Appendix 12A - Appendix 12A - The Concept of Present Value...

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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: A. will be in error and therefore not usable. B. will be slightly overstated but usable. C. will be slightly understated but usable. D. will produce an error the direction of which is undeterminable. Appendix 12A-1
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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: A. greater than under a 10% discount rate. B. less than under a 10% discount rate. C. equal to that under a 10% discount rate. D. sometimes greater than under a 10% discount rate and sometimes less; it depends on R. 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? A. $36,050 B. $2,774 C. $17,637 D. $5,670 8. (Ignore income taxes in this problem.) Henry wants to send his son to computer school which will start one year from today. Payments of $2,000 are due at the end of each of the next two years. What lump-sum will Henry have to invest now at 12% per year in order to have $2,000 at the end of each of the next two years? A. $4,240 B. $3,380 C. $1,594 D. $2,508 9. (Ignore income taxes in this problem.) If you wanted to withdraw $12,000 from a bank account at the end of each of the next 20 years, approximately how much would you have to invest in the account today assuming a 6% interest rate? A. $20,924
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This note was uploaded on 05/03/2011 for the course ACC 1410 taught by Professor Bauser during the Spring '11 term at Marion Technical College.

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Appendix 12A - Appendix 12A - The Concept of Present Value...

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