Deck 22: The Concept of Present Value

Question 1

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.

Answer 1

C

Question 2

(Ignore income taxes in this problem. ) You have deposited $8,369 in a special account that has a guaranteed interest rate of 13% 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 8 years? Select the amount below that is closest to your answer.

A)$1,046
B)$1,744
C)$2,134
D)$1,182

Answer 2

B

Question 3

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

Answer 3

False

Question 4

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 5

(Ignore income taxes in this problem. ) How much would you have to invest today in the bank at an interest rate of 13% to have an annuity of $3,900 per year for 5 years,with nothing left in the bank at the end of the 5 years? Select the amount below that is closest to your answer.

A)$19,500
B)$17,257
C)$2,118
D)$13,716

Question 6

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

Question 7

(Ignore income taxes in this problem. ) Noe Corporation has entered into a 8 year lease for a building it will use as a warehouse.The annual payment under the lease will be $2,520.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 12%?

A)$8,142
B)$12,519
C)$20,160
D)$18,000

Question 8

(Ignore income taxes in this problem. ) You have deposited $16,727 in a special account that has a guaranteed interest rate.If you withdraw $4,300 at the end of each year for 5 years,you will completely exhaust the balance in the account.The guaranteed interest rate is closest to:

A)6%
B)29%
C)9%
D)26%

Question 9

The accountant of Ronier,Inc. ,has prepared an analysis of a proposed capital project using discounted cash flow techniques.One manager has questioned the accuracy of the results because the discount factors employed in the analysis have assumed the cash inflows occurred at the end of the year when the cash inflows actually occurred uniformly throughout each year.The net present value calculated by the accountant:

A)will be in error and therefore not usable.
B)will be slightly overstated but usable.
C)will be slightly understated but usable.
D)will produce an error the direction of which is undeterminable.

Question 10

(Ignore income taxes in this problem. ) White Company's required rate of return on capital budgeting projects is 12%.The company is considering an investment opportunity which would yield a cash flow of $10,000 in five years.What is the most that the company should be willing to invest in this project?

A)$36,050
B)$2,774
C)$17,637
D)$5,670

Question 11

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

Question 12

(Ignore income taxes in this problem. ) Henry wants to send his son to computer school which will start one year from today.Payments of $2,000 are due at the end of each of the next two years.What lump-sum will Henry have to invest now at 12% per year in order to have $2,000 at the end of each of the next two years?

A)$4,240
B)$3,380
C)$1,594
D)$2,508

Question 13

(Ignore income taxes in this problem. ) If you wanted to withdraw $12,000 from a bank account at the end of each of the next 20 years,approximately how much would you have to invest in the account today assuming a 6% interest rate?

A)$20,924
B)$38,462
C)$74,880
D)$137,604

Question 14

(Ignore income taxes in this problem. ) Knipper Corporation has entered into a 9 year lease for a piece of equipment.The annual payment under the lease will be $2,300,with payments being made at the beginning of each year.If the discount rate is 11%,the present value of the lease payments is closest to:

A)$18,649
B)$14,136
C)$20,700
D)$8,092