SMG FE 323 Chapter Notes - Chapter Ch. 8: Net Present Value, Cash Flow, Opportunity Cost
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Question 1 5 pts
0 multiple_choice_question 22046808
The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.
The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.
| zero |
| one |
| one hundred |
| none of the above |
Question 2 5 pts
On a timeline, the space between date 0 and date 1 represents the _______ between dates. Letâs assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.
On a timeline, the space between date 0 and date 1 represents the _______ between dates. Letâs assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.
| dollar amount |
| present value |
| time period |
| future value |
Question 3 5 pts
As the interest rate __________, present value decreases.
As the interest rate __________, present value decreases.
| decreases |
| increases |
| remains unchanged |
| is unrelated |
Question 4 5 pts
The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow
The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow
| difference between |
| product of |
| sum of |
| same as |
Question 5 5 pts
When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.
When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.
| annuity |
| perpetuity |
| interest payment |
| principle payment |
Question 6 5 pts
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0 multiple_choice_question 22047052
There are two basic types of annuities:
There are two basic types of annuities:
| Discounted and compounded annuities |
| Ordinary annuities and annuities due. |
| Future value and present value annuities |
| None of the above |
Question 7 5 pts
The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.
The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.
| consistent |
| dollar |
| annual |
| semi-annual |
Question 8 5 pts
The Net Present Value rule implies that we should compare a projectâs net present value (NPV) to ________
The Net Present Value rule implies that we should compare a projectâs net present value (NPV) to ________
| zero |
| one |
| 100 |
| none of the above |
Question 9 5 pts
To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one yearâs time, how much will you need to donate to endow the party?
The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =
To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one yearâs time, how much will you need to donate to endow the party?
The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =
| $3,750 |
| $37,500 |
| $375,000 |
| $3,750,000 |
Question 10 5 pts
With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.
With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.
| beginning |
| middle |
| end |
| payments are not required |
Iron Mountain Inc. has the opportunity to expand its product line but it will have to invest in a new piece of equipment. Plan A is a robotic machine that will cost $8,580,000 and is expected to result in annual net cash inflows of $1,500,000 over nine years, with zero residual value at the end of nine years. A second piece of equipment, called Plan B, will cost $7,980,000 and is expected to generate net cash inflows of $1,000,000 per year for nine years. Estimated residual value for Plan B is $1,075,000. Iron Mountain uses straight-line depreciation and requires an annual rate of return of 6%.
Note: At a 6% discount rate, the present value of annuity of $1 for 9 years is 6.802, and the present value of $1 for 9 years is 0.592.
Answer the following questions. Each question is worth 1 point.
1. Compute payback period (round answers to one decimal place):
a. Compute payback period for Plan A:
b. Compute payback period for Plan B:
| Tries 0/10 |
2. Compute accounting rate of return (Calculate with three decimal places; for example, enter 11.8% as 0.118):
a. Compute accounting rate of return for Plan A:
b. Compute accounting rate of return for Plan B:
| Tries 0/10 |
For questions 3 and 4, enter as a positive if positive NPV and negative if negative NPV.
3. Compute net present value for Plan A (round answer to the nearest dollar):
| Tries 0/10 |
4. Compute net present value for Plan B (round answer to the nearest dollar):
| Tries 0/10 |
5. What is the Internal Rate of Return (IRR) for Plan A? Enter as a % not decimal; e.g., 8.12 not .0812
Hint: The payback period for Plan A will be the factor to use in the PV of an annuity of $1 tables.
| Tries 0/10 |
