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2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3) At a discount rate of 5 percent, which one of the following is the correct formula for computing the PV of $1 to be received one year from today? A) $1/1.05 B) $1 C) $1 × 1.05 D) $1 × 1.052 E) $1/1.052 Answer: A Difficulty: 1 Easy Section: 4.1 Valuation: The One-Period Case Topic: Present value - single cash flow Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 4) What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows? A) There will be no effect on the PV. B) The PV will change but the direction of the change is unknown. C) The PV will remain the same as the timing of the cash flows must change also. D) The PV will increase. E) The PV will decrease. Answer: E Difficulty: 1 Easy Section: 4.2 The Multiperiod Case Topic: Present value - multiple cash flows Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation
3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5) You are considering two projects. Project A has projected cash flows of $6,500, $4,500, and $2,500 for the next three years, respectively. Project B has projected cash flows of $2,500, $4,500, and $6,500 for the next three years, respectively. Assuming both projects have the same initial cost, you know that: A) there are no conditions under which the projects can have equal values. B) Project B has a higher net present value than Project A. C) Project A is more valuable than Project B given a positive discount rate. D) both projects offer the same rate of return. E) both projects have equal net present values at any discount rate. Answer: C Difficulty: 1 Easy Section: 4.2 The Multiperiod Case Topic: Present value - multiple cash flows Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation 6) An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the ________ rate. A) stated interest B) compound interest C) effective annual D) periodic interest E) daily interest Answer: C Difficulty: 1 Easy Section: 4.3 Compounding Periods Topic: Annual, holding period, and effective rates Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation
4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 7) The interest rate charged per period multiplied by the number of periods per year is called the ________ rate. A) effective annual B) annual percentage C) periodic interest D) compound interest E) daily interest Answer: B Difficulty: 1 Easy Section: 4.3 Compounding Periods Topic: Annual, holding period, and effective rates Bloom's: Remember AACSB: Reflective Thinking Accessibility: Keyboard Navigation 8) The annual percentage rate: A) considers interest on interest. B) is the actual cost of a loan with monthly payments. C) is higher than the effective annual rate when interest is compounded quarterly. D) is the interest rate charged per period divided by (1 + n), when n is the number of periods per year. E) equals the effective annual rate when the interest on an account is designated as simple interest. Answer: E Difficulty: 1 Easy Section: 4.3 Compounding Periods Topic: Annual, holding period, and effective rates Bloom's: Understand AACSB: Reflective Thinking Accessibility: Keyboard Navigation