Question 1

Net present value (NPV) is the difference between the present value (PV) of the benefits and the present value (PV) of the costs of a project or investment.

Accepted Answer

NPV is calculated by subtracting the PV of the costs from the PV of the benefits, resulting in a single value that represents the net gain or loss of an investment.

Question 2

The owners of a chain of fast-food restaurants spend $25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $11 million per year for the next five years. If the discount rate is 5.3%, were the owners correct in making the decision to install donut makers?
A) No, as it has a net present value (NPV) of -$4.45 million.
B) No, as it has a net present value (NPV) of -$2.22 million.
C) Yes, as it has a net present value (NPV) of $13.34 million.
D) Yes, as it has a net present value (NPV) of $22.23 million.

Accepted Answer

D) Using financial calculator, enter 11ea84dc_f551_02ad_9a63_5366479079e0_TB1316_11_TB1316_11 11ea84dc_f551_02ae_9a63_916dfdae1dbf_TB1316_11_TB1316_11 11ea84dc_f551_02af_9a63_59028c5c5b94_TB1316_11_TB1316_11 calculate NPV for 11ea84dc_f551_02b0_9a63_ed31a06bb5a0_TB1316_11_TB1316_11

Question 3

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?
A) $531.40 later today, since $1 today is worth more than $1 in one year.
B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested.
C) Neither - both investments have a negative NPV.
D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.

Accepted Answer

D) The NPVs are equal, so that each is the same as $31.40 today.

Question 4

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract?
A) Yes, since net present value (NPV) is positive.
B) It does not matter whether the contract is taken or not, since NPV = 0.
C) Yes, since net present value (NPV) is negative.
D) No, since net present value (NPV) is negative.

Accepted Answer

The net present value (NPV) is calculated by discounting the future cash inflow of $80,000 at the interest rate of 8.5% and comparing it to the current cost of $74,000. The present value of $80,000 in one year is $80,000 / (1 + 0.085) = $73,722.63, which is less than $74,000, resulting in a negative NPV.

Question 5

An orcharder spends $110,000 to plant pomegranate bushes. It will take four years for the bushes to provide a usable crop. He estimates that every year for 20 years after that he will receive a crop worth $10,500 per year. If the discount rate is 9%, what is the net present value (NPV) of this investment?
A) -$42,098
B) -$21,049
C) $8420
D) $12,629

Accepted Answer

A) Using financial calculator, enter 11ea84dc_f550_b487_9a63_1727e3f68c2b_TB1316_11_TB1316_11 11ea84dc_f550_b488_9a63_77336761c022_TB1316_11_TB1316_11 11ea84dc_f550_b489_9a63_c5ed8c502c9e_TB1316_11_TB1316_11 11ea84dc_f550_b48a_9a63_07e3080d6fcb_TB1316_11_TB1316_11 11ea84dc_f550_b48b_9a63_6d6c19fe00be_TB1316_11_TB1316_11 calculate NPV for 11ea84dc_f550_db9c_9a63_536a2d59cc53_TB1316_11_TB1316_11

Question 6

The present value (PV) of an investment is ________.
A) the amount that an investment would yield if the benefit were realized today
B) the difference between the cost of the investment and the benefit of the investment in dollars today
C) the amount you need to invest at the current interest rate to re-create the cash flow from the investment
D) the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate

Accepted Answer

The answer of The present value (PV) of an investment...

Question 7

Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment?
A) 1%
B) 2%
C) 3%
D) 4%

Accepted Answer

C) 11ea84dc_f54f_ca24_9a63_7d69adfa287e_TB1316_11_TB1316_11 = 3%

Question 8

Use the information for the question(s) below. 
-The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. If her discount rate is 6%, should she accept the project?
A) Yes, because the NPV is positive at that rate.
B) No, because the NPV is negative at that rate.
C) No, because the NPV is positive at that rate.
D) Cannot be determined from the information given.

Accepted Answer

B) The point at which the graph line cuts the Discount Rate axis is in the negative NPV region.

Question 9

Use the information for the question(s) below. 
-The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. At what discount rate does her decision to renovate become untenable?
A) 3.0%
B) 3.3%
C) 4.0%
D) 4.8%

Accepted Answer

B) The point at which the graph cuts the Discount Rate axis

Question 10

Should personal preferences for cash today versus cash tomorrow play a role in the net present value (NPV) decision-making process?

Accepted Answer

The answer of Should personal preferences for cash today versus...

Question 11

Preference for cash today versus cash in the future in part determines net present value (NPV).

Accepted Answer

The answer of Preference for cash today versus cash in...

Question 12

Peter has a business opportunity that requires him to invest $10,000 today, and receive $12,000 in one year. He can either use $10,000 that he already has for this investment or borrow the money from his bank at an interest rate of 10%. However, the $10,000 he has right now is needed for urgent repairs to his home, repairs that will cost at least $15,000 if he delays them for a year. What is the best alternative for Peter out of the following choices?
A) No, since the net present value (NPV) of the investment, should he take it, is less than the net present value (NPV) of the home repairs if he delays them for one year.
B) Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan.
C) Yes, since the net present value (NPV) of the investment is greater than zero he can invest the $10,000 in the business opportunity, and then next year use this money plus the benefit from this money to make the necessary home repairs.
D) Yes, since the net present value (NPV) of the investment, should he take it, is greater than the net present value (NPV) of the home repairs if he delays them for one year.

Accepted Answer

B is correct because Peter can borrow the $10,000 at a 10% interest rate, which means he would owe $11,000 in one year. Investing the borrowed $10,000 to receive $12,000 in a year gives him a profit of $1,000 after repaying the loan, while still allowing him to use his own $10,000 for the urgent home repairs. This option effectively manages both his need for home repairs and the desire to take advantage of the business opportunity without incurring a higher cost for delayed repairs.

Question 13

An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?
A) $498,597
B) $747,896
C) $797,756
D) $847,615

Accepted Answer

A) 11ea84dc_f550_8d76_9a63_37824c4b17a3_TB1316_00_TB1316_00 = $498,597

Question 14

The Net Present Value rule implies that we should compare a project's net present value (NPV) to zero.

Accepted Answer

The Net Present Value rule states that if the NPV of a project is positive, the project is expected to be profitable, and if it is negative, then the project is expected to result in a net loss. Therefore, we should compare the NPV to zero, as a positive NPV means that the project will generate a return greater than the required rate of return, and a negative NPV implies that the project will not meet the required rate of return.

Question 15

A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year?
A) $667
B) $1333
C) $13,333
D) $14,000

Accepted Answer

A) $14,000 / (1 + 0.05) = $13,333.3333;
$14,000 - $13,333 = $667

Question 16

A delivery service is buying 600 tires for its fleet of vehicles. One supplier offers to supply the tires for $80 per tire, payable in one year. Another supplier will supply the tires for $20,000 down today, then $45 per tire, payable in one year. What is the difference in PV between the first and the second offer, assuming interest rates are 8.1%?
A) -$860
B) -$229
C) -$574
D) $860

Accepted Answer

C) -$80 × 600 = $48,000;
PV1 = 48,000 / (1 + 0.081) = $44,403.3302;
-$45 × 600 = $27,000;
PV2 = -20,000 + $27,000 / (1 + 0.081) = $44,976.8733;
PV1 - PV2 = $44,403.3302 - $44,976.8733 = -$574

Question 17

A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one year's time it will cost $93,200 to harvest the crop. If the crop will be worth $350,000, and the interest rate is 7%, what is the net present value (NPV) of this investment?
A) $240,000
B) $87,103
C) $0
D) $567,103

Accepted Answer

C) 11ea84dc_f54f_f135_9a63_9bf566e803f3_TB1316_11_TB1316_11 - 240,000 = $0

Question 18

What is the Net Present Value rule?

Accepted Answer

The answer of What is the Net Present Value rule?...

Question 19

A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV) of this investment?
A) $10,048
B) $11,053
C) $16,077
D) $14,250

Accepted Answer

A) $109,250 / (1 + 0.04) = $105,048.077;
$105,048.077 - $95,000 = $10,048

Question 20

Most corporations measure the value of a project in terms of which of the following?
A) discount value
B) discount factor
C) future value (FV)
D) present value (PV)

Accepted Answer

Most corporations measure the value of a project based on its present value (PV) - the value of the project today, taking into account the time value of money and expected cash flows. This allows them to compare the value of different projects and determine which ones are most valuable to pursue. Discount value, discount factor, and future value (FV) are not typically used to measure the value of a project.

Quiz 8: Investment Decision Rules

Net present value (NPV) is the difference between the present value (PV) of the benefits and the present value (PV) of the costs of a project or investment.

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract?

The present value (PV) of an investment is ________.

Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment?

Should personal preferences for cash today versus cash tomorrow play a role in the net present value (NPV) decision-making process?

Preference for cash today versus cash in the future in part determines net present value (NPV).

The Net Present Value rule implies that we should compare a project's net present value (NPV) to zero.

A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year?

A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one year's time it will cost $93,200 to harvest the crop. If the crop will be worth $350,000, and the interest rate is 7%, what is the net present value (NPV) of this investment?

What is the Net Present Value rule?

A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV) of this investment?

Most corporations measure the value of a project in terms of which of the following?