Question

Question 29 (1 point) 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? Option A Option B Option C The answer depends on the rate of interest, which is not specified here. Question 30 (1 point) A University of Iowa basketball standout is offered a choice of contracts by the New York Liberty. The first one gives her $100,000 one year from today and $100.000 two years from today. The second one gives her $132,000 one year from today and $66,000 two years from today. As her agent, you must compute the present value of each contract Which of the following interest rates is the lowest one at which the present value of the second contract exceeds that of the first? 7 percent 8 percent 9 percent 10 percent

Answer 1

29. Ans- d) The answer depends on the rate of interest, which is not specified here

30. Ans - a) 7 percent

Explanation:

Present Value = Future Value/ (1 + r);

- 7% First Contract: Present Value = 100.000/ (1+0.07) = 93.457,94

Present Value = 100.000/ (1+0.07) ^2= 87.343,87

Second Contract: P.V. = 132.000/ (1+0,07) = 123.364,49

P.V.: = 66.000/ (1+0,07) ^2 = 22.837,37

- 8% First Contract: Present Value = 100.000/ (1+0.08) = 92.592,6

Present Value = 100.000/ (1+0,08) ^2=85.733,8

Second Contract: P.V. = 132.000/ (1+0,08) = 122.222,2

P.V.: = 66.000/ (1+0,08) ^2 = 56.584,4

- 9% First Contract: Present Value = 100.000/ (1+0.09) = 92.743,12

Present Value = 100.000/ (1+0,09) ^2= 84.167,9

Second Contract: P.V. = 132.000/ (1+0,09) =121.100,9

P.V.: = 66.000/ (1+0,09) ^2 =55.550,9

- 10% First Contract: Present Value = 100.000/ (1+0.10) =90.909,1

Present Value = 100.000/ (1+0,10) ^2=82.644,63

Second Contract: P.V. = 132.000/ (1+0,10) =120.000

P.V.: = 66.000/ (1+0,10) ^2 =54.545,4

The lowest interest rate is 7%