Question 1

The importance of capital budgeting decisions is due to all of the following factors except for:

Accepted Answer

A)  the impact of a capital budgeting decision is long term;the firm loses some decision-making flexibility when capital projects are purchased. 
B)  effective capital budgeting can improve the timing of asset acquisition and the quality of assets purchased. 
C)  the acquisition of fixed assets typically involves substantial expenditures,and before a firm spends a large amount of money,it must have the funds available. 
D)  capital budgeting techniques overcome the problems with error in forecasts for asset requirements and projected sales,we will still be able to determine if we should fund the project. 
E)  all of the above are factors that make capital budgeting important.

Question 2

Suppose the present value of a 2-year ordinary annuity is $100.If the discount rate is 10 percent,what must be the annual cash flow?

Accepted Answer

A)  $65.45 
B)  $82.64 
C)  $57.62 
D)  $53.78 
E)  $79.22

Question 3

Which of the following is not a rationale for using the NPV method in capital budgeting?

Accepted Answer

A)  An NPV of zero signifies that the project's cash flows are just sufficient to repay the invested capital and to provide the required rate of return on that capital. 
B)  A project whose NPV is positive will increase the value of the firm if that project is accepted. 
C)  A project is considered acceptable if it has a positive NPV. 
D)  A project is not considered acceptable if it has a negative NPV. 
E)  All of the above are true.

Question 4

The effective annual rate is always greater than the simple rate as a result of compounding effects.

Accepted Answer

A) True 
 B)False

Question 5

If the NPV for a project is positive it must be that

Accepted Answer

A)  the discounted payback period is longer than the useful life of the project. 
B)  the internal rate of return is lower than the discount used. 
C)  the project is not acceptable on a risk adjusted basis. 
D)  this project is preferred to any other mutually exclusive project. 
E)  accepting the project increases the value of the firm.

Question 6

You will receive a $100 annual perpetuity starting at Year 0,a $300 annual perpetuity with the first payment at the end of Year 5,and a $200 semiannual perpetuity 1/2 − 1.0 = 7%. )

Accepted Answer

A)  $2,091.86 
B)  $2,785.14 
C)  $4,213.51 
D)  Infinite;the future value of any perpetuity is infinite. 
E)  Cannot determine the value since some payments are received annually and some semiannually.

Question 7

If a 5-year regular annuity has a present value of $1,000,and if the interest rate is 10 percent,what is the amount of each annuity payment?

Accepted Answer

A)  $240.42 
B)  $263.80 
C)  $300.20 
D)  $315.38 
E)  $346.87

Question 8

You want to borrow $1,000 from a friend for one year,and you propose to pay her $1,120 at the end of the year.She agrees to lend you the $1,000,but she wants you to pay her $10 of interest at the end of each of the first 11 months plus $1,010 at the end of the 12th month.How much higher is the effective annual rate under your friend's proposal than under your proposal?

Accepted Answer

A)  0.00% 
B)  0.45% 
C)  0.68% 
D)  0.89% 
E)  1.00%

Question 9

A recent advertisement in the financial section of a magazine carried the following claim: "Invest your money with us at 14 percent,compounded annually,and we guarantee to double your money sooner than you imagine." Ignoring taxes,how long would it take to double your money at a simple rate of 14 percent,compounded annually?

Accepted Answer

A)  Approximately 3.5 years 
B)  Approximately 5 years 
C)  Exactly 7 years 
D)  Approximately 10 years 
E)  Exactly 14 years

Question 10

You are given the following cash flows.What is the present value (t = 0)if the discount rate is 12 percent?

Accepted Answer

A)  $3,277 
B)  $4,804 
C)  $5,302 
D)  $4,289 
E)  $2,804

Question 11

When a loan is amortized,the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan.

Accepted Answer

A) True 
 B)False

Question 12

At an effective annual interest rate of 20 percent,how many years will it take a given amount to triple in value? (Round to the closest year. )

Accepted Answer

A)  5 
B)  8 
C)  6 
D)  10 
E)  9

Question 13

You have the opportunity to buy a perpetuity which pays $1,000 annually.Your required rate of return on this investment is 15 percent.You should be essentially indifferent to buying or not buying the investment if it were offered at a price of

Accepted Answer

A)  $5,000.00 
B)  $6,000.00 
C)  $6,666.67 
D)  $7,500.00 
E)  $8,728.50

Question 14

You deposited $1,000 in a savings account that pays 8 percent interest,compounded quarterly,planning to use it to finish your last year in college.Eighteen months later,you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school,so you close out your account.How much money will you receive?

Accepted Answer

A)  $1,171 
B)  $1,126 
C)  $1,082 
D)  $1,163 
E)  $1,008

Question 15

You have just borrowed $20,000 to buy a new car.The loan agreement calls for 60 monthly payments of $444.89 each to begin one month from today.If the interest is compounded monthly,then what is the effective annual rate on this loan?

Accepted Answer

A)  12.68% 
B)  14.12% 
C)  12.00% 
D)  13.25% 
E)  15.08%

Question 16

As the discount rate increases without limit,the present value of the future cash inflows

Accepted Answer

A)  Gets larger without limit. 
B)  Stays unchanged. 
C)  Approaches zero. 
D)  Gets smaller without limit,i.e. ,approaches minus infinity. 
E)  Goes to ern.

Question 17

Assume that,to help build your nest-egg,you made two deposits of $100,one on January 1,2014,and one on July 1,2014,in a savings account that paid 10 percent compounded semiannually.On January 1,2015,the bank increased the interest rate paid on savings accounts to 12 percent,annual compounding.Then you made a third $100 deposit on April 1,2015.How much should there be in your account on January 1,2016?

Accepted Answer

A)  $353.08 
B)  $349.95 
C)  $355.27 
D)  $362.10 
E)  $338.43

Question 18

One of the potential benefits of investing early for retirement is that an investor can receive greater benefits from the compounding of interest.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is correct?

Accepted Answer

A)  Simple rates can't be used in present value or future value calculations because they fail to account for compounding effects. 
B)  The periodic interest rate can be used directly in calculations as long as the number of payments per year is greater than or equal to the number of compounding periods per year. 
C)  In all cases where interest is added or payments are made more frequently than annually,the periodic rate is less than the annual rate. 
D)  Generally,the APR is greater than the EAR as a result of compounding effects. 
E)  If the compounding period is semiannual then the periodic rate will equal the effective annual rate divided by two.

Question 20

If you buy a factory for $250,000 and the terms are 20 percent down,the balance to be paid off over 30 years at a 12 percent rate of interest on the unpaid balance,what are the 30 equal annual payments?

Accepted Answer

A)  $20,593 
B)  $31,036 
C)  $24,829 
D)  $50,212 
E)  $6,667

Exam 9: Time Value of Money

The importance of capital budgeting decisions is due to all of the following factors except for:

Suppose the present value of a 2-year ordinary annuity is $100.If the discount rate is 10 percent,what must be the annual cash flow?

Which of the following is not a rationale for using the NPV method in capital budgeting?

The effective annual rate is always greater than the simple rate as a result of compounding effects.

If the NPV for a project is positive it must be that

You will receive a $100 annual perpetuity starting at Year 0,a $300 annual perpetuity with the first payment at the end of Year 5,and a $200 semiannual perpetuity ^1/2 − 1.0 = 7%. )

If a 5-year regular annuity has a present value of $1,000,and if the interest rate is 10 percent,what is the amount of each annuity payment?

You are given the following cash flows.What is the present value (t = 0) if the discount rate is 12 percent?

When a loan is amortized,the largest portion of the periodic payment goes to reduce principal in the early years of the loan such that the accumulated interest can be spread out over the life of the loan.

At an effective annual interest rate of 20 percent,how many years will it take a given amount to triple in value? (Round to the closest year. )

You have the opportunity to buy a perpetuity which pays $1,000 annually.Your required rate of return on this investment is 15 percent.You should be essentially indifferent to buying or not buying the investment if it were offered at a price of

You have just borrowed $20,000 to buy a new car.The loan agreement calls for 60 monthly payments of $444.89 each to begin one month from today.If the interest is compounded monthly,then what is the effective annual rate on this loan?

As the discount rate increases without limit,the present value of the future cash inflows

One of the potential benefits of investing early for retirement is that an investor can receive greater benefits from the compounding of interest.

Which of the following statements is correct?

If you buy a factory for $250,000 and the terms are 20 percent down,the balance to be paid off over 30 years at a 12 percent rate of interest on the unpaid balance,what are the 30 equal annual payments?