FC chap 4

1) The net present value of a project is equal to the:

• present value of the future cash flows
• present value of the future cash flows minus the initial cost
• future value of the future cash flows minus the initial cost
• future value of the future cash flows minus the present value of the initial cost
• sum of the project's anticipated cash inflows

2) Which one of these statements is correct concerning the time value of money?

• Increasing the initial cost of a project increases the project's NPV
• Increasing the discount rate increases the PV of a project
• Increasing the FV decreases the PV
• Decreasing the PV decreases the FV
• Decreasing the discount rate increases the FV

3) At a discount rate of 5 percent, which one of the following is the correct formula for computing the PV of $1 to be received one year from today?

• $1/1.05
• 1
• $1 × 1.05
• $1 × 1.05²
• $1/1.05²

4) What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows?

• There will be no effect on the PV.
• The PV will change but the direction of the change is unknown.
• The PV will remain the same as the timing of the cash flows must change also.
• The PV will increase.
• The PV will decrease.

5) You are considering two projects. Project A has projected cash flows of $6,500, $4,500, and $2,500 for the next three years, respectively. Project B has projected cash flows of $2,500, $4,500, and $6,500 for the next three years, respectively. Assuming both projects have the same initial cost, you know that:

• there are no conditions under which the projects can have equal values.
• Project B has a higher net present value than Project A.
• Project A is more valuable than Project B given a positive discount rate.
• both projects offer the same rate of return.
• both projects have equal net present values at any discount rate.

6) An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the ________ rate.

• stated interest rate
• compound interest rate
• effective annual rate
• periodic interest rate
• daily interest rate

7) The interest rate charged per period multiplied by the number of periods per year is called the ________ rate.

• effective annual rate
• annual percentage rate
• periodic interest rate
• compound interest rate
• daily interest rate

8) The annual percentage rate:

• considers interest on interest.
• is the actual cost of a loan with monthly payments.
• is higher than the effective annual rate when interest is compounded quarterly.
• is the interest rate charged per period divided by (1 + n).
• equals the effective annual rate when the interest is designated as simple interest.

9) You would be making a wise decision if you chose to:

• base decisions on effective rates for investments and APR for loans.
• assume all loans and investments are based on simple interest.
• accept the loan with the lower effective annual rate rather than the loan with the lower APR.
• invest in an account paying 6% compounded quarterly rather than monthly.
• ignore effective rates and focus on APR for all transactions.

10) The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed as:

• (1 + .09/365)³⁶⁵
• e⁰․⁹
• 1.09ᵉ
• e⁰․⁹ − 1
• (1 + .09/365)³⁶⁵ − 1