Question 1

Use the table for the question(s)below.
 
-If the interest rate is 10%,then which investment(s),if any,would you take and why?

Accepted Answer

The answer of Use the table for the question(s)below.
 
-If...

Question 2

Damon is contemplating taking a deal with his uncle,who is a very successful entrepreneur.He must pay his uncle $50,000 this year and an additional $50,000 at the end of both the fifth and tenth year.This would allow him to receive a perpetual annual cashflow of $12,000.What is the NPV of this offer if the interest rate is 10%?

Accepted Answer

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Question 3

You have been offered the following investment opportunity: if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Assuming that you could otherwise earn 10% per year on your money,the net present value (NPV)for this opportunity is closest to:

Accepted Answer

We can calculate the NPV using the formula NPV = (-Initial Investment) + (Cash flow year 1/1+r^1) + (Cash flow year 2/1+r^2) + (Cash flow year 3/1+r^3). Plugging in the numbers, we get NPV = (-2500) + (1000/1.1) + (1000/1.1^2) + (1000/1.1^3) = -$13.22, which is closest to option C. Since the NPV is negative, it means that the investment opportunity is not worth it as we could earn more than $2500 by investing our money elsewhere.

Question 4

Alex buys a consol (perpetual bond)for $90,000.This consol promises him a fixed cash flow of $10,000 every year,forever,starting at the end of the year.If the current market rate is 10%,what is the net present value of his purchase?

Accepted Answer

The answer of Alex buys a consol (perpetual bond)for $90,000.This...

Question 5

If $10,000 is invested in a certain business at the start of the year,the investor will receive $3000 at the end of each of the next four years.What is the net present value (NPV)of this business opportunity if the interest rate is 7% per year?

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Question 6

An investment of $6000 at the start of the year will pay $1000 at the end of the year for a set number of years.What is the minimum number of years these payments must be made for if the investment is to be worthwhile,given that the interest rate is 6%?

Accepted Answer

To determine whether the investment is worthwhile, we need to calculate the future value of the investment at the end of the payment period. Using the formula for future value of an annuity:

FV = PMT x [(1 + r)^n - 1]/r

Where FV is the future value, PMT is the payment amount, r is the interest rate, and n is the number of payment periods.

Plugging in the numbers, we get:

$6000 = $1000 x [(1 + 0.06)^n - 1]/0.06

Simplifying, we get:

6 = (1.06^n - 1)/0.06

Multiplying both sides by 0.06, we get:

0.36 = 1.06^n - 1

Adding 1 to both sides, we get:

1.36 = 1.06^n

Taking the natural log of both sides, we get:

ln(1.36) = n x ln(1.06)

Dividing both sides by ln(1.06), we get:

n = ln(1.36)/ln(1.06) = 8.16

Since the number of payment periods has to be a whole number, the minimum number of years needed to make the investment worthwhile is 8 years (option C).

Question 7

A business is deciding whether to give an end-of-year bonus of $5000 each year for the next four years to an employee,in order to increase the number of sales that employee makes.What is the minimum extra profit the employee must generate this year for the bonus to be worthwhile over the next four years,if the discount rate is 7%?

Accepted Answer

The present value of the bonuses over four years must be calculated using the formula for the present value of an annuity. The present value of $5000 per year for four years at a 7% discount rate is approximately $16,936. Therefore, the employee must generate at least this amount in extra profit for the bonus to be worthwhile.

Question 8

Why must a growing perpetuity have a growth rate less than the discount rate?

Accepted Answer

The answer of Why must a growing perpetuity have a...

Question 9

Micha offers to pay an investor of a lump sum in her business today $1000 in one year's time,$2000 in two years' time,$3000 in three years' time and $4000 in 4 years' time.If the interest rate is 8%,what is the minimum value of the lump sum she must ask of an investor if the net present value (NPV)is to be equal to zero?

Accepted Answer

The answer of Micha offers to pay an investor of...

Question 10

What is the interest rate if the NPV= $0?

Accepted Answer

The answer of  What is the interest rate if...

Question 11

Suppose a second entrepreneur approaches Joe and offers him $250,000 today for the business.Should Joe accept the new entrepreneur's offer or stick with the original offer of $100,000 and the series of payments over three years? Why?

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The answer of Suppose a second entrepreneur approaches Joe and...

Question 12

Kresta can invest in a scheme which will pay $10,000 at the end of each of the next four years.She must make an investment at the start of the first year of $32,000.Should she make this investment,given that the interest rate is 7%?

Accepted Answer

To determine whether Kresta should make the investment, we need to calculate the net present value (NPV) of the cash flows.

Using a financial calculator or spreadsheet, we can calculate the NPV as follows:

CF0 = -32000 (initial investment) 
CF1-4 = 10000 
I/Y = 7% 
NPV = $5,430.40

Since the NPV is positive, it means that the investment is expected to generate a return greater than the required rate of return (7%). Therefore, Kresta should make the investment.

Question 13

An investor can invest $1000 at the start of a certain year,then $1000 the end of that year and the next year in a certain business.The business guarantees that the investor will receive a payment at the end of the year in five years.What is the future value (FV)of that payment if the investor is to break even,given that the discount rate over those five years is 6% per year?

Accepted Answer

In order for the investor to break even, the present value of the three investments ($1000 at the start, $1000 at the end of year 1, and $1000 at the end of year 2) must equal the present value of the future payment received in year 5. 
Using the formula for present value of a future payment: PV = FV/(1+r)^n 
where PV is the present value, FV is the future value, r is the interest rate or discount rate, and n is the number of years,
we can find the present value of the three investments as follows:

PV1 = $1000 
PV2 = $1000/(1+0.06) = $943.40 
PV3 = $1000/(1+0.06)^2 = $890.00

The total present value of the investments is: 
PV_total = PV1 + PV2 + PV3 = $2833.40

This must equal the present value of the future payment received in year 5, so we can solve for the future value (FV) as follows:
PV_total = FV/(1+0.06)^5 
FV = PV_total x (1+0.06)^5 = $3791.54

Rounding this to the nearest dollar gives the answer of $3792, which is choice D.

Question 14

Which of the following investments has the highest net present value (NPV),given that the interest rate is 5.5%?

Accepted Answer

Option E has the highest NPV because payments are made at the beginning of each year, which means each payment is discounted for one less year compared to the other options where payments are made at the end of each year. This results in a higher present value for the cash flows.

Question 15

Allan decides to invest in a new company which would allow him to receive $250,000 at the end of each year for the next 5 years.He purchases 100,000 shares at the price of $6.50.What is the NPV of a single share,if the interest rate is 15% per year?

Accepted Answer

First, we calculate the present value of the 5-year annuity using the formula:
PV = C * (1 - (1 + r)^-n) / r
where PV is the present value, C is the annual cash flow, r is the discount rate, and n is the number of years.

PV = 250,000 * (1 - (1 + 0.15)^-5) / 0.15
PV = 827,974.38

Next, we calculate the total cost of purchasing 100,000 shares:
Cost = 100,000 * 6.50
Cost = 650,000.00

Finally, we calculate the net present value of a single share using the formula:
NPV = (PV - Cost) / Number of Shares

NPV = (827,974.38 - 650,000.00) / 100,000
NPV = 1.7797438

Therefore, the NPV of a single share is $1.78, which is closest to answer choice B ($1.88).

Question 16

A business promises to pay the investor of $2000 today a payment of $500 in one year's time,$1000 in two years' time and $1000 in three years' time.What is the present value of this business opportunity if the interest rate is 5% per year?

Accepted Answer

The answer of A business promises to pay the investor...

Question 17

Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years.He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year.What is the net present value (NPV)of this investment if the interest rate is 4%?

Accepted Answer

The answer of Salvatore has the opportunity to invest in...

Question 18

What is the Net Present Value of this investment,given that the interest rate is 5%?

Accepted Answer

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

Question 19

When the net present value (NPV)of an investment is positive,the benefits exceed the costs and the investment should be made.

Accepted Answer

A positive NPV indicates that the present value of the expected cash inflows exceeds the present value of the expected cash outflows, which means the investment will add value to the company and should be made.

Question 20

A bank is negotiating a loan.The loan can either be paid off as a lump sum of $100,000 at the end of five years,or as equal annual payments at the end of each of the next five years.If the interest rate on the loan is 10%,what annual payments should be made so that both forms of payment are equivalent?

Accepted Answer

The answer of A bank is negotiating a loan.The loan...

Quiz 4: The Time Value of Money

Use the table for the question(s)below. -If the interest rate is 10%,then which investment(s),if any,would you take and why?

You have been offered the following investment opportunity: if you pay $2500 today,you will receive $1000 at the end of each of the next three years.Assuming that you could otherwise earn 10% per year on your money,the net present value (NPV) for this opportunity is closest to:

Alex buys a consol (perpetual bond) for $90,000.This consol promises him a fixed cash flow of $10,000 every year,forever,starting at the end of the year.If the current market rate is 10%,what is the net present value of his purchase?

If $10,000 is invested in a certain business at the start of the year,the investor will receive $3000 at the end of each of the next four years.What is the net present value (NPV) of this business opportunity if the interest rate is 7% per year?