Question

You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows? 

The discount rate decreases. 

The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same. 

The discount rate increases. 

Answers band c above. 

Answers a and b above. 

The future value of a lump sum at the end of five years is $1,000. The nominal interest is 10 percent and interest is compounded semiannually. Which of the following statements is most correct? 

The present value of the $1,000 is greater if interest is compounded monthly rather than semiannually. 

The effective annual rate is greater than 10 percent. 

The periodic interest rate is 5 percent. 

Both statements b and care correct. 

All of the statements above are correct.

Which of the following statements is most correct? 

A 5-year $100 annuity due will have a higher present value than a 5-year $100 ordinary annuity. 

A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and same interest rate. 

If an investment pays 10 percent interest compounded annually, its effective rate will also be 10 percent. 

Statements a and care correct. 

All of the statements above are correct.

Answer 1

1. The Discount rate decreases.

Discount rate and present value is inversely related which means when discount decreases then present value increases and vice versa.

2. Both statements b and c are correct.

• The effective annual rate is greater than 10 percent.
• The periodic interest rate is 5 percent

3. All of the above statements are correct.

Annuity due is a series of payment at the beginning of the period where as Ordinary Annuity is a series of payment of at end of each period. Annuity due has always higher present value if other factors remain same.

Shorter the maturity higher the monthly repayment of mortgage, if other factors remain constant.

Annual effective rate is same as Nominal annual rate if compounding period is annual.