domande cap 4-5-6
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New Jersey Institute Of Technology *
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Finance
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Feb 20, 2024
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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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Related Questions
A project's IRR: A) All of these answers are correct. B is the average rate of return necessary to pay back the project's capital providers. C is equal to the discounted cash flows divided by the number of cash flows if the cash flows are a perpetuity. D will change with the cost of capital.
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3. project's required rate of return
4. project's NPV
a. 1 and 2
b. 4 only
c. 1,2 and 3
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A) Project A
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A)
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B)
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C)
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The future benefits received from investing in a project are the projects?
Net cash flows
Net investment
Net cost
Net return
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The difference between the present value of the expected future cash flows and the initial cash outflow
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The initial cash outflow divided by the present value of the expected future cash flows
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If a project’s internal rate of return (IRR) exceeds the cost of capital, then the project’s net present value (NPV) must be positive.
If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
The IRR calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the cost of capital.
Answers a and c are correct.
None of the answers above are correct.
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(question3 c,d)
c) Calculate the profitability index (PI) for each project d) Calculate the internal rate of return (IRR) for each project.
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I) It is the rate at which the NPV of the project is positive. IV) IRR method is based on concept of time value of mone
V) In IRR method the cash flows from a project are reinvested at the IRR itself. Which of the following statements are incorrect about Internal rate of return (IRR
A III and I
B. III and
C. L III and I
D. I onl
y.V. VV.):y.
D. I only.
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. Match each sentence to the correct concept.
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I. variability of the project's cash flow.
II. correlation of the project's cash flow relative to the prevailing cash flows of the MNC.
III. interest rate
IV. capital structure
A.
II, III
B.
I, III
C.
III, IV
D.
I, II
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