Question 1

What is the present value of $150 acquired in 2 years with a discount rate of 2% (approximately)?&#10;A)$156&#10;B)$150&#10;C)$144&#10;D)$130

Accepted Answer

The present value can be calculated using the formula:
PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value, r is the discount rate, and n is the number of years.

Substituting the given values, we get:
PV = 150 / (1 + 0.02)^2
PV = 150 / 1.0404
PV = $144 (approximately)

Therefore, the best choice is C, $144, as it is the closest option to the calculated present value.

Question 2

If you put $50 in a savings account paying 4% for 2 years, and the interest rate is 4%, approximately how much money will you end up with?&#10;A)$52&#10;B)$55&#10;C)$54&#10;D)$58

Accepted Answer

The interest earned over 2 years at 4% per annum on $50 can be calculated using the formula for simple interest: Interest = Principal × Rate × Time. So, Interest = $50 × 4% × 2 = $4. Adding the interest to the principal gives $54, but due to compounding (which is typical for savings accounts), the amount will be slightly more, making $55 the closest approximation.

Question 3

When one incorporates inflation into a present value calculation, which of the following is the most correct?&#10;A)the inflation-corrected discount rate should be equal to the nominal interest rate minus the inflation rate&#10;B)if the net benefits are not corrected for inflation, the discount rate shouldn't be either&#10;C)the discount rate should be equal to the nominal interest rate plus the inflation rate&#10;D)all of the above&#10;E)a and b only

Accepted Answer

The correct approach to incorporating inflation into present value calculations involves adjusting either the cash flows for inflation or adjusting the discount rate to reflect inflation. Option A is incorrect because the inflation-corrected discount rate (real interest rate) is typically calculated using the Fisher equation, which does not simply subtract the inflation rate from the nominal interest rate. Option B is correct because if net benefits are not adjusted for inflation, the discount rate used should also not be adjusted for inflation to maintain consistency. Option C is incorrect because adding the inflation rate to the nominal interest rate would not correctly adjust for inflation in present value calculations. Therefore, options A and B are the most correct ways to incorporate inflation, making E the correct choice.

Question 4

Present values of alternative projects of different lengths of time cannot be compared directly because&#10;A)the net benefits must be analyzed carefully in the more distant future&#10;B)the discounted net benefits in more distant years will be smaller, all else equal&#10;C)the net benefits can be compared directly.The premise of this question is incorrect.&#10;D)If a project lasting for fewer years can be repeated, its present value will be underestimated using standard analysis

Accepted Answer

If a project with a shorter duration can be repeated, its present value might be underestimated because standard analysis might not account for the benefits of repeating the project.

Question 5

The decision rule for the internal rate of return states that if the IRR&#10;A)is greater than the market interest rate the project should be approved&#10;B)is lower than the market interest rate the project should be approved&#10;C)is roughly the same as the market interest rate the project should be approved&#10;D)is greater than 0 the project should be approved

Accepted Answer

The decision rule for the internal rate of return states that if the IRR is greater than the market interest rate, the project should be approved. This is because the IRR represents the rate at which the project's cash flows are equal to the project's initial investment. Therefore, if the IRR is greater than the market interest rate, it means that the project will generate a rate of return higher than the cost of capital, making it a profitable investment.

Question 6

Suppose a program costs $100 with no benefits in year 0 and has net benefits of $40 for the next three years.With a discount rate of 6%, what is the program's present value?&#10;A)$6.92&#10;B)$20&#10;C)$27.20&#10;D)$13.21

Accepted Answer

The answer of Suppose a program costs $100 with no...

Question 7

Suppose a program has 0 initial costs and provides a net benefit of $10 every year forever.If the discount rate is 3%, approximately what is the present value of the program?&#10;A)$10.30&#10;B)$333.33&#10;C)$1,000&#10;D)&#8734;

Accepted Answer

The present value of a perpetuity (a payment that occurs indefinitely) is calculated using the formula PV = P / r, where P is the payment per period and r is the discount rate. Here, P = $10 and r = 0.03 (3%), so PV = $10 / 0.03 = $333.33.

Question 8

A program has initial costs of $1,300.If the benefits of the program are $500 each year and costs are $200 each year, what is the internal rate of return over 5 years?&#10;A).01&#10;B).1&#10;C).05&#10;D).5

Accepted Answer

The internal rate of return (IRR) is the rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. In this case, the initial cost is $1,300, and the net benefit each year is $300 ($500 benefit - $200 cost). Over 5 years, the cash flows can be represented as follows: Year 0: -$1,300, Years 1-5: +$300. The IRR that makes the net present value of these cash flows equal to zero is approximately 5% or 0.05. This can be calculated using financial calculators or software designed for IRR calculations.

Question 9

Assume a project has $500 in initial costs.If annual benefits of the project are $800 and annual costs are $500, using a discount rate of 5%, what is the discounted benefit/cost ratio over 3 years?&#10;A)1.20&#10;B)1.36&#10;C)1.17&#10;D)1.09

Accepted Answer

The answer of Assume a project has $500 in initial...

Deck 7: Net Benefits Over Time and Present Value