Question 1

The interest rate used when we discount a future cash ﬂow to compute its present value is called the discount rate.

Accepted Answer

This statement is true. The discount rate is the rate used to determine how much to discount a future cash flow in order to calculate its value in today's dollars.

Question 2

Compound interest is interest earned on the interest earned in previous periods.

Accepted Answer

Compound interest is calculated based on the principal amount as well as the interest earned in previous periods. Therefore, it is true that compound interest is interest earned on the interest earned in previous periods.

Question 3

A series of equivalent cash ﬂows is called the accumulation factor.

Accepted Answer

A series of equivalent cash flows is called an annuity. The accumulation factor is a factor used to calculate the future value of a single cash inflow.

Question 4

What is the disadvantage of using the tabular method to identify the economic order quantity?

Accepted Answer

The answer of What is the disadvantage of using the...

Question 5

Consider the following items of information: I.The target recovery period. II.The discount rate. III.The timing (i.e., year) of a cash ﬂow. Which of the above items would be needed to calculate the present value of a cash ﬂow?

Accepted Answer

To calculate the present value of a cash flow, you need the discount rate (II) and the timing of the cash flow (III). The target recovery period (I) is not necessary for this calculation.

Question 6

You desire to invest $3,000 at the end of each year for the next ﬁve years to accumulate the funds needed for a down payment on a home.Which table factor(s) should be used to most eﬃciently determine the amount accumulated by the end of the ﬁve-year period?

Accepted Answer

The future value of a $1 annuity factor is used to calculate the future value of a series of equal payments made at regular intervals, such as the $3,000 invested annually.

Question 7

Norton Company has a 12% compound annual interest rate.If the ﬁrm invests $60,000 today, how much will have accumulated by the end of eight years? Use appendix Table 1, Table 2, Table 3 and Table 4.

Accepted Answer

To find the future value of an investment with compound interest, use the formula: FV = PV * (1 + r)^n. Here, PV = $60,000, r = 0.12, and n = 8. FV = $60,000 * (1.12)^8 = $148,560.

Question 8

All other things being equal, which of the following would be the most attractive to an investor?

Accepted Answer

A cash inflow of $10,000 today is the most attractive to an investor because it has the highest present value, assuming a discount rate greater than 0%. The other options require discounting future cash flows, which reduces their attractiveness.

Question 9

The main idea behind the time value of money is that:

Accepted Answer

The time value of money concept recognizes that a dollar received today is worth more than a dollar received at some point in the future. This is because money today can be invested and earn interest or returns, increasing its value over time. Therefore, cash flows received in the distant future are less valuable than cash flows received in the present or near future.

Question 10

You estimate that it will take ﬁve years to complete your college education.Your parents want to invest enough money today at an interest rate of 8% compounded annually to allow you to withdraw $10,000 at the end of each year for the next ﬁve years, with nothing left at the end.The amount of money to invest today is: Use appendix Table 1, Table 2, Table 3 and Table 4.

Accepted Answer

Using Table 1, we can find the interest factor for 8% compounded annually over 5 years to be 1.46933.
Using Table 4, we can find the present value interest factor for an annuity of $1 for 5 years at 8% compounded annually to be 3.99271.
To calculate the amount of money to invest today, we can use the formula: 
Present value = Annual withdrawal amount x Present value interest factor for an annuity
Present value = $10,000 x 3.99271
Present value = $39,927.10
Round up to nearest cent: $39,930.
Therefore, the answer is choice C, $39,930.

Question 11

Uncle Roscoe, a wealthy relative, has given you a choice of receiving $10,000 today or $3,000 at the end of each year for the next four years.Which table factor(s) should be used to most eﬃciently determine the "value" of the $3,000 cash-ﬂow stream?

Accepted Answer

The present value of a $1 annuity factor should be used to determine the value of the cash-flow stream. This is because the question is asking for the present value of a series of cash flows that occur over time (four years), which is exactly what the present value of an annuity factor calculates. The future value of $1 and the present value of $1 factors would not be as useful in this situation.

Question 12

The fundamental concept in a capital-budgeting decision analysis is inﬂation.

Accepted Answer

The fundamental concept in capital-budgeting decision analysis is the evaluation of potential investments or projects to determine their value and impact on a company's financial performance, primarily focusing on cash flows, risk, and return, rather than inflation.

Question 13

The procedure used to compute the present value of a series of cash ﬂows is known as:

Accepted Answer

The procedure used to compute the present value of a series of cash flows is known as discounting. This involves calculating the current worth of future cash flows by accounting for the time value of money, which factors in the potential earning power of the funds if they were invested elsewhere. Compounding, annuity method, present-cost approach, and indexing may all be related to financial calculations, but they are not specifically associated with the computation of present value.

Question 14

You are a sports agent who is representing Jack Lofton, a star football player, in contract negotiations with the New York Landmarks.The Landmarks have offered Lofton a four-year contract, with annual raises and performance bonuses that will result in a growing cash-ﬂow stream for Lofton each year.Which table factor(s) should you use to most eﬃciently determine the "value" of the contract?

Accepted Answer

The answer of You are a sports agent who is...

Question 15

The factor applicable to individual cash ﬂows in a series of equal cash ﬂows is called the:

Accepted Answer

The answer of The factor applicable to individual cash ﬂows...

Question 16

All other things being equal, which of the following would be most attractive to an investor?

Accepted Answer

A cash outflow of $60,000 in six years is most attractive because it allows the investor to retain and potentially earn returns on their capital for a longer period before the outflow occurs, compared to the other options which require earlier or more frequent cash outflows.

Question 17

A series of equal cash ﬂows is called a (n):

Accepted Answer

A series of equal cash flows is an annuity.

Question 18

The procedure used to compute the future value of a series of cash ﬂows is known as:

Accepted Answer

Compounding is the process of calculating the future value of a series of cash flows by applying interest over time.

Question 19

Which of the following choices is closest to the amount of money that must be invested today in order to have $25,000 at the end of four years if the rate of return is 12% compounded annually? Use appendix Table 1, Table 2, Table 3 and Table 4.

Accepted Answer

The future value of $1 invested today at 12% compounded annually for four years is $1.5735. Therefore, to have $25,000 at the end of four years, you would need to invest $25,000/$1.5735 = $15,900 today.

Question 20

Lawson Company invests $60,000 today and has $148,560 by the end of eight years.What is the ﬁrm's compound annual interest rate? Use appendix Table 1, Table 2, Table 3 and Table 4.

Accepted Answer

The compound annual interest rate can be calculated using the formula for future value: FV = PV * (1 + r)^n. Solving for r, we get r = (FV/PV)^(1/n) - 1. Plugging in the values: r = (148,560/60,000)^(1/8) - 1 = 0.12 or 12.00%.

Quiz 13: Inventory Management and Economic Order Quantity (EOQ) Analysis