Question

1. An increase in the discount rate:

A) will increase the present value of future cash flows.

B) will have no effect on net present value.

C) will reduce the present value of future cash flows.

D) is one method of compensating for reduced risk.

2. Suddeth Corporation has entered into a 6 year lease for a building it will use as a warehouse. The annual payment under the lease will be $2,468. The first payment will be at the end of the current year and all subsequent payments will be made at year-ends. If the discount rate is 5%, the present value of the lease payments is closest to (Ignore income taxes.):

See separate handout to determine the appropriate discount factor(s) using table.

A) $12,528

B) $14,103

C) $14,808

D) $11,050

3. At an interest rate of 14%, approximately how much would you need to invest today if you wanted to have $2,000,000 in 10 years? (Ignore income taxes.)

See separate handout to determine the appropriate discount factor(s) using table.

A) $383,436

B) $540,000

C) $740,741

D) $1,043,200

4. A company wants to have $20,000 at the end of a ten-year period by investing a single sum now. How much needs to be invested in order to have the desired sum in ten years, if the money can be invested at 12%? (Ignore income taxes.)

See separate handout to determine the appropriate discount factor(s) using table.5

A) $3,254.68

B) $3,539.82

C) $6,440

D) $7,720

5. Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's:

	Payback	Net Present Value	Internal Rate of Return
A)	No	No	No
B)	Yes	Yes	Yes
C)	No	Yes	Yes
D)	No	Yes	No	THIS IS THE handout to determine the appropriate discount factor(s) using table.5 Time Value of Money Factor for the Present Value of a Sum PV =FV * TVM Factor Present Value of a Sum = FV * 1/ (1 + i) n 2% 3% 4% 5% 6% 8% 10% 12% 1 0.9804 0.9709 0.9615 0.9524 0.9434 0.9259 0.9091 0.8929 2 0.9612 0.9426 0.9246 0.9070 0.8900 0.8573 0.8264 0.7972 3 0.9423 0.9151 0.8890 0.8638 0.8396 0.7938 0.7513 0.7118 4 0.9238 0.8885 0.8548 0.8227 0.7921 0.7350 0.6830 0.6355 5 0.9057 0.8626 0.8219 0.7835 0.7473 0.6806 0.6209 0.5674 6 0.8880 0.8375 0.7903 0.7462 0.7050 0.6302 0.5645 0.5066 7 0.8706 0.8131 0.7599 0.7107 0.6651 0.5835 0.5132 0.4523 8 0.8535 0.7894 0.7307 0.6768 0.6274 0.5403 0.4665 0.4039 9 0.8368 0.7664 0.7026 0.6446 0.5919 0.5002 0.4241 0.3606 10 0.8203 0.7441 0.6756 0.6139 0.5584 0.4632 0.3855 0.3220 20 0.6730 0.5537 0.4564 0.3769 0.3118 0.2145 0.1486 0.1037 25 0.6095 0.4776 0.3751 0.2953 0.2330 0.1460 0.0923 0.0588 Time Value of Money Factor for the Present Value of an Annuity PV = Annuity * TVM Factor Present Value of an Annuity = X*((1-(1/(1+i)^n))/i) 2% 3% 4% 5% 6% 8% 10% 12% 1 0.9804 0.9709 0.9615 0.9524 0.9434 0.9259 0.9091 0.8929 2 1.9416 1.9135 1.8861 1.8594 1.8334 1.7833 1.7355 1.6901 3 2.8839 2.8286 2.7751 2.7232 2.6730 2.5771 2.4869 2.4018 4 3.8077 3.7171 3.6299 3.5460 3.4651 3.3121 3.1699 3.0373 5 4.7135 4.5797 4.4518 4.3295 4.2124 3.9927 3.7908 3.6048 6 5.6014 5.4172 5.2421 5.0757 4.9173 4.6229 4.3553 4.1114 7 6.4720 6.2303 6.0021 5.7864 5.5824 5.2064 4.8684 4.5638 8 7.3255 7.0197 6.7327 6.4632 6.2098 5.7466 5.3349 4.9676 9 8.1622 7.7861 7.4353 7.1078 6.8017 6.2469 5.7590 5.3282 10 8.9826 8.5302 8.1109 7.7217 7.3601 6.7101 6.1446 5.6502 20 16.3514 14.8775 13.5903 12.4622 11.4699 9.8181 8.5136 7.4694 25 19.5235 17.4131 15.6221 14.0939 12.7834 10.6748 9.0770 7.8431

Answer 1

1) An increase in the discount rate will reduce the present value of future cash flows:

For eg.

Present value of future cash flows for a company with 6% discount rate and 300000$ Cash flow every year will be=300000*(PVAF6%,3 YEARS)=801904$

Present value of future cash flows for a company with 10% discount rate and 300000$ Cash flow every year will be=300000*(PVAF10%,3 YEARS)=746056$

Therefore,

An increase in the discount rate will C)reduce the present value of future cash flows.

2)Annual payment for the lease=2468

No. of years=6 years

Discount rate=5%

Calculation of the present value of the lease payments=2468*(PVAF 5%,6 years)

=5.077*2468=12527

Therefore answer is A)12528.

3) Rate of interest=14%

No. of years=10

Final amount required=2000000

Initial investment= Present value factor(14%,10 years)*2000000=0.2697*2000000=539488.

Therefore answer is B) 540000.

4)

Rate of interest=12%

No. of years=10

Final amount required=20000

Initial investment= Present value factor(12%,10 years)*20000=0.3220*20000=6440.

Therefore answer is C)6440.

5)Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's Internal rate of return and Net present value. Therfore the answer is C.