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You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment? Select one: a. The discount rate increases. b. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000. c. The discount rate decreases. d. The riskiness of the investment's cash flows increases. e. The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

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Beverley Smith
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2 Aug 2019

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QUESTION 1 The time value of money refers to the issue of: A. what the value of the stream of future cash flows is today. B. why a dollar received tomorrow is worth more than a dollar received today. C. what the time required to double an amount of money. D. why people prefer to consume things at some time in the future rather than today.

QUESTION 2 The process of converting an amount given at the present time into a future value is called: A. annualizing. B. discounting. C. compounding. D. capital budgeting. 2 points

QUESTION 3 Juan Vinson is planning to buy a house in five years. He is looking to invest $25,000 today in an index mutual fund that will provide him a return of 12 percent annually. How much will he have at the end of five years? (Round to the nearest dollar.) A. $45,000 B. $28,000 C. $44,059 D. $28,530 2 points

QUESTION 4 Which of the following statements is true with respect to the present value of a future amount? A. The higher the discount rate, the higher the present value of a single sum for a given time period. B. The relation between present value and time is exponential. C. The greater the time period, the higher the present value of a single sum for a given interest rate. D. The lower the discount rate, the lower the present value of a single sum for a given time period. 2 points

QUESTION 5 Which of the following statements is true of the rule of 72? A. It can be used to determine the amount of time it takes to double an investment. B. It is fairly accurate for interest rates between 25 and 50 percent. C. It states that the time to double your money (TDM) approximately equals 72/i, where i represents the years it takes to double your investment. D. It can be used to estimate approximate compound interest earned for a period of 72 days. 2 points

QUESTION 6 The present value of future cash flows are computed by multiplying future value with the: A. discounting factor. B. compound factor. C. interest rate. D. number of periods. 2 points

QUESTION 7 The present value of multiple cash flows is: A. greater than the sum of the cash flows. B. equal to the sum of all the cash flows. C. less than the sum of the cash flows. D. higher or lower than the cash flows depending on the interest rate. 2 points

QUESTION 8 Cash flows associated with annuities are considered to be: A. an uneven cash flow stream. B. a constant cash flow stream. C. a mix of constant and uneven cash flow streams. D. a cash flow stream with decreasing trend. 2 points

QUESTION 9 The annuity transformation method is used to transform: A. a present value annuity to a future value annuity. B. a present value annuity to an annuity due. C. an ordinary annuity to an annuity due. D. a perpetuity to an annuity. 2 points

QUESTION 10 The true cost of borrowing is the: A. annual percentage rate. B. effective annual rate. C. quoted interest rate. D. periodic rate.

QUESTION 1

  1. You purchased land 3 years ago for $60000 and believe its market value is now $90000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $150000, an expense that you plan to depreciate straight line over the next three years. Wells Fargo offered you a loan for $60,000 at an 8% interest rate to be repaid over the next 4 years. You anticipate that the hotel will earn revenues of $165000 each year, while expenses will be a mere $30000 each year. The initial working capital requirement will be $7000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 10%. What is the net present value of this project?

    $24,918.55

    $20,000.38

    $38,020.13

    $45,200.80

    $33,869.93

10 points

QUESTION 2

  1. The NPV rule states that you should accept an investment if the NPV:

    is negative.

    is positive.

    is less than or equal to zero.

    is less than the investment's initial cost.

    exceeds the investment's initial cost.

5 points

QUESTION 3

  1. The payback period is the period of time it takes an investment to generate sufficient cash flows to:

    earn the required rate of return.

    produce the required net income.

    produce a yield equal to or greater than the market rate on similar investments.

    have a cash inflow, rather than an outflow, for the year.

    recover the investment's initial cost.

5 points

QUESTION 4

  1. A proposed project will increase a firm's accounts payables. This increase:

    should be ignored when conducting scenario analysis.

    is a cash outflow at time zero.

    is an initial cash inflow only.

    is a sunk cost and should be ignored.

    is a cash inflow at time zero and a cash outflow at the end of the project.

5 points

QUESTION 5

  1. What is the net present value of a project with the following cash flows if the discount rate is 7 percent?

    Year 0: $-3500

    Year 1: $1200

    Year 2: $1000

    Year 3: $900

    Year 4: $0

    -$1,112.30

    $305.75

    -$770.40

    $2,007.99

    $946.31

10 points

QUESTION 6

  1. The change in a firm's future cash flows that results from adding a new project are referred to as _____ cash flows.

    eroded

    deviated

    incremental

    direct

    residual
(a) Compare NPV, PI and IRR investment criteria. Describe each investment criteria, detailing their advantages and disadvantages. (9 marks)
(b) In calculating a NPV for a series of cash flows there are two assumptions. Identify and discuss these two assumptions. (2 marks)
(c) Identify whether you agree or disagree with the statements and briefly, in few sentences discuss the reason for your agreement or disagreement: (2 marks each/ 8 marks total)
a. Using the same discount rate to discount all cash flows ignores the fact that less distant cash flows are preferred to more distant ones.
b. The present value of a project is the minimum amount one would have to pay for it to be economically acceptable.
c. A project having a positive NPV should always be chosen.
d. If a project does not recover its initial outlay within three years, it probably is not worth pursuing.

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