8.1

A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV) of this investment? $10,048 $11,053 $16,077 $14,250

A) $109,250 / (1 + 0.04) = $105,048.077 ; $105,048.077 - $95,000 = $10,048

A car dealership offers a car for $14,000 , with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not to pay for the car for one year? $667 $1333 $13,333 $14,000

A) $14,000 / (1 + 0.05) = $13,333.3333 ; $14,000 - $13,333 = $667

Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment? 1% 2% 3% 4%

C) ($6180 - $6000 )/6000 = 3%

A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one yearʹs time it will cost $93,200 to harvest the crop. If the crop will be worth $350,000 , and the interest rate is 7%, what is the net present value (NPV) of this investment? $240,000 $87,103 $0 $567,103

C) (350,000 - $93,200 )/(1 + 0.07) - 240,000 = $0

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract? Yes, since net present value (NPV) is positive. It does not matter whether the contract is taken or not, since NPV = 0. Yes, since net present value (NPV) is negative. No, since net present value (NPV) is negative.

D

Most corporations measure the value of a project in terms of which of the following? discount value discount factor future value (FV) present value (PV)

D

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer? $531.40 later today, since $1 today is worth more than $1 in one year. $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. Neither - both investments have a negative NPV. Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.

D) The NPVs are equal, so that each is the same as $31.40 today.

Preference for cash today versus cash in the future in part determines net present value (NPV).

F

Net present value (NPV) is the difference between the present value (PV) of the benefits and the present value (PV) of the costs of a project or investment.

T

The present value (PV) of an investment is ________. the difference between the cost of the investment and the benefit of the investment in dollars today the amount you need to invest at the current interest rate to re-create the cash flow from the investment the amount that an investment would yield if the benefit were realized today the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate

the amount that an investment would yield if the benefit were realized today