Exam 1

The "discounting" in a discounted cash flow approach requires the use of which of the following?

An interest rate

Bonds are short-term notes issued by the borrower to a lender usually to raise money for small projects.

False

If a set of investment alternatives contains all possible choices that can be made, then the set is said to be which of the following?

Collectively exhaustive

When specifying the minimum attractive rate of return (MARR):

Ensure that it reflects the opportunity cost associated with investing in the candidate alternative as opposed to investing in other available alternatives.

The first thing paid when repaying a loan is the principal.

False

As a borrower, would one prefer more or fewer compounding periods?

Fewer

Assuming that interest is paid at 10% compounded quarterly, the effective annual interest rate will be:

Higher than 10%

When identifying the investment alternatives:

Identify mutually exclusive alternatives. Identify collectively exhaustive alternatives. Frequently include the "do nothing" alternative.

Under what circumstances are the effective annual interest rate and the period interest rate equal?

If the number of compounding periods per year is one

To calculate present worth of cash flow stream using Excel, you should use ___ function. (write a function name without arguments)

NPV

What is most suitable Excel function to calculate present worth for the bond investment? (write a function name without arguments)

PV

Answering "what if" questions with respect to an economic analysis is an example of which step in the Systematic Economic Analysis Technique?

Performing supplementary analysis

The period of time, or width of the "window", over which alternatives will be compared is also known as the:

Planning horizon

The present worth equivalent of an irregular series of cash flows may be calculated by:

Summing the present worth of each individual cash flow in the series

All of the following are true statements about a gradient series of cash flows except the following:

The cash flows increase by the gradient step, G, every other period

An investor considering two vastly different cash flows for alternate investments would be indifferent as to which alternative was selected when:

The present worth of each investment was identical. The investments were deemed equivalent from an economic analysis perspective

The fact that one should not add or subtract money unless it occurs at the same point in time is an illustration of what concept?

Time value of money

A college loan that does not require the student to begin paying back until after graduation is an example of a deferred loan.

True

A young engineer calculated that monthly payments of $A are required to pay off a $5,000 loan for n years at i% interest, compounded annually. If the engineer decides to borrow $10,000 instead with the same n and i%, her monthly payments will be $2A.

True

Rather than changing by a constant amount each period as with the gradient series, the geometric series changes by a constant percentage each period.

True

Which of the following best represents the relationship between the weighted average cost of capital (WACC) and the minimum attractive rate of return (MARR)?

WACC is a lower bound for MARR

When cash flow frequency or compounding frequency (or both) is not annual:

We can use the period interest rate which divides the nominal annual interest rate by the number of interest periods per year

Interest rates are likely to vary in an economic analysis:

When the planning horizon expands over several years. Depending on the riskiness of the investment. During times of inflation or deflation.

The maintenance costs of a car increase by $200 each year. This cash flow pattern is best described by which of the following?

gradient series

Risks and returns are generally ______________ correlated.

positively