Deck 19: the Concept of Present Value

Question 1

Domebo Corporation has entered into a 7 year lease for a piece of equipment. The annual payment under the lease will be $3,400, with payments being made at the beginning of each year. If the discount rate is 14%, the present value of the lease payments is closest to (Ignore income taxes.): Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) $9,511
B) $16,623
C) $20,877
D) $23,800

Answer 1

B
Explanation: $3,400 × 1.000 + $3,400 × 3.889 = $16,622.60

Question 2

The present value of a cash flow increases as it moves further into the future.

Answer 2

False

Question 3

A company wants to have $40,000 at the end of a five-year period through investment of a single sum now. How much needs to be invested in order to have the desired sum in five years, if the money can be invested at 10% (Ignore income taxes.)? Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) $10,551
B) $8,000
C) $24,840
D) $12,882

Answer 3

C
Explanation: Net present value = $40,000 × Present value for 5 years at 10%
= $40,000 × 0.621 = $24,840

Question 4

An increase in the discount rate:

A) will increase the present value of future cash flows.
B) will have no effect on net present value.
C) will reduce the present value of future cash flows.
D) is one method of compensating for reduced risk.

Question 5

The present value of an amount to be received in five years is exactly twice as large as the present value of an equal amount to be received in ten years.

Question 6

At an interest rate of 14%, approximately how much would you need to invest today if you wanted to have $2,000,000 in 10 years? (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) $383,436
B) $540,000
C) $740,741
D) $1,043,200

Question 7

You have deposited $24,764 in a special account that has a guaranteed rate of return. If you withdraw $4,300 at the end of each year for 9 years, you will completely exhaust the balance in the account. The guaranteed rate of return is closest to: (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) 6%
B) 10%
C) 17%
D) 56%

Question 8

The present value of a cash flow will never be greater than the future dollar amount of the cash flow.

Question 9

A company wants to have $20,000 at the end of a ten-year period by investing a single sum now. How much needs to be invested in order to have the desired sum in ten years, if the money can be invested at 12%? (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) $3,254.68
B) $3,539.82
C) $6,440
D) $7,720

Question 10

In order to receive $12,000 at the end of three years and $10,000 at the end of five years, how much must be invested now if you can earn 14% rate of return? (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) $12,978
B) $8,100
C) $13,290
D) $32,054

Question 11

You have deposited $7,620 in a special account that has a guaranteed rate of return of 19% per year. If you are willing to completely exhaust the account, what is the maximum amount that you could withdraw at the end of each of the next 7 years? Select the amount below that is closest to your answer. (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) $1,295
B) $2,056
C) $2,219
D) $1,089

Question 12

Suppose an investment has cash inflows of R dollars at the end of each year for two years. The present value of these cash inflows using a 12% discount rate will be:

A) greater than under a 10% discount rate.
B) less than under a 10% discount rate.
C) equal to that under a 10% discount rate.
D) sometimes greater than under a 10% discount rate and sometimes less; it depends on R.

Question 13

The present value of a given future cash flow will decrease as the discount rate decreases.

Question 14

How much would you have to invest today in the bank at an interest rate of 8% to have an annuity of $4,800 per year for 7 years, with nothing left in the bank at the end of the 7 years? Select the amount below that is closest to your answer. (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) $33,600
B) $2,798
C) $24,989
D) $31,111

Question 15

Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. If the discount rate is 5%, the present value of the lease payments is closest to (Ignore income taxes.): Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided. (Round your intermediate calculations to 3 decimal places.)

A) $12,528
B) $14,103
C) $14,808
D) $11,050

Question 16

The higher the discount rate, the higher the present value of a given future cash flow.