Question 1

A proposed 3-year project has expected annual cash inflows of $5,600,$7,900,and $11,200,for Years 1 to 3,respectively.What is the net present value of this project at a discount rate of 16 percent if the initial cost is $7,800?

Accepted Answer

A) $10,713.62 
B) $10,073.94 
C) $14,103.18 
D) $12,292.25 
E) $9,899.36

Question 2

Investment options A and B are equally risky and have identical initial costs.Each investment will produce cash inflows of $20,000.Option A will pay $8,000 the first year followed by four annual payments of $3,000 each.Option B will pay five annual payments,starting in 1 year,of $4,000 each.Which one of the following statements is correct given these two investment options? Assume a positive rate of return.

Accepted Answer

A) Neither investment should be undertaken. 
B) Option A is the better investment. 
C) Option B has a higher net present value. 
D) Option B has a lower future value at Year 5. 
E) Both options are of equal value.

Question 3

A 5-year loan in the amount of $48,000 is to be repaid in equal annual payments.What is the remaining principal balance after the third payment if the interest rate is 5 percent,compounded annually?

Accepted Answer

A) $22,173.58 
B) $18,294.24 
C) $22,998.30 
D) $18,677.70 
E) $20,614.89

Question 4

What is the effective annual rate if a firm charges you 7.75 percent,compounded daily,based on a 360-day year?

Accepted Answer

A) 7.928% 
B) 7.994% 
C) 8.057% 
D) 7.582% 
E) 8.109%

Question 5

What is the effective annual rate if the APR is 6.35 percent,compounded continuously?

Accepted Answer

A) 6.427% 
B) 6.447% 
C) 6.539% 
D) 6.602% 
E) 6.556%

Question 6

Clint just won a prize that will pay him $15,000 a year for 15 years,starting at the end of Year 5.What is the current value of this prize if the discount rate is 7 percent,compounded annually?

Accepted Answer

A) $102,655.52 
B) $98,550.64 
C) $104,225.76 
D) $116,191.91 
E) $108,806.61

Question 7

The future value of an annuity due is computed as

Accepted Answer

A) C(1 + r)T 
B) C{[(1 + r)T - 1] / r} 
C) C{[(1 + r)T - 1] / (1 + r)} 
D) C(1 + r)T - 1 / (1 + r) 
E) C{[(1 + r)T - 1] / r}(1 + r)

Question 8

Which type(s)of loan repays the interest as an annuity and the principal as a lump sum?

Accepted Answer

A) Pure discount loans 
B) Both amortized and interest-only loans 
C) Amortized loans 
D) Both interest-only and amortized loans 
E) Interest-only loans

Question 9

You expect to receive $5,400 2 years from now,$6,300 3 years from now,and $10,900 6 years from now.What is the future value of these cash flows 7 years from now if the interest rate is 7.4 percent,compounded annually?

Accepted Answer

A) $25,916.78 
B) $28,109.08 
C) $27,805.20 
D) $29,341.02 
E) $25,889.39

Question 10

A project is expected to produce cash flows of $12,800,$15,900,and $18,000 over the next 3 years,respectively.After 3 years,the project will be discontinued.What is this project worth today at a discount rate of 12.5 percent?

Accepted Answer

A) $35,201.76 
B) $34,435.74 
C) $36,582.72 
D) $36,808.17 
E) $35,758.00

Question 11

Today,you are retiring.You have a total of $387,419 in your retirement savings and have the funds invested at a guaranteed 3.68 percent,compounded monthly.You want to withdraw $1,500 at the beginning of every month,starting today.You also want the withdrawals to stop when your account balance declines to $100,000.For how many years can you make withdrawals?

Accepted Answer

A) 36.52 years 
B) 34.43 years 
C) 34.22 years 
D) 35.24 years 
E) 36.22 years

Question 12

Jensen's Shipping is expected to produce an annual cash flow of $218,900 next year.Thereafter,this cash flow is expected to decrease by 1.6 percent per year indefinitely.What is this firm worth today at a discount rate of 18 percent?

Accepted Answer

A) $1,116,836.74 
B) $1,424,350.00 
C) $1,394,210.53 
D) $1,334,756.10 
E) $1,221,400.00

Question 13

A 10-year,$600 annuity pays its first payment at Date 3.If you compute the present value of this annuity,the computed value will be as of Date

Accepted Answer

A) 0 
B) 1 
C) 2 
D) 3 
E) 4

Question 14

Given a positive rate of return and multiple time periods,compound interest

Accepted Answer

A) increases in an exponential manner. 
B) increases in a linear manner. 
C) produces the same future values as simple interest. 
D) provides future values that are less than those provided by simple interest. 
E) increases at a decreasing rate.

Question 15

Your parents have been investing $25 a week for the past 18 years into an account for you.Today,this investment account is worth $60,762.53.Interest is compounded weekly.What is the annual rate of return?

Accepted Answer

A) 8.80% 
B) 8.47% 
C) 8.16% 
D) 9.62% 
E) 9.34%

Question 16

You have just obtained a 5-year pure discount loan in the amount of $75,000 at 6.28 percent interest,compounded monthly.What total amount will you have to repay?

Accepted Answer

A) $102,582.70 
B) $87,370.00 
C) $84,219.16 
D) $105,260.13 
E) $96,100.84

Question 17

A loan in the amount of $212,000 is to be repaid in equal annual payments over 15 years.The interest rate is 7 percent,compounded annually.What is the amount of interest that is included in the loan payment for Year 3?

Accepted Answer

A) $13,617.56 
B) $12,721.88 
C) $13,885.85 
D) $11,221.07 
E) $12,454.19

Question 18

Wise University expects to receive $100 next year from a new donor.They also expect this amount to increase by 3 percent annually and to continue forever.Which formula will correctly compute the current value of this donation at a discount rate of 13 percent?

Accepted Answer

A) $100 / 0.13 + 0.03 
B) $100 / (0.13 - 0.03) 
C) ($100 × 1.03)/ 0.13 
D) ($100 × 1.03)/ (0.13 - 0.03) 
E) $100 + ($100 × 1.03)/ (0.13 - 0.03)

Question 19

Which one of these is the best indicator that acquiring a firm is a good idea?

Accepted Answer

A) The firm has a positive NPV at an appropriate discount rate. 
B) The firm has a negative NPV at all positive discount rates. 
C) The firm has a positive NPV at the riskless rate of return. 
D) The firm has increasing cash inflows. 
E) The firm is growing on an annual basis.

Question 20

The Uptown Development project is expected to provide a cash flow of $18,600 next year with annual increases of 3.5 percent for 15 years.After that,the project will be worthless.What is the present value of this project at a discount rate of 17 percent,compounded annually?

Accepted Answer

A) $251,987.56 
B) $115,875.14 
C) $103,206.07 
D) $121,008.67 
E) $247,266.41

Exam 4: Discounted Cash Flow Valuation