domande cap 4-5-6

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New Jersey Institute Of Technology *

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600

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Finance

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Feb 20, 2024

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docx

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Chapters 4, 5, 6 1) The net present value of a project is equal to the: A) present value of the future cash flows. B) present value of the future cash flows minus the initial cost. C) future value of the future cash flows minus the initial cost. D) future value of the future cash flows minus the present value of the initial cost. E) sum of the project's anticipated cash inflows. Answer: B 2) Of the following choices, which one is the correct formula for computing the PV of $1 to be received two years from today? Assume the discount rate is 7 percent. A) $1/1.07 B) $1 C) $1 × 1.07 D) $1 × 1.072 E) $1/1.072 Answer: E 3) An analyst is evaluating two projects. Project A has projected cash flows of $7,500, $6,000, and $4,500 for the next three years, respectively. Project B has projected cash flows of $4,500, $6,000, and $7,500 for the next three years, respectively. Assuming both projects have the same initial cost, the analyst knows that: A) there are no conditions under which the projects can have equal values. B) Project B has a higher net present value than Project A. C) Project A is more valuable than Project B, given the same positive discount rate for each project. D) both projects offer the same rate of return. E) given any positive discount rate, both projects have equal net present values. Answer: C

4) The annual percentage rate: A) considers interest on interest. B) reveals the actual cost of a loan that has monthly payments. C) is higher than the effective annual rate when interest is compounded quarterly. D) is the interest rate per period divided by (1 + m), where m is the number of periods per year. E) equals the effective annual rate when the interest on an account is designated as simple interest. Answer: E 5) For any given interest rate, ________compounding will yield the highest effective annual rate. A) annual B) monthly C) daily D) continuous E) semiannual Answer: D 6) In which way does a perpetuity differ from an annuity? A) Perpetuity cash flows vary with the rate of inflation. B) Perpetuity cash flows vary with the market rate of interest. C) Perpetuity cash flows are variable while annuity payments are constant. D) Perpetuity cash flows never cease. E) Annuity cash flows occur at irregular intervals of time. Answer: D 7) ______ annuities have payments that occur at the end of each period, whereas ______ annuities have payments that occur at the beginning of each period. A) Ordinary annuities; early annuities B) Delayed annuities; straight annuities C) Straight annuities; delayed annuities

D) Annuities due; ordinary annuities E) Ordinary annuities; annuities due Answer: E 8) Aubrey just purchased an annuity that will pay $2,500 per month for five years. The first payment was issued today. Bennett just purchased an annuity that will pay $2,500 per month for five years. The first payment will be issued one month from today. Which one of the following statements is correct concerning these two annuities? A) Both annuities are of equal value today. B) Bennett’s annuity is an annuity due. C) Aubrey’s annuity has a higher present value than Bennett’s. D) Bennett’s annuity has a higher present value than Aubrey’s. E) Aubrey’s annuity is an ordinary annuity. Answer: C 9) Your firm is considering the purchase of a company called Frost. What rate of return should be used to compute the NPV of the proposed purchase? A) A discount rate equal to Frost’s current return on equity B) The discount rate applicable to other investments with similar risks C) A discount rate equal to Frost’s net profit percentage D) The rate of interest charged by a bank for a loan similar in size to the cost of the purchase E) A discount rate that makes the NPV of the proposed purchase positive Answer: B 10) What is the present value of $21,797 to be received in one year if the discount rate is 5.1 percent? A) $20,715.46 B) $20,739.30 C) $42,739.22 D) $207.39 E) $21,406.39

Answer: B Please use Excel as well – make sure you get the same result 11) Jannat is purchasing a house today for $172,800, and expects to resell it in one year for $197,100. Using a discount rate of 6.75 percent, what is the expected net present value? A) $11,469.68 B) $11,837.00 C) $20,305.04 D) $19,310.50 E) $18,463.70 Answer: B Please use Excel as well – make sure you get the same result 12) You have been awarded an insurance settlement of $211,400 that is payable one year from today. What is the minimum amount you should accept today in exchange for this settlement if you can earn 6.3 percent on your investments? A) $198,525.36 B) $224,718.20 C) $198,871.12 D) $207,239.13 E) $335,555.56 Answer: C Please use Excel as well – make sure you get the same result 13) You plan to invest $6,500 for three years at 4 percent simple interest. What will your investment be worth at the end of the three years? A) $7,280.00 B) $7,311.62 C) $7,250.00 D) $6,924.32 E) $6,760.00 Answer: A 14) Marco invested $50,000 in account that he predicts will earn 5.25 percent per year, compounded annually. What does he expect his account to be worth in 45 years?

A) $499,994 B) $504,359 C) $2,916,706 D) $2,969,456 E) $1,571,312 Answer: A Please use Excel 15) Beatrice invests $1,000 in an account that pays 5 percent simple interest. How much more could she have earned over a period of 10 years if the interest had compounded annually? A) $132.45 B) $135.97 C) $128.89 D) $117.09 E) $121.67 Answer: C Please use Excel too 16) A project is expected to produce cash flows of $140,000, $225,000, and $200,000 over the next three years, respectively. After three years, the project will be worthless. What is the net present value of this project if the applicable discount rate is 10.1 percent and the initial cost is $522,765? A) −$99,428 B) $51,317 C) −$9,595 D) $46,262 E) −$60,141 Answer: E Please use Excel as well – make sure you get the same result 17) Aaron plans to invest $20,000 at the end of Year 1, $44,000 at the end of Year 2, and $53,000 at the end of Year 3. You want to have the same amount of money as Aaron three years from now, but you want to make one lump sum investment today. What amount must you invest today if you both earn 9.7 percent per year, compounded annually? A) $88,627

B) $94,942 C) $106,655 D) $154,456 E) $151,047 Answer: B Please use Excel as well – make sure you get the same result 18) You have been offered a consulting opportunity that will pay $33,000, $35,000, and $48,000 over the next three years, respectively. The offer also includes a retainer of $5,000, payable immediately. What is this opportunity worth to you today if your discount rate is 7.9 percent? A) $97,341 B) $112,507 C) $150,721 D) $103,856 E) $148,492 Answer: D Please use Excel as well – make sure you get the same result 19) Assume a cash flow of $82,400 in the first year and $148,600 in the second year. Also assume a present value of $303,764.34 at a discount rate of 12.75 percent. What is the cash flow in the third year if that is the only other cash flow? A) $163,100 B) $163,800 C) $164,900 D) $164,400 E) $163,700 Answer: A Please use Excel as well – make sure you get the same result 20) Assume you deposited $3,200 in an account two years ago and are depositing another $5,000 today. You will make a final deposit of $3,500 one year from now. What will your account balance be three years from now if the account pays 4.85 percent interest, compounded annually? A) $13,033.95 B) $13,430.84

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