XAppendixII - Compound Interest and Concept of Present Value

XAppendixII - Compound Interest and Concept of Present...

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Appendix II: Compound Interest and the Concept of Present Value MULTIPLE CHOICE QUESTIONS 1. The main idea behind the time value of money is that: A. cash flows received in the distant future are less valuable than cash flows received in the near-term future. B. cash received in year 3, say, $80,000, has the same value as $40,000 received in year 3 plus $40,000 received in year 4. C. cash flows received in different years are treated as equal in value. D. cash payments made in the future have the same value as payments made today. E. timing considerations have little value in decision making. Answer: A LO: 1 Type: RC 2. The procedure used to compute the future value of a series of cash flows is known as: A. compounding. B. the annuity method. C. discounting. D. the future-cost approach. E. indexing. Answer: A LO: 2 Type: RC 3. Norton Company has a 12% interest rate. If the firm invests $60,000 today, how much will have accumulated by the end of eight years? A. $117,600. B. $148,560. C. $298,080. D. $738,000. E. Some other amount. Answer: B LO: 2 Type: A 4. Lawson Company invests $60,000 today and has $148,560 by the end of eight years. What is the firm's interest rate? A. 10.00%. B. 12.00%. C. 18.45%. D. 40.39%. E. None of the above. Answer: B LO: 2 Type: A, N Appendix II 81
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5. The procedure used to compute the present value of a series of cash flows is known as: A. compounding. B. the annuity method. C. discounting. D. the present-cost approach. E. indexing. Answer: C LO: 2 Type: RC 6. All other things being equal, which of the following would be the most attractive to an investor? A. A cash inflow of $10,000 in five years. B. A cash inflow of $2,000 each year for the next five years. C. A cash inflow of $5,000 in year 1 and $5,000 in year 5. D. A cash inflow of $10,000 today. E. All of the above would be equally attractive to an investor. Answer: D LO: 2 Type: N 7. All other things being equal, which of the following would be most attractive to an investor? A. A cash outflow of $60,000 in six years. B. A cash outflow of $10,000 each year for the next six years. C. A cash outflow of $30,000 in year 1 and $30,000 in year 6. D. A cash outflow of $60,000 today. E. All of the above would be equally attractive to an investor. Answer: A LO: 2 Type: N 8. A series of equal cash flows is called a(n): A. ongoing cash flow.
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This note was uploaded on 06/22/2011 for the course ALL 101 taught by Professor Laus during the Spring '11 term at FIU.

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XAppendixII - Compound Interest and Concept of Present...

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