1.for a given amount, the lower the discount rate, the less the presen value A)
ID: 2784860 • Letter: 1
Question
1.for a given amount, the lower the discount rate, the less the presen value A) True B)False What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the cost of capital is 14%? 2. A) B) C) D) $3,397.57 $4,473.44 16,100.00 $35,000.00 3. The decision rule for net present value is to: A) Accept all projects with cash inflows exceeding initial cost B)Reject all projects with rates of return exceeding the opportunity cost of capital C) Accept all projects with positive net present values. D) Reject all projects lasting longer than 10 years. 4.Which of the following changes will increase the NPV of a project? A)A decrease in the discount rate B)A decrease in the size of the cash inflows C) An increase in the initial cost of the project D) A decrease in the number of cash inflow 5.What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for 6 years? A) B) C) D) 19.9% 30.0% 32.3% 80.0%Explanation / Answer
Question 1). Answer :- Option B). False.
Explanation :- Lesser is the discount rate, Higher is the present value of the cash flow stream.
Question 2). Answer :- Option B). $ 4473.44
Explanation :- Net present value = Present value of cash inflows - Present value of cash outflow.
Present value of cash outflow = $ 100,000. (Given in the question).
Present value of cash inflows = 45000 / (1.14)1 + 45000 / (1.14)2 + 45000 / (1.14)3
= 45000 / 1.14 + 45000 / 1.2996 + 45000 / 1.481544
= 39473.68 + 34626.04 + 30373.72
= $ 104473.44
Accordingly, Net present value (NPV) of Project = 104473.44 - 100000
= $ 4473.44 (Option B).
Question 3). Answer :- Option C). Accept all projects with the positive net present values.
Question 4). Answer :- Option A). A decrease in the discount rate.
Question 5). Answer :- Option A). 19.9 %
Explanation :- Cumulative present value factor = 100000 / 30000 = 3.33 (approx)
Cumulative present value factor of 3.33 correspond to discount rate of 19.9 %. In other words, Cumulative present value factor for six years at the discount rate 19.9 % is 3.33 (approx). Accordingly, The approximate internat rate of return (IRR) is 19.9 % in the given question.
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