Question 1

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

A

Question 2

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) 11eaabab_c09b_4569_b90e_a5987ea1cde7_TB5536_11 = $498,597

Question 3

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) 11eaabab_c09a_f747_b90e_c9ba92ccc431_TB5536_11 = 3%

Question 4

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 5

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) 11eaabab_c09b_1e58_b90e_4b025e6c040d_TB5536_11 - 240,000 = $0

Question 6

What is the Net Present Value rule?

Accepted Answer

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

Question 7

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 8

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 9

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 11eaabab_c09b_9390_b90e_dda7fbd5d661_TB5536_11 11eaabab_c09b_9391_b90e_a1f4583a0de5_TB5536_11 11eaabab_c09b_baa2_b90e_a9f3d2dc4140_TB5536_11 calculate NPV for 11eaabab_c09b_baa3_b90e_af58e9eb3f98_TB5536_11

Question 10

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 11

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 12

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

Accepted Answer

The NPV rule states that a project is only acceptable if its NPV is greater than or equal to zero. Therefore, we should compare a project's NPV to zero.

Question 13

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 answer of A security firm is offered $80,000 in...

Question 14

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

This is the definition of NPV, which calculates the value of an investment by subtracting the present value of expected costs from the present value of expected benefits.

Question 15

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 16

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 17

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 18

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 19

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 11eaabab_c09b_6c7a_b90e_bfa03ab4446b_TB5536_11 11eaabab_c09b_6c7b_b90e_436fece51269_TB5536_11 11eaabab_c09b_6c7c_b90e_b75a3982ddc7_TB5536_11 11eaabab_c09b_6c7d_b90e_cf645d986d80_TB5536_11 11eaabab_c09b_6c7e_b90e_db1b1fdeb144_TB5536_11 calculate NPV for 11eaabab_c09b_938f_b90e_e9bc7ce5ca0c_TB5536_11

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 in terms of its present value (PV), which calculates the current value of future cash flows that the project is expected to generate. This helps assess whether the project will generate a positive return on investment and whether it is worth pursuing. Option A (discount value) and option B (discount factor) are not directly used in measuring the value of a project. Option C (future value) is also not commonly used as it does not take into account the time value of money.

Quiz 8: Investment Decision Rules

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?

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

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?

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?

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

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?

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?

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

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