Appendix 12A  The Concept of Present Value
Appendix 12A
The Concept of Present Value
True / False Questions
1. The present value of a given sum to be received in five years is exactly twice as large as the
present value of an equal sum to be received in ten years.
True False
2. The higher the discount rate, the higher the present value of a given future cash flow.
True False
3. The present value of a cash flow decreases as it moves further into the future.
True False
Multiple Choice Questions
4. An increase in the discount rate:
A. will increase the present value of future cash flows.
B. will have no effect on net present value.
C. will reduce the present value of future cash flows.
D. is one method of compensating for reduced risk.
5. The accountant of Ronier, Inc., has prepared an analysis of a proposed capital project using
discounted cash flow techniques. One manager has questioned the accuracy of the results
because the discount factors employed in the analysis have assumed the cash inflows occurred
at the end of the year when the cash inflows actually occurred uniformly throughout each
year. The net present value calculated by the accountant:
Appendix 12A1
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Appendix 12A  The Concept of Present Value
6. Suppose an investment has cash inflows of R dollars at the end of each year for two years.
The present value of these cash inflows using a 12% discount rate will be:
7. (Ignore income taxes in this problem.) White Company's required rate of return on capital
budgeting projects is 12%. The company is considering an investment opportunity which
would yield a cash flow of $10,000 in five years. What is the most that the company should
be willing to invest in this project?
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 Spring '11
 Bauser
 Managerial Accounting, Net Present Value, AACSB, Thinking AICPA FN

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