 years B = 3.0 years

b. A = 4.0 years B = 3.0 years

c. A = 3.0 years B = 2.0 years

d. A = 3.0 years B = 3.0 years

11. Calculate the NPV of each alternative assuming an 8% cost of capital.

a. A = $14,470 B = $8,774

b. A = $3,398 B = $4,124

c. A = $4,124 B = $3,398

d. A = $8,774 B = $14,470

12.What is the IRR of each option?

a. A = 128.15 B = 103.61

b. A =103.61 B = 128.15

c. A = 20.98 B = 44.07

d. A = 44.07 B = 20.98

13.If the inflation rate in the United States is greater than the inflation rate in Sweden, other things held constant, the Swedish currency will

a. appreciate against the U. S. dollar

b. depreciate against the U. S. dollar

c. remain unchanged against the U. S. dollar

d. appreciate against other major currencies

e. appreciate against the dollar and other major currencies

14.Which of the following are reasons why companies move into international operations?

a. to take advantage of lower production costs in regions of inexpensive labor

b. to develop new markets or increase market share for their finished products

c. to diversify risk and product offerings

d. because important raw materials are located abroad

e. all of the above

15.The overall effects of currency fluctuations on a firm's value are caused by:

a. foreign competition

b. exports

c. imports

d. all of the above

16.The ultimate goal of corporate management is to:

a. maximize shareholder wealth

b. maximize profits

c. minimize variances

d. minimize risk

17.Managers can increase stock price by:

a. increasing expected cash flows

b. speeding up cash flow

c. reducing riskiness of cash flow

d. none of the above

e. all of the above

18. When choosing between two investments with the same expected returns but different standard deviations, choose the one with the:

a. higher standard deviation

b. higher expected return

c. lower standard deviation

d. lower expected return

19. It costs $35,000 to buy a car for cash and it will be worth $20,000 in 5 years. You can lease the same car for 5 years for $5,400 per year. If the discount rate is 8%, which is the better value?

a. buy the car

b. lease the car

c. indifferent

d. not enough information to determine

20. A bond sells for $1,200 with a coupon rate of 6% and 10 years until maturity. What is the current yield on the bond?

a. 6%

b. 7.2%

c. 6.5%

d. 5%

#### Solution Preview

1. Break-even is the point where:

a. revenue equals total manufacturing costs

b. revenue equals cost of goods sold

c. revenue equals total variable costs

d. revenue equals total variable costs plus total fixed costs

e. none of the above

Answer: d. revenue equals total variable costs plus total fixed costs

2. Future value can also be described as ____________ while present value can also be described as ____________.

a. compounding, discounting

b. discounting, compounding

c. cash flow, an annuity

d. an annuity, cash flow

e. none of the above

Answer: a. compounding, discounting

3. You deposited $1,000 in a savings account that pays 6% interest, compounded annually, planning to use it to fund your education at UOP. Four years later, you decide to join the Mesquite Rodeo to become a bull rider rather than earn your degree, so you close your account. How much money will you receive?

a. $1,265

b. $1,262

c. $4,375

d. $6,633

Answer: b. $1,262

1000 x (1+6%)^4= $1262

4. If you have $200 at the end of 5 years and the discount rate is 8%, what is the present value?

a. $293.87

b. $798.54

c. $1173.32

d. $136.12

Answer: d. $136.12

$ 200 / (1+8%)^5= $136.12

5. A bond sells at a _________ when current rates are less than the coupon rate.

a. discount

b. premium

c. par value

d. required return

Answer: b. premium

6. A major disadvantage of the payback period method is that it

a. is useless as a risk indicator

b. ignores cash flows beyond the payback period

c. it only considers the time value of money

d. statements b and c are correct

e. all of the above

Answer: b. ignores cash flows beyond the payback period

7. Which of the following is not a relevant cash flow to be considered when evaluating whether or not to accept a capital project?

a. initial investment

b. operating cash ...

#### Solution Summary

20 Multiple choice questions on break-even, future value, time value of money, present value, bond, payback period, capital project, NPV, IRR, international operations, currency fluctuations, goal of corporate management, current yield on the bond have been answerd.