ACCT 310 Final Exam Questions
Verified And Complete Answers
\.If deposited money in a bank, money grows at 10% ➔
* If invested money, money grows at 10% ➔
* We discount (compute present values) at 10%. ➔
* If we obtain money at a 10% cost, we require that our money grow at 10% or higher ➔
interest rate
rate of return
discount rate
cost of capital
(mean the same thing)
\.3 possible patterns of cash flows
single cash flow
uneven multiple cash flows
annuity (same amount of cash flows at regular intervals)
\.Suppose you need $10,000 in three years for your graduate school. If you can earn 5%
annually with your savings account, how much do you need to deposit today?
P = $10,000 * 1 / (1 + 0.05) 3 = 8,638
\.An investment will pay you $2,000 in one year, $0 in two years, $6,000 inthree years. You
require a 12% rate of return. Therefore, you discount future cash flows at 12%. What is the
present value of this investment?
PV (12%, 1) = .893 * 2000 = 1786
PV (12%, 3) = .712 * 6000 = 4272
sum = 6,058
,\.Suppose that you've just won $8 million lottery. You will be paid$400,000 a year for the next
20 years. If the interest rate is 7%, what is the present value of the lottery as of now?
1/r [ 1- 1/(1+r)^n]
400,000 * PVA (7%, 20) = 4,237,600
\.72 rule (rule of thumb)
How long do I have to wait until my money doubles up?
ex) invest 1,000 and get 2,000.
if interest rate - 12% -- wait 6 years
* If you want to double up the investment money in 8 years _______
72 = annual interest rate * wait period
have to earn 9% return.
\.The Manhattan Island was sold for $24 in 1626 by Indians.Did the Indians get the better end
of the deal?
at 10%, FV = 24 * (1 + 0.1) ^ 397 = 650,000,000,000,000,000 or 650 Quadrillion
fair game
\.based on income
Simple Rate of Return
\.based on cash flows
Net Present Value
Internal Rate of Return
Profitability Index
payback
\.Time value of money
net present value
internal rate of return
profitability index
,\.Simple Rate of Return Formula
annual incremental net operating income/ initial investment
reduced by salvage from old equipment
\.NPV = Present value of a project's cash inflow
less
present value of its cash outflows
NPV > 0 Accept
NPV < 0 Reject
\.Lester Company has been offered a five-year contract to provide component parts for a
large manufacturer.
Cost of Special Equipment 160,000
working capital required 100,000
relining equipment in 3 years 30,000
salvage value of equipment in 5 years 5,000
annual cash revenue and costs:
sales revenue from parts 750,000
cost of parts sold. 400,000
salaries, shipping, etc. 270,000
At the end of five years the working capital will be released and may be used elsewhere by
Lester. Lester Company uses a discount rate of 11%.
Should the contract be accepted?
Working Capital = Capital actively turned over in or available for use in the course of business
activity
76,015
IRR = Discount rate that makes:
Net present value = 0
, If IRR > Required rate (discount rate)
If IRR < Required rate (discount rate)
accept
reject
discount rate up
NPV down
IF NPV > 0
IRR > Required rate
IF NPV = 0
IRR = Required Rate
IF NPV < 0
IRR < Required Rate
\.Project J has a zero NPV at 7%. Project K has a zero NPV at 10%.
For______ , we discount future cash flows more heavily (unfavorably). Still NPV is the same
The better project is ______ ______ IRR better.
Project K
using higher discount rate
K --> higher IRR
\.IRR formula
compute NPV =
PV of cash inflows - PV f cash outflows
0 = annual net cash flows * PVA (x%, 10) - investment
0 = 20,000 * PVA (x%,10) - 104,320
Verified And Complete Answers
\.If deposited money in a bank, money grows at 10% ➔
* If invested money, money grows at 10% ➔
* We discount (compute present values) at 10%. ➔
* If we obtain money at a 10% cost, we require that our money grow at 10% or higher ➔
interest rate
rate of return
discount rate
cost of capital
(mean the same thing)
\.3 possible patterns of cash flows
single cash flow
uneven multiple cash flows
annuity (same amount of cash flows at regular intervals)
\.Suppose you need $10,000 in three years for your graduate school. If you can earn 5%
annually with your savings account, how much do you need to deposit today?
P = $10,000 * 1 / (1 + 0.05) 3 = 8,638
\.An investment will pay you $2,000 in one year, $0 in two years, $6,000 inthree years. You
require a 12% rate of return. Therefore, you discount future cash flows at 12%. What is the
present value of this investment?
PV (12%, 1) = .893 * 2000 = 1786
PV (12%, 3) = .712 * 6000 = 4272
sum = 6,058
,\.Suppose that you've just won $8 million lottery. You will be paid$400,000 a year for the next
20 years. If the interest rate is 7%, what is the present value of the lottery as of now?
1/r [ 1- 1/(1+r)^n]
400,000 * PVA (7%, 20) = 4,237,600
\.72 rule (rule of thumb)
How long do I have to wait until my money doubles up?
ex) invest 1,000 and get 2,000.
if interest rate - 12% -- wait 6 years
* If you want to double up the investment money in 8 years _______
72 = annual interest rate * wait period
have to earn 9% return.
\.The Manhattan Island was sold for $24 in 1626 by Indians.Did the Indians get the better end
of the deal?
at 10%, FV = 24 * (1 + 0.1) ^ 397 = 650,000,000,000,000,000 or 650 Quadrillion
fair game
\.based on income
Simple Rate of Return
\.based on cash flows
Net Present Value
Internal Rate of Return
Profitability Index
payback
\.Time value of money
net present value
internal rate of return
profitability index
,\.Simple Rate of Return Formula
annual incremental net operating income/ initial investment
reduced by salvage from old equipment
\.NPV = Present value of a project's cash inflow
less
present value of its cash outflows
NPV > 0 Accept
NPV < 0 Reject
\.Lester Company has been offered a five-year contract to provide component parts for a
large manufacturer.
Cost of Special Equipment 160,000
working capital required 100,000
relining equipment in 3 years 30,000
salvage value of equipment in 5 years 5,000
annual cash revenue and costs:
sales revenue from parts 750,000
cost of parts sold. 400,000
salaries, shipping, etc. 270,000
At the end of five years the working capital will be released and may be used elsewhere by
Lester. Lester Company uses a discount rate of 11%.
Should the contract be accepted?
Working Capital = Capital actively turned over in or available for use in the course of business
activity
76,015
IRR = Discount rate that makes:
Net present value = 0
, If IRR > Required rate (discount rate)
If IRR < Required rate (discount rate)
accept
reject
discount rate up
NPV down
IF NPV > 0
IRR > Required rate
IF NPV = 0
IRR = Required Rate
IF NPV < 0
IRR < Required Rate
\.Project J has a zero NPV at 7%. Project K has a zero NPV at 10%.
For______ , we discount future cash flows more heavily (unfavorably). Still NPV is the same
The better project is ______ ______ IRR better.
Project K
using higher discount rate
K --> higher IRR
\.IRR formula
compute NPV =
PV of cash inflows - PV f cash outflows
0 = annual net cash flows * PVA (x%, 10) - investment
0 = 20,000 * PVA (x%,10) - 104,320
