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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

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

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