2
Student: ___________________________________________________________________________
1. The present value of $100.00 expected two years from today at a discount rate of 6% is:
A. $112.36.
B. $106.00.
C. $100.00.
D. $89.00.
2. Present value is defined as:
A. future cash flows discounted to the present by an appropriate discount rate.
B. inverse of future cash flows.
C. present cash flows compounded into the future.
D. future cash flows multiplied by the factor (1 + r)t.
3. If the annual interest rate is 12.00%, what is the two-year discount factor?
A. 0.7972
B. 0.8929
C. 1.2544
D. 0.8065
4. If the present value of cash flow X is $240, and the present value of cash flow Y is $160, then the present
value of the combined cash flows is:
A. $240.
B. $160.
C. $80.
D. $400.
5. The rate of return is also called the: I) discount rate; II) hurdle rate; III) opportunity cost of capital
A. I only.
B. I and II only.
C. I, II, and III.
D. I and III only.
6. The present value of $121,000 expected one year from today at an interest rate (discount rate) of 10% per
year is:
A. $121,000.
B. $100,000.
C. $110,000.
D. $108,900.
7. The one-year discount factor, at a discount rate of 25% per year, is:
A. 1.25.
B. 1.0.
C. 0.8.
D. 0.75.
8. The one-year discount factor, at an interest rate of 100% per year, is:
A. 1.50.
B. 0.50.
C. 0.25.
D. 1.00.
,9. The present value of $100,000 expected at the end of one year, at a discount rate of 25% per year, is:
A. $80,000.
B. $125,000.
C. $100,000.
D. $75,000.
10. If the one-year discount factor is 0.8333, what is the discount rate (interest rate) per year?
A. 10%
B. 20%
C. 30%
D. 40%
11. If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount
factor?
A. 0.8333
B. 1.20
C. 0.20
D. 1.00
12. If the present value of $250 expected one year from today is $200, what is the one-year discount rate?
A. 10%
B. 20%
C. 25%
D. 30%
13. If the one-year discount factor is 0.90, what is the present value of $120 expected one year from today?
A. $100
B. $96
C. $108
D. $133
14. If the present value of $600, expected one year from today, is $400, what is the one-year discount rate?
A. 15%
B. 20%
C. 25%
D. 50%
15. The present value formula for a cash flow expected one period from now is:
A. PV = C1 × (1 + r).
B. PV = C1/(1 + r).
C. PV = C1/r.
D. PV = (1 + r)/C1.
16. The net present value formula for one period is:
A. NPV = C0 + [C1/(1 + r)].
B. NPV = PV required investment.
C. NPV = C0/C1.
D. NPV = C1/C0.
17. An initial investment of $400,000 is expected to produce an end-of-year cash flow of $480,000. What is
the NPV of the project at a discount rate of 20%?
A. $176,000
B. $80,000
C. $0 (zero)
D. $64,000
,18. If the present value of a cash flow generated by an initial investment of $200,000 is $250,000, what is the
NPV of the project?
A. $250,000
B. $50,000
C. $200,000
D. -$50,000
19. What is the present value of the following cash flows at a discount rate of 9%?
A. $372,431.81
B. $450,000.00
C. $405,950.68
D. $412,844.04
20. At an interest rate of 10%, which of the following sequences of cash flows should you prefer?
A. option A
B. option B
C. option C
D. option D
21. What is the net present value of the following cash flow sequence at a discount rate of 11%?
A. $69,108.03
B. $231,432.51
C. $80,000.00
D. $88,000.00
22. What is the net present value of the following sequence of annual cash flows at a discount rate of 16%
APR?
A. $136,741.97
B. $122,948.87
C. $158,620.69
D. $139,418.23
23. What is the net present value (NPV) of the following sequence of cash flows at a discount rate of 9%?
A. $122,431.81
B. $200,000.00
C. $155,950.68
D. $177,483.77
24. Which of the following statements regarding the NPV rule and the rate of return rule is false?
A. Accept a project if its NPV > 0.
B. Reject a project if the NPV < 0.
C. Accept a project if its rate of return > 0.
D. Accept a project if its rate of return > opportunity cost of capital.
, 25. An initial investment of $500 produces a cash flow of $550 one year from today. Calculate the rate of
return on the project.
A. 10%
B. 15%
C. 20%
D. 25%
26. According to the net present value rule, an investment in a project should be made if the:
A. net present value is greater than the cost of investment.
B. net present value is greater than the present value of cash flows.
C. net present value is positive.
D. net present value is negative.
27. Which of the following statements regarding the net present value rule and the rate of return rule is false?
A. Accept a project if NPV > cost of investment.
B. Accept a project if NPV is positive.
C. Accept a project if return on investment exceeds the rate of return on an equivalent-risk investment in
the financial market.
D. Reject a project if NPV is negative.
28. The opportunity cost of capital for a risky project is:
A. the expected rate of return on a government security having the same maturity as the project.
B. the expected rate of return on a well-diversified portfolio of common stocks.
C. the expected rate of return on a security of similar risk as the project.
D. The expected rate of return on a typical bond portfolio.
29. A perpetuity is defined as a sequence of:
A. equal cash flows occurring at equal intervals of time for a specific number of periods.
B. equal cash flows occurring at equal intervals of time forever.
C. unequal cash flows occurring at equal intervals of time forever.
D. unequal cash flows occurring at equal intervals of time for a specific number of periods.
30. Which of the following is generally considered an example of a perpetuity?
A. Interest payments on a 10-year bond
B. Interest payments on a 30-year bond
C. Interest payments on a consol
D. Interest payments on government bonds
31. You would like to have enough money saved after your retirement such that you and your heirs can
receive $100,000 per year in perpetuity. How much would you need to have saved at the time of your
retirement in order to achieve this goal? (Assume that the perpetuity payments start one year after the date
of your retirement. The annual interest rate is 12.5%.)
A. $1,000,000
B. $10,000,000
C. $800,000
D. $1,125,000
32. What is the present value of $10,000 per year in perpetuity at an interest rate of 10%?
A. $10,000
B. $100,000
C. $200,000
D. $1,000
Student: ___________________________________________________________________________
1. The present value of $100.00 expected two years from today at a discount rate of 6% is:
A. $112.36.
B. $106.00.
C. $100.00.
D. $89.00.
2. Present value is defined as:
A. future cash flows discounted to the present by an appropriate discount rate.
B. inverse of future cash flows.
C. present cash flows compounded into the future.
D. future cash flows multiplied by the factor (1 + r)t.
3. If the annual interest rate is 12.00%, what is the two-year discount factor?
A. 0.7972
B. 0.8929
C. 1.2544
D. 0.8065
4. If the present value of cash flow X is $240, and the present value of cash flow Y is $160, then the present
value of the combined cash flows is:
A. $240.
B. $160.
C. $80.
D. $400.
5. The rate of return is also called the: I) discount rate; II) hurdle rate; III) opportunity cost of capital
A. I only.
B. I and II only.
C. I, II, and III.
D. I and III only.
6. The present value of $121,000 expected one year from today at an interest rate (discount rate) of 10% per
year is:
A. $121,000.
B. $100,000.
C. $110,000.
D. $108,900.
7. The one-year discount factor, at a discount rate of 25% per year, is:
A. 1.25.
B. 1.0.
C. 0.8.
D. 0.75.
8. The one-year discount factor, at an interest rate of 100% per year, is:
A. 1.50.
B. 0.50.
C. 0.25.
D. 1.00.
,9. The present value of $100,000 expected at the end of one year, at a discount rate of 25% per year, is:
A. $80,000.
B. $125,000.
C. $100,000.
D. $75,000.
10. If the one-year discount factor is 0.8333, what is the discount rate (interest rate) per year?
A. 10%
B. 20%
C. 30%
D. 40%
11. If the present value of $480 to be paid at the end of one year is $400, what is the one-year discount
factor?
A. 0.8333
B. 1.20
C. 0.20
D. 1.00
12. If the present value of $250 expected one year from today is $200, what is the one-year discount rate?
A. 10%
B. 20%
C. 25%
D. 30%
13. If the one-year discount factor is 0.90, what is the present value of $120 expected one year from today?
A. $100
B. $96
C. $108
D. $133
14. If the present value of $600, expected one year from today, is $400, what is the one-year discount rate?
A. 15%
B. 20%
C. 25%
D. 50%
15. The present value formula for a cash flow expected one period from now is:
A. PV = C1 × (1 + r).
B. PV = C1/(1 + r).
C. PV = C1/r.
D. PV = (1 + r)/C1.
16. The net present value formula for one period is:
A. NPV = C0 + [C1/(1 + r)].
B. NPV = PV required investment.
C. NPV = C0/C1.
D. NPV = C1/C0.
17. An initial investment of $400,000 is expected to produce an end-of-year cash flow of $480,000. What is
the NPV of the project at a discount rate of 20%?
A. $176,000
B. $80,000
C. $0 (zero)
D. $64,000
,18. If the present value of a cash flow generated by an initial investment of $200,000 is $250,000, what is the
NPV of the project?
A. $250,000
B. $50,000
C. $200,000
D. -$50,000
19. What is the present value of the following cash flows at a discount rate of 9%?
A. $372,431.81
B. $450,000.00
C. $405,950.68
D. $412,844.04
20. At an interest rate of 10%, which of the following sequences of cash flows should you prefer?
A. option A
B. option B
C. option C
D. option D
21. What is the net present value of the following cash flow sequence at a discount rate of 11%?
A. $69,108.03
B. $231,432.51
C. $80,000.00
D. $88,000.00
22. What is the net present value of the following sequence of annual cash flows at a discount rate of 16%
APR?
A. $136,741.97
B. $122,948.87
C. $158,620.69
D. $139,418.23
23. What is the net present value (NPV) of the following sequence of cash flows at a discount rate of 9%?
A. $122,431.81
B. $200,000.00
C. $155,950.68
D. $177,483.77
24. Which of the following statements regarding the NPV rule and the rate of return rule is false?
A. Accept a project if its NPV > 0.
B. Reject a project if the NPV < 0.
C. Accept a project if its rate of return > 0.
D. Accept a project if its rate of return > opportunity cost of capital.
, 25. An initial investment of $500 produces a cash flow of $550 one year from today. Calculate the rate of
return on the project.
A. 10%
B. 15%
C. 20%
D. 25%
26. According to the net present value rule, an investment in a project should be made if the:
A. net present value is greater than the cost of investment.
B. net present value is greater than the present value of cash flows.
C. net present value is positive.
D. net present value is negative.
27. Which of the following statements regarding the net present value rule and the rate of return rule is false?
A. Accept a project if NPV > cost of investment.
B. Accept a project if NPV is positive.
C. Accept a project if return on investment exceeds the rate of return on an equivalent-risk investment in
the financial market.
D. Reject a project if NPV is negative.
28. The opportunity cost of capital for a risky project is:
A. the expected rate of return on a government security having the same maturity as the project.
B. the expected rate of return on a well-diversified portfolio of common stocks.
C. the expected rate of return on a security of similar risk as the project.
D. The expected rate of return on a typical bond portfolio.
29. A perpetuity is defined as a sequence of:
A. equal cash flows occurring at equal intervals of time for a specific number of periods.
B. equal cash flows occurring at equal intervals of time forever.
C. unequal cash flows occurring at equal intervals of time forever.
D. unequal cash flows occurring at equal intervals of time for a specific number of periods.
30. Which of the following is generally considered an example of a perpetuity?
A. Interest payments on a 10-year bond
B. Interest payments on a 30-year bond
C. Interest payments on a consol
D. Interest payments on government bonds
31. You would like to have enough money saved after your retirement such that you and your heirs can
receive $100,000 per year in perpetuity. How much would you need to have saved at the time of your
retirement in order to achieve this goal? (Assume that the perpetuity payments start one year after the date
of your retirement. The annual interest rate is 12.5%.)
A. $1,000,000
B. $10,000,000
C. $800,000
D. $1,125,000
32. What is the present value of $10,000 per year in perpetuity at an interest rate of 10%?
A. $10,000
B. $100,000
C. $200,000
D. $1,000
