An investment costs $800 initially, then earns $300 in years 2, 3, and 4. The annual interest rate is 4%. Which of the following statements about this investment is correct?

	The investment should be made, since its payback period is three years.
	The investment should not be made because its net present value is negative.
	The investment would become more attractive if the interest rate increased.
	The investment should be made, since the total amount earned is greater than the cost.

You are considering buying a house. Your mortgage requires monthly payments of $2,500 for 360 months. The interest rate is fixed at 4%. What is the present discounted value of your mortgage?

	$62,499.95
	$2,500
	$62,500
	$900,000

What is the option value of waiting?

	the increase in the net present value from postponing an investment until uncertainty about the investment returns is reduced
	the use of a risk-free discount rate for the evaluation of risky investments
	the interest rate that causes the net present value of an investment to equal zero
	the difference between the present discounted value calculated from using the nominal interest rate and the real interest rate

Adam has wealth of $40,000 as long as his business does not burn down. However, there is a 50% probability that his business will burn down and cause a $30,000 loss, leaving him with $10,000 of wealth. Adam's utility function is given by U = W^0.5, where W is wealth. What is the maximum price that Adam would pay for full insurance that covers the potential $30,000 loss? [Hint: The maximum price equals the actuarially fair premium plus the risk premium.]

	$22,500
	$17,500
	$12,500
	$15,500