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Present Value Calculations: Multiple Choice Questions and Answers, Exercises of Financial Management

Vietnam National University Ho Chi Minh City (VNUHCM)Financial Management

Financial Management Excercise

Typology: Exercises

2019/2020

Uploaded on 10/25/2021

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Chapter 02 - How to Calculate Present Values
2-1
Chapter 02
How to Calculate Present Values
Multiple Choice Questions
1. The present value of $100 expected in two years from today at a discount rate of 6% is:
A. $116.64
B. $108.00
C. $100.00
D. $89.00
2. Present Value is defined as:
A. Future cash flows discounted to the present at an appropriate discount rate
B. Inverse of future cash flows
C. Present cash flow compounded into the future
D. None of the above
3. If the interest rate is 12%, what is the 2-year discount factor?
A. 0.7972
B. 0.8929
C. 1.2544
D. None of the above
4. If the present value of the cash flow X is $240, and the present value cash flow Y $160,
then the present value of the combined cash flow is:
A. $240
B. $160
C. $80
D. $400
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Chapter 02

How to Calculate Present Values

Multiple Choice Questions

  1. The present value of $100 expected in two years from today at a discount rate of 6% is: A. $116. B. $108. C. $100. D. $89.
  2. Present Value is defined as: A. Future cash flows discounted to the present at an appropriate discount rate B. Inverse of future cash flows C. Present cash flow compounded into the future D. None of the above
  3. If the interest rate is 12%, what is the 2-year discount factor? A. 0. B. 0. C. 1. D. None of the above
  4. If the present value of the cash flow X is $240, and the present value cash flow Y $160, then the present value of the combined cash flow is: A. $ B. $ C. $ D. $
  1. The rate of return is also called: I) discount rate; II) hurdle rate; III) opportunity cost of capital A. I only B. I and II only C. I, II, and III D. None of the given ones
  2. Present value of $121,000 expected to be received one year from today at an interest rate (discount rate) of 10% per year is: A. $121, B. $100, C. $110, D. None of the above
  3. One year discount factor at a discount rate of 25% per year is: A. 1. B. 1. C. 0. D. None of the above
  4. The one-year discount factor at an interest rate of 100% per year is: A. 1. B. 0. C. 0. D. None of the above
  5. Present Value of $100,000 that is, expected, to be received at the end of one year at a discount rate of 25% per year is: A. $80, B. $125, C. $100, D. None of the above
  1. The present value formula for one period cash flow is: A. PV = C 1 (1 + r) B. PV = C 1 /(1 + r) C. PV = C 1 /r D. None of the above
  2. The net present value formula for one period is: I) NPV = C 0 + [C 1 /(1 + r)]; II) NPV = PV required investment; and III) NPV = C 0 /C 1 A. I only B. I and II only C. III only D. None of the above
  3. An initial investment of $400,000 will produce an end of year cash flow of $480,000. What is the NPV of the project at a discount rate of 20%? A. $176, B. $80, C. $0 (zero) D. None of the above
  4. If the present value of a cash flow generated by an initial investment of $200,000 is $250,000, what is the NPV of the project? A. $250, B. $50, C. $200, D. None of the above
  1. What is the present value of the following cash flow at a discount rate of 9%?

A. $372,431.

B. $450,

C. $405,950.

D. None of the above

  1. At an interest rate of 10%, which of the following cash flows should you prefer?

A. Option A B. Option B C. Option C D. Option D

  1. What is the net present value of the following cash flow at a discount rate of 11%?

A. $69,108.

B. $231,432.

C. $80,

D. None of the above

  1. What is the present value of the following cash flow at a discount rate of 16% APR?

A. $136,741.

B. $122,948.

C. $158,620.

D. None of the above

  1. Which of the following statements regarding the net present value rule and the rate of return rule is not true? A. Accept a project if NPV > cost of investment B. Accept a project if NPV is positive C. Accept a project if return on investment exceeds the rate of return on an equivalent investment in the financial market D. Reject a project if NPV is negative
  2. The opportunity cost of capital for a risky project is A. The expected rate of return on a government security having the same maturity as the project B. The expected rate of return on a well-diversified portfolio of common stocks C. The expected rate of return on a portfolio of securities of similar risks as the project D. None of the above
  3. A perpetuity is defined as: A. Equal cash flows at equal intervals of time for a specific number of periods B. Equal cash flows at equal intervals of time forever C. Unequal cash flows at equal intervals of time forever D. None of the above
  4. Which of the following is generally considered an example of a perpetuity: A. Interest payments on a 10-year bond B. Interest payments on a 30-year bond C. Consols D. None of the above
  1. You would like to have enough money saved to receive $100,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments start one year from the date of your retirement. The interest rate is 12.5%)? A. $1,000, B. $10,000, C. $800, D. None of the above
  2. What is the present value of $10,000 per year perpetuity at an interest rate of 10%? A. $10, B. $100, C. $200, D. None of the above
  3. You would like to have enough money saved to receive $80,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments start one year from the date of your retirement. The interest rate is 8%)? A. $7,500, B. $750, C. $1,000, D. None of the above
  4. You would like to have enough money saved to receive a $50,000 per year perpetuity after retirement so that you and your family can lead a good life. How much would you need to save in your retirement fund to achieve this goal (assume that the perpetuity payments starts on the day of retirement. The interest rate is 8%)? A. $1,000, B. $675, C. $625, D. None of the above
  1. If the five-year present value annuity factor is 3.60478 and four-year present value annuity factor is 3.03735, what is the present value at the $1 received at the end of five years? A. $0. B. $1. C. $0. D. None of the above
  2. What is the present value annuity factor at a discount rate of 11% for 8 years? A. 5. B. 11. C. 5. D. None of the above
  3. What is the present value annuity factor at an interest rate of 9% for 6 years? A. 7. B. 4. C. 1. D. None of the above
  4. What is the present value of $1000 per year annuity for five years at an interest rate of 12%? A. $6,352. B. $3,604. C. $567. D. None of the above
  5. What is the present value of $5000 per year annuity at a discount rate of 10% for 6 years? A. $21,776. B. $3,371. C. $16,760. D. None of the above
  1. After retirement, you expect to live for 25 years. You would like to have $75,000 income each year. How much should you have saved in the retirement to receive this income, if the interest is 9% per year (assume that the payments start on the day of retirement)? A. $736,693. B. $802,995. C. $2,043, D. None of the above
  2. After retirement, you expect to live for 25 years. You would like to have $75,000 income each year. How much should you have saved in the retirement to receive this income, if the interest is 9% per year (assume that the payments start one year after the retirement)? A. $736,693. B. $6,352,567. C. $1,875, D. None of the above
  3. For $10,000 you can purchase a 5-year annuity that will pay $2504.57 per year for five years. The payments are made at the end of each year. Calculate the effective annual interest rate implied by this arrangement: (approximately) A. 8% B. 9% C. 10% D. None of the above
  4. If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the present value annuity factor for an equivalent annuity due? A. 6. B. 7. C. 6. D. None of the above
  1. If the present value of $1.00 received n years from today at an interest rate of r is 0.3855, then what is the future value of $1.00 invested today at an interest rate of r% for n years? A. $1. B. $2. C. $1. D. Not enough information to solve the problem
  2. If the present value of $1.00 received n years from today at an interest rate of r is 0.621, then what is the future value of $1.00 invested today at an interest rate of r% for n years? A. $1. B. $1. C. $1. D. Not enough information to solve the problem
  3. If the future value of $1 invested today at an interest rate of r% for n years is 9.6463, what is the present value of $1 to be received in n years at r% interest rate? A. $9. B. $1. C. $0. D. None of the above
  4. If the future value annuity factor at 10% and 5 years is 6.1051, calculate the equivalent present value annuity factor A. 6. B. 3. C. 6. D. None of the given ones
  5. If the present value annuity factor at 10% APR for 10 years is 6.1446, what is the equivalent future value annuity factor? A. 3. B. 15. C. 2. D. None of the above
  1. If the present value annuity factor at 12% APR for 5 years is 3.6048, what is the equivalent future value annuity factor? A. 2. B. 6. C. 1. D. None of the above
  2. If the present value annuity factor at 8% APR for 10 years is 6.71, what is the equivalent future value annuity factor? A. 3. B. 14. C. 2. D. None of the above
  3. You are considering investing in a retirement fund that requires you to deposit $5,000 per year, and you want to know how much the fund will be worth when you retire. What financial technique should you use to calculate this value? A. Future value of a single payment B. Future value of an annuity C. Present value of an annuity D. None of the above
  4. Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in his retirement fund by that time. If the interest rate is 10% per year, how much should Mr. Hopper put into the retirement fund each year in order to achieve this goal? [Assume that the payments are made at the end of each year] A. $4,559. B. $2, C. $7,626. D. None of the above
  1. The managers of a firm can maximize stockholder wealth by: A. Taking all projects with positive NPVs B. Taking all projects with NPVs greater than the cost of investment C. Taking all projects with NPVs greater than present value of cash flow D. All of the above
  2. If you invest $100 at 12% APR for three years, how much would you have at the end of 3 years using simple interest? A. $ B. $140. C. $240. D. None of the above
  3. If you invest $100 at 12% APR for three years, how much would you have at the end of 3 years using compound interest? A. $ B. $140. C. $240. D. None of the above
  4. Which of the following statements is true? A. The process of discounting is the inverse of the process of compounding. B. Ending balances using simple interest is always greater than the ending balance using compound interest at positive interest rates. C. Present value of an annuity due is always less than the present value of an equivalent annuity at positive interest rates. D. All of the above are true.
  5. The concept of compound interest is most appropriately described as: A. Interest earned on an investment B. The total amount of interest earned over the life of an investment C. Interest earned on interest D. None of the above
  1. Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year. If the mortgage calls for equal monthly payments for twenty years, what is the amount of each payment? (Assume monthly compounding or discounting.) A. $1254. B. $1625. C. $1263. D. None of the above are true
  2. An investment at 10.47% effective rate compounded monthly is equal to a nominal (annual) rate of: A. 10.99% B. 9.57% C. 10% D. None of the above
  3. An investment at 12% nominal rate compounded monthly is equal to an annual rate of: A. 12.68% B. 12.36% C. 12% D. None of the above
  4. Mr. William expects to retire in 30 years and would like to accumulate $1 million in the pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams put into the pension fund each month in order to achieve his goal? Assume that Mr. Williams will deposit the same amount each month into his pension fund and also use monthly compounding. A. $286. B. $771. C. $345. D. None of the above
  1. The opportunity cost of capital is higher for safe investments than for risky ones. True False
  2. A safe dollar is always worth less than a risky dollar because the rate of return on a safe investment is generally low and the rate of return on a risky investment is generally high. True False
  3. "Accept investments that have positive net present values" is called the net present value rule. True False
  4. "Accept investments that offer rates of return in excess of opportunity cost of capital". True False
  5. The rate of return on any perpetuity is equal to the cash flow multiplied by the price. True False
  6. An annuity is an asset that pays a fixed sum each year for a specified number of years. True False
  7. The value of a five-year annuity is equal to the sum of two perpetuities. One makes its first payment in year 1, and the other makes its first payment in year 6. True False
  8. An equal-payment home mortgage is an example of an annuity. True False
  1. In the amortization of a mortgage loan with equal payments, the fraction of each payment devoted to interest steadily increases over time and the fraction devoted to reducing the loan decreases steadily. True False
  2. In the case of a growing perpetuity, the present value of the cash flow is given by: [C 1 /(r - g)] where r > g. True False
  3. Compound interest assumes that you are reinvesting the interest payments at the rate of return. True False

Short Answer Questions

  1. Briefly explain the term "discount rate."
  2. Intuitively explain the concept of the present value.