Principles of Corporate Finance, 13e (Brealey) Chapter 2 How to Calculate Present Values 1) The present value of $100 expected two years from today at a discount rate of 6 percent is A) $112.36. B) $106.00. C) $100.00. D) $89.00. Answer: D Explanation: PV = 100/(1.06^2) = 89.00. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 2) Present value is defined as: A) future cash flows discounted to the present by an appropriate discount rate. B) inverse of future cash flows. C) present cash flows compounded into the future. D) future cash flows multiplied by the factor (1 + r)t. Answer: A Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 3) If the annual interest rate is 12 percent, what is the two-year discount factor? A) 0.7972 B) 0.8929 C) 1.2544 D) 0.8065 Answer: A Explanation: DF2 = 1/(1.12^2) = 0.7972. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 4) If the present value of cash flow X is $240, and the present value of cash flow Y is $160, then the present value of the combined cash flows is: A) $240. B) $160. C) $80. D) $400. Answer: D Explanation: PV (x + y) = PV (x) + PV (y) = 240 + 160 = 400. Difficulty: 2 Medium Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 5) The rate of return is also called the: A) discount rate. B) discount rate and hurdle rate only. C) discount rate, hurdle rate, and opportunity cost of capital. D) discount rate and opportunity cost of capital only. Answer: C Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 6) The present value of $121,000 expected one year from today at an interest rate (discount rate) of 10 percent per year is: A) $121,000. B) $100,000. C) $110,000. D) $108,900. Answer: C Explanation: PV = (121,000)/(1.10) = 110,000. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 7) The one-year discount factor, at a discount rate of 25 percent per year, is: A) 1.25. B) 1.0. C) 0.8. D) 0.75. Answer: C Explanation: Discount factor = 1/1.25 = 0.8. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 8) The one-year discount factor, at an interest rate of 100 percent per year, is: A) 1.50. B) 0.50. C) 0.25. D) 1.00. Answer: B Explanation: Discount factor = 1/(1 + 1.00) = 0.5. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 9) The present value of $100,000 expected at the end of one year, at a discount rate of 25 percent per year, is: A) $80,000. B) $125,000. C) $100,000. D) $75,000. Answer: A Explanation: PV = (100,000)/(1 + 0.25) = 80,000. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 10) If the one-year discount factor is 0.8333, what is the discount rate (interest rate) per year? A) 10 percent B) 20 percent C) 30 percent D) 40 percent Answer: B Explanation: DF = 1/(1 + r)1 = 0.8333;1 + r = 1/0.8333; r = 20%. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 11) If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount factor? A) 0.8333 B) 1.20 C) 0.20 D) 1.00 Answer: A Explanation: Discount factor is = 400/480 = 0.8333. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 12) If the present value of $250 expected one year from today is $200, what is the one-year discount rate? A) 10 percent B) 20 percent C) 25 percent D) 30 percent Answer: C Explanation: 1 + r = 250/200 = 1.25; r = 25%. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 13) If the one-year discount factor is 0.90, what is the present value of $120 expected one year from today? A) $100 B) $96 C) $108 D) $133 Answer: C Explanation: PV = (120)(0.90) = 108. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 14) If the present value of $600, expected one year from today, is $400, what is the one-year discount rate? A) 15 percent B) 20 percent C) 25 percent D) 50 percent Answer: D Explanation: 1 + r = (600)/(400) = 1.5; r = 50%. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 15) The present value formula for a cash flow expected one period from now is: A) PV = C1 × (1 + r). B) PV = C1/(1 + r). C) PV = C1/r. D) PV = (1 + r)/C1. Answer: B Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 16) The net present value formula for one period is: A) NPV = C0 + [C1/(1 + r)]. B) NPV = PV required investment. C) NPV = C0/C1. D) NPV = C1/C0. Answer: A Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Remember AACSB: Analytical Thinking Accessibility: Keyboard Navigation 17) An initial investment of $400,000 is expected to produce an end-of-year cash flow of $480,000. What is the NPV of the project at a discount rate of 20 percent? A) $176,000 B) $80,000 C) $0 (zero) D) $64,000 Answer: C Explanation: NPV = -400,000 + (480,000/1.2) = 0. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation 18) If the present value of a cash flow generated by an initial investment of $200,000 is $250,000, what is the NPV of the project? A) $250,000 B) $50,000 C) $200,000 D) -$50,000 Answer: B Explanation: NPV = -200,000 + 250,000 = 50,000. Difficulty: 1 Easy Topic: Net Present Value Learning Objective: 02-01 Future Values and Present Values Bloom's: Understand AACSB: Analytical Thinking Accessibility: Keyboard Navigation