Chapter 6 Video Homework
What is the future value of $1,000 invested for 15 years at a rate of 5%?
$2,079
What is the future value of $500 invested each year for 20 years at a rate of 10%?
$28,637
What is the future value of $1,200 invested for 20 years at a rate of 6%?
$3,849
What is the present value of $500 invested each year for 10 years at a rate of 5%?
$3,861
What is the present value of $1,000 to be received in 12 years invested at a rate of 8%?
$397
Using the method of your choice, calculate the Net Present Value of the following cash flows. Assume that the required return on this project is 15% Project A Initial Cost -$150 Year 1 $175 Year 2 $100
$78
Assume the real rate was 9.5% and the inflation rate was 4%. Using the Fisher Effect, what was the nominal rate?
0.095=(1+nominal rate)/(1+0.04)-1 (1+0.095)(1.04)=1+nominal rate nominal rate=(1.095*1.04)-1 =13.88%
Based upon the following data: calculate the Discounted Payback Period with a discount rate of 10%. Project A Initial Cost -50,000 Year 1 $ 20,000 Year 2 $ 25,000 Year 3 $ 20,000
2.74 years Project A Discounted Cash Flows Initial Cost -50,000 Year 1 $ 20,000 ($20,000/1.10) = $18,182 Year 2 $ 25,000 ($25,000/1.102) = $20,661 Year 3 $ 20,000 ($20,000/1.103) = $15,026 Payback period Initial cost = $50,000 - $18,182 (year 1) - $20,661 (year 2) =$11,157 remaining after year 2 $11,157/$15,026 (Year 3) = .742.74 years
What are non-conventional cash flows?
A combination of cash outflows and inflows
How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?
Decrease the future value.
How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)?
Decrease the present value
When short-term rates are higher than long-term rates, we say it is _____
Downward sloping.
The ABC Corporation has the following information. How much is the Operating Cash Flow? ABC Corporation Earnings before interest & taxes $1,588 Depreciation 130 Beginning net fixed assets 1,650 Net new equity raised 450 Taxes 424
Earning before interest ans Taxes - Taxes + Depreciation =Operating Cash Flow 1,588-424+130= 1,294 $1,294
The variables in a present value of a lump sum problem include all of the following, except:
Free Cash Flow
The variable that you are solving for in a future value of a lump sum problem is:
Future value
According the video, one of the biggest challenges for the Net Present Value method is
Identifying the appropriate discount rate to use.
Based upon the following data, which of the following mutually exclusive projects should you choose if your required return is 10%? Yr Invstmnt A Investment B 0 −$ 150 −$ 150 1 80 40 2 40 50 3 40 60 4 30 55
Investment B with an NPV of 10.33% -$150 + (40/1.1) + (50/1.12) + (60/1.13) + (55/1.14) = 10.33%
A common error made when solving a future value of an annuity problem is:
Multiplying the annual deposit and the number of years before calculating the problem.
The variable that you are solving for in a present value of a lump sum problem is:
Present value
Based upon the following data: calculate the Profitability Index. Cost = $325Present value of future cash flows = $350
Profitability index = PV of future cash flow / cost = 350 / 325 = 1.076 Rounding off to nearest two decimals Answer is 1.08
Assume the nominal rate was 11.50% and the inflation rate was 3%. Using the Fisher Effect, what was the real rate?
Real rate=(1+nominal rate)/(1+inflation rate)-1 1.Real rate=(1.115/1.03)-1 =8.25%(Approx)
The variables in a present value of an annuity problem include all of the following, except:
Risk Profile
The ABC Corporation has the following information. How much is the Cash Flow to Creditors? ABC Corporation Earnings before interest & taxes $1,588 Depreciation 130 Beginning net fixed assets 1,650 Interest paid 150 Net new equity raised 450 Net new borrowing 110 Taxes 424
The cash flow to creditors is calculated by using the following formula Cash Flow to Creditors = Interest Expenses Paid - Net new borrowings = $150 - $110= $40 Cash flow to creditors = $40"
The Internal Rate of Return (IRR) represents which of the following
The discount rate that makes the net present value equal to zero.
When choosing between mutually exclusive projects, what is the best method to use?
The highest NPV is always the best option
All of the following are useful for understanding Profitability Index, except
The initial investment is included when calculating the present value of the future cash flows.
The variable that you are solving for in a present value of an annuity problem is:
The present value
Phantom Corporation purchased equipment for $50,000, four years ago. The accumulated depreciation to date is $41,360. If they were able to sell the equipment today for $20,000, what would be the amount of tax due? Assume the company is in the 34% tax bracket. a) 12,000 b) 8,640 c) 3,862 d) 11, 360 e) 1,931
The values will appear as follows:
The variables in a future value of a lump sum problem include all of the following, except:
Usage
The variables in a future value of a lump sum problem include all of the following, except
Volatility
The term structure of interest rates includes all of the following basic components, except:
Weighted Average Cost of Capital Explanation: The term structure of interest rates includes all of the following, except, the weighted average cost of capital.
The variable that you are solving for in a future value of a lump sum problem is:
future value
How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?
increase the present value
An assets class established its _____ for tax purposes
life
The variables in a future value of a lump sum problem include all of the following, except:
payments
The variables in a present value of a lump sum problem include all of the following, except:
payments
The variables in a present value of an annuity problem include all of the following, except:
source of funds
