Question 1

A jewelry manufacturer can trade 200 ounces of silver (market price $$20/oz) for 10 ounces of gold (market price 1$$,000/oz) today. What is the net value of this opportunity?

Accepted Answer

$6,000

Question 2

Which principle states that the value of a commodity or asset is determined by its competitive market price, and not by personal opinion?

Accepted Answer

The Valuation Principle

Question 3

You have the option to receive 4 tickets to a concert (market price $$30 each) or 2 tickets to another concert (market price 50 $$each). What should you do to maximize value?

Accepted Answer

Take the 4 tickets, sell them, and buy the 2 tickets you want, keeping the extra cash.

Question 4

A firm can acquire 200 barrels of oil ($$90/barrel) and 3,000 pounds of copper (3.50/$$pound) for $25,000. What is the net value of this opportunity?

Accepted Answer

$3,500

Question 5

What is an arbitrage opportunity?

Accepted Answer

A situation where a profit can be made without risk or investment.

Question 6

If you invest $$1,000 today at 10% interest, what will you have at the end of two years? Use the formula FV = C$$ 	imes (1 + r)^n$.

Accepted Answer

$1,210

Question 7

A project costs $$100,000 today and returns 105$$,000 in one year. If the interest rate is 10%, what is the net value of the project in one year?

Accepted Answer

$$-5,000$$

Question 8

What is the present value of $$15,000 to be received in 10 years if the interest rate is 6%? Use the formula PV$$ = \frac{C}{(1 + r)^n}$.

Accepted Answer

$$8,385.54$$

Question 9

XYZ Company expects to receive $$2,000,000 in five years. If the interest rate is 4%, how much can they borrow today to repay the loan in full with that cash flow? Use PV$$ = \frac{C}{(1 + r)^n}$.

Accepted Answer

$$1,643,854.21$$

Question 10

If Sony delays the launch of PlayStation 3 by one year, reducing first-year sales from $$2 billion to 1.6 $$billion, and the interest rate is 8%, what is the present value of the delayed revenue? Use $$PV = \frac{C}{1 + r}.$$

Accepted Answer

$$1.481$$ billion

Question 11

Which of the following is NOT a rule for valuing cash flows at different points in time?

Accepted Answer

You can compare values at different points in time without adjustment.

Question 12

If $$826.45 is invested today at 10% interest, what will the investment be worth in two years? Use FV = PV$$ 	imes (1 + r)^n$.

Accepted Answer

$$1,000$$

Question 13

What is the present value of $$1,000 to be received in three years if the interest rate is 10%? Use PV$$ = \frac{C}{(1 + r)^n}$.

Accepted Answer

$$751.31$$

Question 14

Which of the following best describes the effect of compound interest over time?

Accepted Answer

Interest is earned on both the initial deposit and on prior interest payments.

Question 15

If the one-year discount factor is $$\frac{1}{1 + r}$$, what is the present value of $$C$$ received in one year?

Accepted Answer

$$PV = \frac{C}{1 + r}$$

Question 16

Which scenario is an example of arbitrage?

Accepted Answer

Buying gold in one market for $$1,000/oz and selling it in another for 1$$,050/oz with no risk.

Question 17

If you borrow $100,000 from a bank at 10% interest, how much will you owe in one year?

Accepted Answer

$$110,000$$

Question 18

Why is the value of $$15,000 received in 10 years less than 15$$,000 received today?

Accepted Answer

Because of the time value of money and the opportunity to earn interest.

Question 19

Which formula correctly calculates the future value of a cash flow?

Accepted Answer

$$FV = C 	imes (1 + r)^n$$

Question 20

If you want to compare two cash flows occurring at different times, what must you do first?

Accepted Answer

Convert them to the same point in time using present or future value calculations.

The Valuation Principle and the Time Value of Money

Study Guide - Practice Questions

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