1a.A decrease in the discount rate:

a.will decrease the present value of future cash flows

b.will have no effect on net present value

c.is one method of compensating for reduced risk

d.will increase the present value of future cash flows

1b.The time it will take to earn back, in the form of cash inflows from operations, the initial dollars invested in a project is known as the:

a.accelerated recovery period

b.internal return period

c.payback period

d.accounting return period

1c.A company has gathered the following data on a proposed investment project:

Investment required in equipment $30,000 Annual cash inflows $6,000 Salvage value of equipment 0 Life of the investment 15 years Required rate of return 10%

The company uses straight-line depreciation on all equipment.

The simple rate of return for the investment (rounded to the nearest tenth of a percent) is:

a.20.0%

b.10.0%

c.18.0%

d.13.3%

1d. Management is considering the purchase of a machine that would cost $360,000, would last for 7 years, and would have no salvage value. The machine would reduce labor and other costs by $78,000 per year. The company requires a minimum pretax return of 11% on all investment projects.

The net present value of the proposed project is closest to: Present Value of $1 Present Value of Annuity Periods 11% Periods 11% 1 0.901 1 0.901 2 0.812 2 1.713 3 0.731 3 2.444 4 0.659 4 3.102 5 0.593 5 3.696 6 0.535 6 4.231 7 0.482 7 4.712 8 0.434 8 5.146 9 0.391 9 5.537 10 0.352 10 5.889

a.$15,646

b.$7,536

c.$89,588

d.$186,000

1e.Assume you can invest money at a 14% rate of return. How much money must be invested now in order to be able to withdraw $5,000 from this investment at the end of each year for 8 years, the first withdrawal occurring one year from now?

Present Value of $1 Present Value of Annuity Periods 14% Periods 14% 1 0.877 1 0.877 2 0.769 2 1.647 3 0.675 3 2.322 4 0.592 4 2.914 5 0.519 5 3.433 6 0.456 6 3.889 7 0.400 7 4.288 8 0.351 8 4.639 9 0.308 9 4.946 10 0.270 10 5.216

a.$23,195

b.$24,840

c.$21,440

d.$1,755

1f.Assuming a 14% interest rate, which of the following is closest to the total present value of the following payments?

Year 3 $12,000 Year 5 $10,000

Present Value of $1 Present Value of Annuity Periods 14% Periods 14% 1 0.877 1 0.877 2 0.769 2 1.647 3 0.675 3 2.322 4 0.592 4 2.914 5 0.519 5 3.433 6 0.456 6 3.889 7 0.400 7 4.288 8 0.351 8 4.639 9 0.308 9 4.946 10 0.270 10 5.216

a.$12,978

b.$13,290

c.$8,100

d.$32,054