1. An increase in the discount rate: A) will increase the present value of futur
ID: 2405085 • Letter: 1
Question
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
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
Explanation / Answer
1) An increase in the discount rate will reduce the present value of future cash flows:
For eg.
Present value of future cash flows for a company with 6% discount rate and 300000$ Cash flow every year will be=300000*(PVAF6%,3 YEARS)=801904$
Present value of future cash flows for a company with 10% discount rate and 300000$ Cash flow every year will be=300000*(PVAF10%,3 YEARS)=746056$
Therefore,
An increase in the discount rate will C)reduce the present value of future cash flows.
2)Annual payment for the lease=2468
No. of years=6 years
Discount rate=5%
Calculation of the present value of the lease payments=2468*(PVAF 5%,6 years)
=5.077*2468=12527
Therefore answer is A)12528.
3) Rate of interest=14%
No. of years=10
Final amount required=2000000
Initial investment= Present value factor(14%,10 years)*2000000=0.2697*2000000=539488.
Therefore answer is B) 540000.
4)
Rate of interest=12%
No. of years=10
Final amount required=20000
Initial investment= Present value factor(12%,10 years)*20000=0.3220*20000=6440.
Therefore answer is C)6440.
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 Internal rate of return and Net present value. Therfore the answer is C.
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