Deck 27: The Concept of Present Value

Question 1

(Ignore income taxes in this problem. )Mary wants to have $20,000 available for use in four years.How much should Mary invest now in order to have the $20,000 available in four years if she can invest money at 16%:

A)$13,990
B)$2,760
C)$11,040
D)$16,800

Answer 1

C
Explanation: PV = Cash flow  PV Factor
= $20,000  0.552 = $11,040

Question 2

(Ignore income taxes in this problem. )How much would you have to invest today in the bank at an interest rate of 7% to have an annuity of $2,800 per year for 9 years,with nothing left in the bank at the end of the 9 years? Select the amount below that is closest to your answer.

A)$25,200
B)$18,242
C)$23,551
D)$1,523

Answer 2

B
Explanation: PV = Cash flow  PV Factor
= $2,800  6.515
= $18,242

Question 3

(Ignore income taxes in this problem. )Tweedie Corporation has entered into a 7 year lease for a building it will use as a warehouse.The annual payment under the lease will be $1,662.The first payment will be at the end of the current year and all subsequent payments will be made at year-ends.What is the present value of the lease payments if the discount rate is 13%?

A)$10,296
B)$11,634
C)$7,351
D)$4,945

Answer 3

C
Explanation: PV = Cash flow  PV Factor
= $1,662  4.423
= $7,351

Question 4

(Ignore income taxes in this problem. )You have deposited $21,618 in a special account that has a guaranteed interest rate of 18% 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 9 years? Select the amount below that is closest to your answer.

A)$5,024
B)$7,080
C)$2,402
D)$2,834

Question 5

The present value of a given amount decreases as the number of years over which it is to be discounted also decreases.

Question 6

A decrease in the discount rate:

A)will increase present values of future cash flows.
B)is one way to compensate for greater risk in a project.
C)will reduce present values of future cash flows.
D)responses a and b are both correct.

Question 7

(Ignore income taxes in this problem. )Virani Corporation has entered into a 8 year lease for a piece of equipment.The annual payment under the lease will be $2,000,with payments being made at the beginning of each year.If the discount rate is 9%,the present value of the lease payments is closest to:

A)$8,030
B)$12,066
C)$16,000
D)$14,679

Question 8

(Ignore income taxes in this problem. )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?

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

Question 9

(Ignore income taxes in this problem. )Judy Soope just received an annual raise of $500 starting with the current year.If Judy anticipates working for eight more years (including the current year)and the cash flows are discounted at 8%,what cash award today would be equivalent to the pay raise?

A)$4,000
B)$2,874
C)$2,160
D)$2,603

Question 10

An increase in the discount rate will result in an increase in the present value of a given cash flow.

Question 11

(Ignore income taxes in this problem. )You have deposited $5,188 in a special account that has a guaranteed interest rate.If you withdraw $1,400 at the end of each year for 7 years,you will completely exhaust the balance in the account.The guaranteed interest rate is closest to:

A)13%
B)27%
C)19%
D)89%

Question 12

If an investment has cash outflows of Q dollars at the end of each year for three years,then the present value of these cash outflows under a 10% rate of return will be:

A)greater than under a 12% rate of return.
B)less than under a 12% rate of return.
C)equal to that under a 12% rate of return.
D)unknown because it depends on the size of Q.