Q: A timeline shows a cash flow of $$10,000 at the end of year 1 and 10$$,000 at the end of year 2. What is the total future value at the end of year 2 if the interest rate is 10%?

$$10,000 \times 1.10 + 10,000 = 21,000$$

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 of the following best describes the valuation principle?

Accepted Answer

The value of a commodity or asset is determined by its competitive market price.

Question 3

Suppose you win 4 tickets to a concert (market price $$30 each) or can exchange them for 2 tickets to another show (market price 50 $$each). What should you do to maximize value?

Accepted Answer

Take the 4 tickets, sell them for $$120, and buy 2 tickets to the other show for 100.$$

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 the interest rate is 10%, what is the future value in one year of $100,000 invested today?

Accepted Answer

$110,000

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

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

Accepted Answer

$$PV = \frac{15,000}{(1 + 0.06$$)^{10}$$}$$

Question 9

XYZ Company expects to receive $2,000,000 in five years. If the market interest rate is 4%, how much can they borrow today to repay the loan with this cash flow?

Accepted Answer

$$PV = \frac{2,000,000}{(1 + 0.04)^5$}$$

Question 10

If you invest $826.45 today at 10% interest, what will be the value in two years?

Accepted Answer

$$1,000$$

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 the interest rate is 8%, what is the present value of $$1.6$$ billion received in one year?

Accepted Answer

$$PV = \frac{1,600,000,000}{1.08}$$

Question 13

What is the cost of delaying the launch of a product by one year if the present value of the delayed revenue is $$1.481$$ billion and the immediate revenue would have been $$2$$ billion?

Accepted Answer

$$519$$ million

Question 14

Which of the following best describes compound interest?

Accepted Answer

Interest earned on both the initial principal and on prior interest payments.

Question 15

If $$C is a $$cash flow received in $$n$$ years and the interest rate is $$r$$, which formula gives the present value?

Accepted Answer

$$PV = \frac{C}{(1 + r)^n}$$

Question 16

A timeline shows a cash flow of $$10,000 at the end of year 1 and 10$$,000 at the end of year 2. What is the total future value at the end of year 2 if the interest rate is 10%?

Accepted Answer

$$10,000 	imes 1.10 + 10,000 = 21,000$$

Question 17

Which of the following is an example of the Law of One Price?

Accepted Answer

Two identical bonds must sell for the same price in a competitive market.

Question 18

If you invest $1,000 at 10% interest for 2 years, what is the future value using the compound interest formula?

Accepted Answer

$$1,000 	imes (1.10)^2$ = 1,210$$

Question 19

Which of the following statements about market prices is correct?

Accepted Answer

Market prices, not personal preferences, should be used to evaluate costs and benefits.

The Valuation Principle and the Time Value of Money

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