Question

In: Finance

A project earns $10,000 a year for five years. The present total value of the project...

  1. A project earns $10,000 a year for five years. The present total value of the project is (using a discount rate of 5.75%):
    a) $50,000
    b) more than $50,000

    c) less than $50,000

  2. The NPV of a project is $1,012, using a discount rate of 9.75% p.a. The rate of return on this project is:

    a) 9.75%
    b) more than 9.75% c) less than 9.75%

  3. The NPV of a project is 0, using a discount rate of 10%. The rate of return on this project is:

    1. a) 10%

    2. b) more than 10%

    3. c) lessthan10%

  4. A machine has a salvage value of $5,000. Using a discount rate of 5% p.a., the present value of the salvage value is:

    a) $5,000
    b) more than $5,000 c) lessthan$5,000

  5. The capital cost of a project that lasts for five years is $50,000. Using a discount rate of 2.95%, the annual worth of the capital cost is:
    a) $10,000
    b) more than $10,000

    c) lessthan$10,000

  6. A machine has a salvage value of $5,000 after five years. Using a discount rate of 2.95% p.a., the annual worth of the salvage value is:
    a) $1,000
    b) more than $1,000

    c) lessthan$1,000

  7. The NAW of a project is 0, using a discount rate of 6%. The rate of return on this project is:

    1. a) 6%

    2. b) more than 6%

    3. c) lessthan6%

Solutions

Expert Solution

Answer to Question 1:

“less than $50,000”

Annual Cash Inflow = $10,000
Period = 5 years
Discount Rate = 5.75%

Present Value = $10,000/1.0575 + $10,000/1.0575^2 + $10,000/1.0575^3 + $10,000/1.0575^4 + $10,000/1.0575^5
Present Value = $10,000 * (1 - (1/1.0575)^5) / 0.0575
Present Value = $10,000 * 4.241167
Present Value = $42,411.67

Answer to Question 2:

“more than 9.75%”

If NPV of a project is greater than zero at discount rate, then required return is greater than the discount rate.
If NPV of a project is smaller than zero at discount rate, then required return is less than the discount rate.
If NPV of a project is equal to zero at discount rate, then required return is equal to the discount rate.

Answer to Question 3:

“10%”

If NPV of a project is greater than zero at discount rate, then required return is greater than the discount rate.
If NPV of a project is smaller than zero at discount rate, then required return is less than the discount rate.
If NPV of a project is equal to zero at discount rate, then required return is equal to the discount rate.

Answer to Question 4:

“less than $5,000”

Salvage Value = $5,000

Present value is always smaller than the future value.


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