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Business Mathematics in Canada, 4/e

F. Ernest Jerome

Business Investment Decisions

Quiz Questions

The following three alternatives are available to settle an obligation:

Pay $20,000 now.
Pay 40 quarterly payments of $1000 (with the first payment today).
Pay $5000 now and $16,000 one year from now.

From the point of view of the individual paying the money, which alternative is best? Assume money is worth 18% compounded quarterly.

B and A are equally as good

B and C are equally as good

A contract is estimated to yield net returns of $5000 at the end of each quarter for the next five years. The contract requires an immediate outlay of $25,000, and a further outlay of $75,000 four years from now. If the required rate of return is 12% compounded quarterly, what is the contract's net present value?

$27,649.85

–$22,350.15

$2,649.85

–$2,649.85

$22,350.15

What is the maximum price that should be paid for a machine that saves $2000 per year (at the end of each year) in labour costs, and has a scrap value of $4000 after 10 years? Money is worth 9% compounded annually.

$11,990.49

$13,680.14

$15,996.24

$14,524.96

$24,000.00

Suppose you have a choice between receiving $20,000 now plus $100,000 ten years from now, or $10,000 now plus $10,000 at the end of each of the next five years. If money is worth 18% compounded annually, which alternative should you choose? Why?

First alternative because its present value is greater (by $27,165).

Second alternative because its present value is greater (by $27,165).

First alternative because its present value is greater (by $60,000).

First alternative because its present value is greater (by $2165).

Second alternative because its present value is greater (by $2165).

A ten-year license to distribute a product is expected to increase the distributor's profit by $20,000 per year. The license can be acquired for $100,000. What is the investment's internal rate of return?

13.25%

15.10%

16.67%

21.22%

18.00%

Three projects each require an initial investment of $75,000, and each should have a residual value of $10,000 after three years. The following table presents their forecasted annual profits (not including the residual value).


YEAR	PROJECT 1	PROJECT 2	PROJECT 3
1	$40,000	$20,000	$30,000
2	$35,000	$30,000	$30,000
3	$10,000	$40,000	$30,000

Rank these projects (best to worst) based on their IRRs.

3; 1; 2

3; 2; 1

1; 3; 2

1; 2; 3

2; 3; 1

Referring to the previous question, rank these projects (best to worst) based on their NPVs if the cost of capital is 15%.

1; 3; 2

3; 2; 1

3; 1; 2

2; 3; 1

2; 1; 3

Referring to the previous questions, rank these projects (best to worst) based on their NPVs if the cost of capital is 6%.

3; 1; 2

3; 2; 1

1; 3; 2

1; 2; 3

2; 3; 1

Referring to the previous questions, rank these projects (best to worst) according to the payback method.

3; 1; 2

2; 1; 3

1; 2; 3

3; 2; 1

1; 3; 2

You must make a decision concerning buying or leasing a computer system. The purchase price is $2,000,000. As well, it is recommended that you purchase a service contract for five years at a cost of $25,000 per year. The salvage value of the computer system is $200,000 at the end of the five years. Leasing would require a down payment of $750,000 and quarterly payments of $100,000 for five years. The servicing of the computer would be included in the lease agreement at no extra cost. If money is worth 6% compounded quarterly, which alternative should you choose? State why.

purchase; the NPV is less (by $232,765)

purchase; the NPV is less (by $239,203)

purchase; the NPV is less (by $207,012)

purchase; the NPV is less (by $213,450)

purchase; the NPV is less (by $181,259)

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