Test Bank
Chapter 4: ACCOUNTING, CASH FLOWS, AND TAXES
EFS
I. True or False (Definitions and Concepts)
T
1.
In your text, the notation
m
is the number of compounding periods per year.
F
2.
APY is the annual percentage rate (or nominal annual rate) and is
r
times
m
.
(FALSE: Should be
APR
instead of APY.)
T
3.
The future value formula is: FV = PV(1 + r)
n
where (1 + r)
n
is the future-value
factor (FVF).
T
4.
NPV is the present value of the expected future cash flows minus the cost.
T
5.
The expected rate of return is the rate you expect to earn if you make an
investment.
F
6.
The required rate of return is the rate of return actually earned on an investment
over a period of time. (FALSE: Should be
realized
instead of required.)
F
7.
The realized rate of return is the return that exactly reflects the riskiness of the
expected future cash flows. (FALSE: Should be
required
instead of required.)
T
8.
Cash inflows are positive while cash outflows are negative.
T
9.
An installment-debt contract, such as a bank loan for buying a car or house, is an
annuity.
T
10.
The present value of an annuity (PVA
n
) is equal to the future value of an annuity
discounted back to time zero.
F
11.
A deferred or delayed annuity is an annuity where the value of the annuity is
calculated at a point in time where
t
= 0. (FALSE: Should be
where
t
> 0
instead of where
t
= 0.)
F
12.
The formula, YTM = {CPN + [(F – B
0
) / N]} / [(F + 2B
0
) / 3], is used to estimate
the value of a bond. (FALSE: Should be
yield of a bond
instead of value of a bond.)
T
13.
Special financing refers to sales promotion for consumer goods in which there
are reduced financing costs.
T
14.
The value of a postponed annuity can be calculated by subtracting out two
separate annuities.
T
15.
A perpetuity is similar to an annuity but goes on forever.
II. Multiple Choice (Definitions and Concepts)
a
16.
Unless noted otherwise, cash outflows stemming from a project’s cost occur at
time
.
a.
zero
b.
one

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infinity
d.
none of these
b
17.
The present value formula is: PV = FV[1 / (1 + r)
n
]. What do we call the
component [1 / (1 + r)
n
]?
a.
annuity factor
b.
present value factor
c.
future value factor
d.
a
18.
A(n)
involves a series of identical cash flows that are expected to
occur regularly each period for a finite number of periods.
a.
annuity
b.
perpetuity
c.
flexible rate loan
d.
net present value
c
19.
The
is the true or "effective" annual rate of return.
a.
APR
b.
nominal rate of return
c.
APY
d.
realized rate of return
d
20.
The present value factor is the
of the future value factor
a.
IRR
b.
multiply
c.
reverse
d.
inverse
a
21.
The loan amortization schedule reveals that the amount of interest declines each
period since the
gradually becomes smaller.
a.

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