Multiple choice

27. Jacob invests $1000 at 5 percent annual interest for three years. At the end of the first year, he has $1050 (1000 + (05 x 1000)). At the end of the second year, he has $1102.50 (1050+ 0.05 x 105)). The third year, he has $1157.63 (1102.50+ 0.05 x 1102.50)), Jacob's balance at the end of the third year are greater than $1150 due to a. the inflation rate. b. the chance of default. c. the discount rate. d. the rate of return c. compound interest Ans: 28. When companies perform capital budgeting, they must consider both the potential returns and the potential risk, where risk is measured by a. the variability of potential returns. b. the expected inflation rate. c. the average amount of potential returns. d. the bank's interest rate. e. the rate of return on alternative projects. Ans: 29. A company estimates that Project A will return somewhere between $10 million and $12 million, while Project B will return somewhere between $9 million and $13 million. Therefore, the company will a. be indifferent between Project A and Project B, because their expected return is the same. b. likely choose Project A, due to its lower risk for the same expected return. c. choose the project with the lowest expected return. d. prefer Project B, due to its higher expected return. c. not be able to compare the two projects without knowing the level of risk. Ans: 30. Present value calculations determine the a. future value of a cash flow. b. present value of a past cash flow. c. inflation-adjusted value of a current cash flow. d. expected value of a future cash flow, today. c. discount rate of a cash flow, Ans