Applied Corporate Finance

Assignment 1: TVM
Due: 7 May 2020 by 9:00 P.M.
Submission Details: [email protected]

Please show calculations, where necessary.

1. Present value is defined as

a. future cash flows discounted to the present by an appropriate discount rate.

b. inverse of future cash flows.
c. present cash flows compounded into the future.
t
d. future cash flows multiplied by the factor (1 + r) , where r is rate of interest per
period.

2. The required rate of return is also called the

a. discount rate only.

b. discount rate and hurdle rate only.
c. discount rate, hurdle rate, and opportunity cost of capital.
d. discount rate and opportunity cost of capital only.

3. If the present value of cash flow X is $240 and the present value of cash flow Y is $160,
then the present value of the combined cash flows is

a. $240.
b. $160.
c. $80.
d. $400.
4. The present value of $121,000 expected one year from today at an interest rate
(discount rate) of 10 percent per year is

a. $121,000.
b. $100,000.
c. $110,000.
d. $108,900.

5. The present value formula for a cash flow expected one period from now is

a. PV = C1× (1 + r).
b. PV = C1/(1 + r).
c. PV = C1/r.
d. PV = (1 + r)/C1.

6. The net present value formula for one period is

a. NPV = C0 + [C1/(1 + r)].

b. NPV = PV required investment.
c. NPV = C0/C1.
d. NPV = C1/C0.

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7. If the present value of a cash flow generated by an initial investment of $200,000 is
$250,000, what is the NPV of the project?

a. $250,000
b. $50,000
c. $200,000
d. -$50,000

8. What is the present value of the following cash flows at a discount rate of 9 percent?

a. $372,431.81
b. $450,000.00
c. $405,950.68
d. $412,844.04

9. At an interest rate of 10 percent, which of the following sequences of cash flows should
you prefer?

a. Option A
b. Option B
c. Option C
d. Option D

10.at a discount
What is the net present value of the following sequence of annual cash flows
rate of 16 percent APR?

a. $136,741.97
b. $122,948.87
c. $158,620.69
d. $139,418.23

11. What is the net present value (NPV) of the following sequence of cash flows at a
discount rate of 9 percent?

a. $122,431.81
b. $200,000.00
c. $155,950.68
d. $177,483.77

12. Which of the following statements regarding the NPV rule and the rate of return rule is
false?

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 a. Accept a project if its NPV > 0.
b. Reject a project if the NPV < 0.
c. Accept a project if its rate of return > 0.
d. Accept a project if its rate of return > opportunity cost of capital.

13. The opportunity cost of capital for a risky project is

a. the expected rate of return on a government security having the same maturity
as the project.
b. the expected rate of return on a well-diversified portfolio of common stocks.
c. the expected rate of return on a security of similar risk as the project.
d. the expected rate of return on a typical bond portfolio.

14. A perpetuity is defined as a sequence of

a. equal cash flows occurring at equal intervals of time for a specific number of
periods.
b. equal cash flows occurring at equal intervals of time forever.
c. unequal cash flows occurring at equal intervals of time forever.
d. unequal cash flows occurring at equal intervals of time for a specific number of
periods.
15. What is the present value of $10,000 per year in perpetuity at an annual
interest rate of 10 percent? Assume the perpetuity starts in one year.

a. $10,000
b. $100,000
c. $200,000
d. $1,000

16. You would like to have enough money saved to receive $80,000 per year in
perpetuity after retirement for you and your heirs. How much would you need to have
saved in your retirement fund to achieve this goal? (Assume that the perpetuity
payments start one year from the date of your retirement. The annual interest rate is 8
percent.)

a. $7,500,000
b. $750,000
c. $1,000,000
d. $800,000

17. You would like to have enough money saved to receive a $50,000 per year perpetuity
after retirement. How much would you need to have saved in your retirement fund to
achieve this goal? (Assume that the perpetuity payments start on the day of your
retirement. The annual interest rate is 8 percent.)

a. $1,000,000
b. $675,000
c. $625,000
d. $500,000

18. An annuity is defined as a set of

a. equal cash flows occurring at equal intervals of time for a specified period.
b. equal cash flows occurring at equal intervals of time forever.
c. unequal cash flows occurring at equal intervals of time forever.
d. unequal cash flows occurring at equal intervals of time for a specified period.

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19. After retirement, you expect to live for 25 years. You would like to have
$75,000 income each year. How much should you have saved in your retirement
account to receive this income, if the annual interest rate is 9 percent per year?
(Assume that the payments start on the day of your retirement.)

a. $736,693.47
b. $802,995.88
c. $2,043,750.21
d. $1,427,831.93

20. After retirement, you expect to live for 25 years. You would like to have $75,000
income each year. How much should you have saved in your retirement account to
receive this income if the annual interest rate is 9 percent per year? (Assume that the
payments start one year after your retirement.)

a. $736,693.47
b. $83,431.17
c. $1,875,000
d. $1,213,487.12
21. John House has taken a $250,000 mortgage on his house at an interest rate of
6 percent per year. If the mortgage calls for 20 equal annual payments, what is the
amount of each payment?

a. $21,796.14
b. $10,500.00
c. $16,882.43
d. $24,327.18
22. John House has taken a 20-year $250,000 mortgage on his house at an
interest rate of 6 percent per year. What is the remaining balance (or value) of the
mortgage after the payment of the fifth annual instalment?

a. $128,958.41
b. $211,689.53
c. $141,019.50
d. $248,719.21
23. If the present value of $1 received n years from today at an interest rate of
r is 0.3855, then what is the future value of $1 invested today at an interest rate of
r percent for n years?

a. $1.3855
b. $2.594
c. $1.701
d. Not enough information is given to solve the problem.
24. If the present value of $1 received n years from today at an interest rate of r is
0.621, then what is the future value of $1 invested today at an interest rate of r% for n
years?

a. $1.000
b. $1.610
c. $1.621
d. Not enough information is given to solve the problem.

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25. If the future value of $1 invested today at an interest rate of r percent for n
years is 9.6463, what is the present value of $1 to be received in n years at r
percent interest rate?

a. $9.6463
b. $1.0000
c. $0.1037
d. $0.4132
26. You would like to have enough money saved to receive a growing annuity for
20 years, growing at a rate of 5 percent per year, with the first payment of $50,000
occurring exactly one year after retirement. How much would you need to save in
your retirement fund to achieve this goal? The interest rate is 10 percent.

a. $1,000,000.00
b. $425,678.19
c. $605,604.20
d. $827,431.28

27. The managers of a firm can maximize stockholder wealth by

a. taking all projects with positive NPVs.

b. taking all projects with NPVs greater than the cost of investment.
c. taking all projects with NPVs greater than the present value of cash flows.
d. taking only the highest NPV project each year.
28. Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6
percent per year. If the mortgage calls for equal monthly payments for 20 years, what is
the amount of each payment? (Assume monthly compounding or discounting.)

a. $1,254.70
b. $1,625.00
c. $1,263.06
d. $1,074.65

29. An investment at 12 percent APR compounded monthly is equal to an effective annual

rate of

a. 12.68 percent.
b. 12.36 percent.
c. 12.00 percent.
d. 11.87 percent.

30. Mr. Williams expects to retire in 30 years and would like to accumulate $1
million in his pension fund. If the annual interest rate is 12 percent, how much should
Mr. Williams put into his pension fund each month in order to achieve his goal?
(Assume that Mr. Williams will deposit the same amount each month into his pension
fund, using monthly compounding.)

a. $286.13
b. $771.60
c. $345.30
d. $437.13

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31. You just inherited a trust that will pay you $100,000 per year in perpetuity.
However, the first payment will not occur for exactly four more years. Assuming an
8 percent annual interest rate, what is the value of this trust?

A. $918,787
B. $992,290
C. $1,000,000
D. $1,250,000

32. An investment at 10 percent compounded continuously has an equivalent annual rate of

A. 10.250 percent.
B. 10.517 percent.
C. 10.381 percent.
D. none of the options.