Fin 3601 Exam 2

Which one of these projects should definitely be rejected?

A project with an internal rate of return (IRR) less than the firm's cost of capital.

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?

Annual

Banks A, B, and C have identical quoted rates of interest on certificates of deposit (CDs); however, they compound interest annual, monthly, and semiannually, respectively. You have decided to purchase a one year CD. Which bank offers you the highest effective annual rate(EAR)?

Bank B

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at time zero

Payback period:

Is the length of time until the sum of an investment's cash flows equals its cost.

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

A project has a net present value of zero. Which one of the following best describes this project?

The project's cash inflows equal its cash outflows in current dollar terms.

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.

annual percentage

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.

effective annual

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ____ loan.

interest-only

A perpetuity is defined as:

unending equal payments paid at equal time intervals.