Question 1

You are offered an investment opportunity in which you will receive $23,750 today in exchange for paying $25,000 in one year.Suppose the risk-free interest rate is 6% per year.Should you take this project? The NPV for this project is closest to:
A) Yes; NPV = $165
B) No; NPV = $165
C) Yes; NPV = -$165
D) No; NPV = -$165

Accepted Answer

A) NPV = 23,750 - 25,000/(1.06) = 165, since NPV > 0 accept the project

Question 2

Which of the following statements regarding Net Present Value (NPV)is incorrect?
A) The NPV represents the value of the project in terms of cash today.
B) Good projects will have a positive NPV.
C) The NPV of a project is the difference between the present value of its benefits and the present value of its costs.
D) When faced with a set of alternatives, choose the one with the lowest NPV in order to minimize the preset value of costs.

Accepted Answer

This statement is incorrect because when faced with a set of alternatives, one should choose the one with the highest NPV in order to maximize the present value of benefits. Therefore, the best choice would be to select option D.

Question 3

Which of the following statements regarding the NPV decision rule is false?
A) Reject projects with a NPV of zero, as accepting them is equivalent to reducing firm value.
B) When faced with a set of alternatives, choose the one with the highest NPV.
C) Accept those projects with a positive NPV, as accepting them is equivalent to receiving their NPV in cash today.
D) Reject those projects with a negative NPV..

Accepted Answer

The statement "Reject projects with a NPV of zero, as accepting them is equivalent to reducing firm value" is false. Projects with a NPV of zero should be accepted as they are expected to generate exactly enough cash flows to recover the initial investment, and accepting them will not reduce firm value.

Question 4

You are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today.Suppose the risk-free interest rate is 6% per year.Should you take this project? The NPV for this project is closest to:
A) Yes; NPV = $165
B) No; NPV = $165
C) Yes; NPV = -$165
D) No; NPV = -$165

Accepted Answer

D) NPV = -23,750 + 25,000 / 1.06 = -165, since NPV < 0 you should reject project

Question 5

When we express the value of a cash flow or series of cash flows in terms of dollars today,we call it the ________ of the investment.If we express it in terms of dollars in the future,we call it the ________.
A) present value; future value
B) future value; present value
C) ordinary annuity; annuity due
D) discount factor; discount rate

Accepted Answer

Present value represents the current value of a cash flow or series of cash flows, while future value represents the value of those cash flows at a future point in time. Therefore, the answer is A. Ordinary annuity and annuity due are types of cash flows, not measures of value. Discount factor and discount rate are related to the calculation of present value, but are not themselves measures of value.

Question 6

Use the following information to answer the question(s) below.
The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.
-If the discount rate is 15%,then which alternative should the owner choose:
A) #1
B) #2
C) #3
D) either #1 or #2
E) either #1 or #3

Accepted Answer

A) NPV_#1 = $350,000 (No TVM here) NPV_#2 = -50,000 + 11ea7e54_8ba4_fea6_ba34_a32f6255b600_TB1620_11 = 341,304 NPV_#3= -40,000 + 11ea7e54_8ba4_fea7_ba34_1140076d4cc8_TB1620_11 = 329,565 Correct answer is #1 with NPV of 350,000.

Question 7

Use the following information to answer the question(s) below.
The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.
-If the discount rate is 15%,the alternative with the lowest NPV is:
A) #1 with an NPV of approximately $350,000
B) #2 with an NPV of approximately $341,300
C) #3 with an NPV of approximately $329,570
D) #2 with an NPV of approximately $400,000
E) None of the above

Accepted Answer

C) NPV_#1 = $350,000 (No TVM here) NPV_#2 = -50,000 + 11ea7e54_8ba4_8974_ba34_e3429db68498_TB1620_11 = 341,304 NPV_#3= -40,000 + 11ea7e54_8ba4_8975_ba34_af8793fd8b95_TB1620_11 = 329,565 Correct answer is #2 with NPV of 329,565.

Question 8

Which of the following formulas regarding NPV is incorrect?
A) NPV + PV(benefits) = PV(Cost)
B) NPV + PV(costs) = PV(benefits)
C) NPV = PV(All project cash flows)
D) All of the above

Accepted Answer

The correct formula for NPV is NPV = PV(benefits) - PV(costs). Therefore, option A is incorrect because it suggests that NPV plus the present value of benefits equals the present value of costs, which is not accurate.

Question 9

Use the table for the question(s) below.
 
-If the risk-free interest rate is 10%,then the NPV for Eenie is closest to:
A) -3.64
B) 2.73
C) 3.18
D) 3.64

Accepted Answer

D) NPV = -10 + 15 / 1.10 = 3.64

Question 10

Use the following information to answer the question(s) below.
The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.
-If the discount rate is 15%,the alternative with the highest NPV is:
A) #1 with an NPV of approximately $350,000
B) #2 with an NPV of approximately $341,300
C) #3 with an NPV of approximately $329,570
D) #2 with an NPV of approximately $400,000
E) None of the above

Accepted Answer

A) NPV_#1 = $350,000 (No TVM here) NPV_#2 = -50,000 + 11ea7e54_8ba3_ed32_ba34_51731736b6c6_TB1620_11 = 341,304 NPV_#3= -40,000 + 11ea7e54_8ba4_1443_ba34_f1ddbb355a36_TB1620_11 = 329,565 Correct answer is #1 with NPV of 350,000.

Question 11

You have an investment opportunity in Germany that requires an investment of $250,100 today and will produce a cash flow of €208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is €0.78 to $1.00.What is the NPV of this project? Would you take the project?
A) NPV = -$100; No
B) NPV = $100; Yes
C) NPV = $2,358; Yes
D) NPV = $3,650; Yes

Accepted Answer

A) NPV = -250,100 + (€208,650 / 1.07) × $1.00 / €0.78 = -$100, so since NPV is not > 0, reject

Question 12

Use the information below to answer the following question(s):
The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.
-If the interest rate is 7%,the NPV of alternative # 3 is closest to:
A) $350,000
B) $357,196
C) $370,561
D) $401,121

Accepted Answer

B) NPV = -40,000 +(75,000 + 350,000)/1.07 = $357,196

Question 13

Use the information below to answer the following question(s):
The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.
-If the interest rate is 7%,the NPV of alternative #1 is closest to:
A) $350,000
B) $357,000
C) $375,500
D) $400,000

Accepted Answer

A) There is no TVM for alternative # 1. The NPV = $350,000.

Question 14

Use the information below to answer the following question(s):
The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.
-If the interest rate is 7%,the NPV of alternative #2 is closest to:
A) $350,000
B) $357,196
C) $370,561
D) $401,121

Accepted Answer

C) NPV = -50,000 +(100,000 + 350,000)/1.07 = $370,561

Question 15

You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 6% and the current competitive exchange rate is €0.78 to $1.00.What is the NPV of this project? Would you take the project?
A) NPV = 0; No
B) NPV = -$2,358; No
C) NPV = $2,358; Yes
D) NPV = $13,650; Yes

Accepted Answer

C) NPV = -250,000 + (€208,650 / 1.06) × $1.00 / €0.78 = $2358, so since NPV > 0, accept

Question 16

Use the information below to answer the following question(s):
The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.
-If the interest rate is 7%,the alternative with the lowest NPV is:
A) Alternative #1 with an NPV of approximately $350,000
B) Alternative #2 with an NPV of approximately $370,561
C) Alternative #3 with an NPV of approximately $357,196
D) Alternative #2 with an NPV of approximately $380,561

Accepted Answer

A) There is no TVM for alternative # 1. The NPV = $350,000.
Alternative # 2: NPV = -50,000 +(100,000 + 350,000)/1.07 = $370,561
Alternative # 3: NPV = -40,000 +(75,000 + 350,000)/1.07 = $357,196
Thus Alternative # 1 has the lowest NPV

Question 17

Suppose you will receive $500 in one year and the risk-free interest rate (r_f)is 5%.The equivalent value today is closest to: A) $475 B) $476 C) $500 D) $525

Accepted Answer

B) $500 / (1.05) = $476

Question 18

Use the information below to answer the following question(s):
The owner of the Krusty Krab is considering selling his restaurant and retiring. An investor has offered to buy the Krusty Krab for $350,000 whenever the owner is ready for retirement. The owner is considering the following three alternatives:
1. Sell the restaurant now and retire.
2. Hire someone to manage the restaurant for the next year and retire. This will require the owner to spend $50,000 now, but will generate $100,000 in profit next year. In one year the owner will sell the restaurant.
3. Scale back the restaurant's hours and ease into retirement over the next year. This will require the owner to spend $40,000 on expenses now, but will generate $75,000 in profit at the end of the year. In one year the owner will sell the restaurant.
-If the interest rate is 7%,the alternative with the highest NPV is:
A) Alternative #1 with an NPV of approximately $350,000
B) Alternative #2 with an NPV of approximately $370,561
C) Alternative #3 with an NPV of approximately $357,196
D) Alternative #2 with an NPV of approximately $380,561

Accepted Answer

B) There is no TVM for alternative # 1. The NPV = $350,000.
Alternative # 2: NPV = -50,000 +(100,000 + 350,000)/1.07 = $370,561
Alternative # 3: NPV = -40,000 +(75,000 + 350,000)/1.07 = $357,196

Question 19

Rearden Metal needs to order a new blast furnace that will be delivered in one year.The $1,000,000 price for the blast furnace is due in one year when the new furnace is installed.The blast furnace manufacturer offers Rearden Metal a discount of $50,000 if they pay for the furnace now.If the interest rate is 7%,then the NPV of paying for the furnace now is closest to:
A) ($15,421)
B) $15,421
C) ($46,729)
D) $46,729

Accepted Answer

The answer of Rearden Metal needs to order a new...

Question 20

If we use future value rather than present value to decide whether to make an investment,
A) we will make a bad decision, since the future value will always be higher if the discount rate is positive.
B) we will make a bad decision, since the future value will always be lower if the discount rate is positive.
C) we will make the same decision using either future value or present value.
D) There is not enough information given to answer the question.

Accepted Answer

The answer of If we use future value rather than...

Quiz 3: Arbitrage and Financial Decision Making

You are offered an investment opportunity in which you will receive $23,750 today in exchange for paying $25,000 in one year.Suppose the risk-free interest rate is 6% per year.Should you take this project? The NPV for this project is closest to:

Which of the following statements regarding Net Present Value (NPV) is incorrect?

Which of the following statements regarding the NPV decision rule is false?

You are offered an investment opportunity in which you will receive $25,000 in one year in exchange for paying $23,750 today.Suppose the risk-free interest rate is 6% per year.Should you take this project? The NPV for this project is closest to:

When we express the value of a cash flow or series of cash flows in terms of dollars today,we call it the of the investment.If we express it in terms of dollars in the future,we call it the .

Which of the following formulas regarding NPV is incorrect?

Use the table for the question(s) below. -If the risk-free interest rate is 10%,then the NPV for Eenie is closest to:

Suppose you will receive $500 in one year and the risk-free interest rate (r_f) is 5%.The equivalent value today is closest to:

If we use future value rather than present value to decide whether to make an investment,