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Corporate Finance, 12e (Ross)
1) The net present value of a project is equal to the:
A) present value of the future cash flows.
B) present value of the future cash flows minus the initial cost.
C) future value of the future cash flows minus the initial cost.
D) future value of the future cash flows minus the present value of the initial cost.
E) sum of the project's anticipated cash inflows.
2) Which one of these statements is correct concerning the time value of money?
A) Increasing the initial cost of a project increases the project's NPV.
B) Increasing the discount rate, increases the PV of a project.
C) Increasing the FV decreases the PV.
D) Decreasing the PV decreases the FV.
E) Decreasing the discount rate increases the FV.
3) At a discount rate of 5 percent, which one of the following is the correct formula for
computing the PV of $1 to be received one year from today?
A) $1/1.05
B) $1
C) $1 × 1.05
D) $1 × 1.052
E) $1/1.052
4) What effect will an increase in the discount rate have on the present value of a project that has
an initial cash outflow followed by five years of cash inflows?
A) There will be no effect on the PV.
B) The PV will change but the direction of the change is unknown.
C) The PV will remain the same as the timing of the cash flows must change also.
D) The PV will increase.
E) The PV will decrease.
5) You are considering two projects. Project A has projected cash flows of $6,500, $4,500, and
$2,500 for the next three years, respectively. Project B has projected cash flows of $2,500,
$4,500, and $6,500 for the next three years, respectively. Assuming both projects have the same
initial cost, you know that:
A) there are no conditions under which the projects can have equal values.
B) Project B has a higher net present value than Project A.
C) Project A is more valuable than Project B given a positive discount rate.
D) both projects offer the same rate of return.
E) both projects have equal net present values at any discount rate.
6) An interest rate that is compounded monthly, but is expressed as if the rate were compounded
annually, is called the ________ rate.
A) stated interest
B) compound interest
C) effective annual
D) periodic interest
E) daily interest
7) The interest rate charged per period multiplied by the number of periods per year is called the
________ rate.
A) effective annual
B) annual percentage
C) periodic interest
D) compound interest
E) daily interest
8) The annual percentage rate:
A) considers interest on interest.
B) is the actual cost of a loan with monthly payments.
C) is higher than the effective annual rate when interest is compounded quarterly.
D) is the interest rate charged per period divided by (1 + n), when n is the number of periods per
year.
E) equals the effective annual rate when the interest on an account is designated as simple
interest.
9) You would be making a wise decision if you chose to:
A) base decisions regarding investments on effective rates and base decisions regarding loans on
annual percentage rates.
B) assume all loans and investments are based on simple interest.
C) accept the loan with the lower effective annual rate rather than the loan with the lower annual
percentage rate.
D) invest in an account paying 6 percent, compounded quarterly, rather than an account paying 6
percent, compounded monthly.
E) ignore the effective rates and concentrate on the annual percentage rates for all transactions.
10) The highest effective annual rate that can be derived from an annual percentage rate of 9
percent is computed as:
A) (1 + .09/365)(365).
B) e.09q.
C) 1.09e.
D) e.09 − 1.
E) (1 + .09/365)365 − 1.
11) Given a stated interest rate, which form of compounding will yield the highest effective rate
of interest?
A) Annual compounding
B) Monthly compounding
C) Daily compounding
D) Continuous compounding
E) Semiannual compounding
12) A perpetuity differs from an annuity because:
A) perpetuity cash flows vary with the rate of inflation.
B) perpetuity cash flows vary with the market rate of interest.
C) perpetuity cash flows are variable while annuity payments are constant.
D) perpetuity cash flows never cease.
E) annuity cash flows occur at irregular intervals of time.
13) You are comparing two investment options, each of which will provide $15,000 of total
income. Option A pays five annual payments starting with $5,000 the first year followed by four
annual payments of $2,500 each. Option B pays five annual payments of $3,000 each. Which
one of the following statements is correct given these two investment options?
A) Both options are of equal value today.
B) Given a positive rate of return, Option A is worth more today than Option B.
C) Option B has a higher present value than Option A given a positive rate of return.
D) Option B has a lower present value than Option A given a zero rate of return.
E) Option A is preferable because it is an annuity due.
14) An annuity stream of cash flow payments is a set of:
A) equal cash flows occurring at equal periods of time over a fixed length of time.
B) equal cash flows occurring each time period forever.
C) either equal or varying cash flows occurring at set intervals of time for a fixed period.
D) increasing cash flows occurring at set intervals of time that go on forever.
E) arbitrary cash flows occurring each time period for no more than 10 years.
15) Annuities where the payments occur at the end of each time period are called ________,
whereas ________ refer to annuity streams with payments occurring at the beginning of each
time period.
A) ordinary annuities; early annuities
B) late annuities; straight annuities
C) straight annuities; late annuities
D) annuities due; ordinary annuities
E) ordinary annuities; annuities due
16) A flow of unending annual payments that increase by a set percentage each year and occur at
regular intervals of time is called a(n):
A) annuity due.
B) growing annuity.
C) growing perpetuity.
D) variable annuity.
E) variable perpetuity.
17) Ted purchased an annuity today that will pay $1,000 a month for five years. He received his
first monthly payment today. Allison purchased an annuity today that will pay $1,000 a month
for five years. She will receive her first payment one month from today. Which one of the
following statements is correct concerning these two annuities?
A) Both annuities are of equal value today.
B) Allison's annuity is an annuity due.
C) Ted's annuity has a higher present value than Allison's.
D) Allison's annuity has a higher present value than Ted's.
E) Ted's annuity is an ordinary annuity.
18) Assume an annuity will pay $1,000 a year for five years with the first payment occurring in
Year 4, that is, four years from today. When you compute the present value of that annuity using
the PV formula, the PV will be as of which point in time?
A) Today, Year 0
B) Year 1
C) Year 3
D) Year 4
E) Year 2
19) Martha left an inheritance to her grandson that will pay him $1,500 on the first day of every
other year. When computing the PV of this inheritance, the grandson should use:
A) simple interest.
B) a semiannually compounded discount rate.
C) an effective annual rate.
D) a 2-year discount rate.
E) a semiannual discount rate.
20) Binder and Sons borrowed $138,000 for three years from their local bank and now they are
paying monthly payments that include both principal and interest. Paying off debt by making
instalment payments, such as this firm is doing, is referred to as:
A) foreclosing on the debt.
B) amortizing the debt.
C) funding the debt.
D) calling the debt.
E) refunding the debt.
21) Assume you borrow $6,600 for three years. How much will you still owe after the three
years if you pay all of the payments as set forth in the loan's amortization schedule?
A) $6,500
B) $0
C) $2,200
D) $3,150
E) $2,650
22) Assume you borrow $12,000 for 5 years with equal annual repayments. If the interest rate on
the actual loan turns out to be higher than you anticipated, then the:
A) total principal repaid will be less than anticipated.
B) loan will still have a balance due at the end of the 5-year amortization period.
C) first annual payment will repay more of the principal than anticipated.
D) anticipated amortization schedule will still apply as the loan is still a 5-year loan.
E) annual payments will be higher than you anticipated.
23) What rate of return should be used to compute the NPV of a proposed purchase of Smiley's,
an operating business?
A) A discount rate equal to Smiley's current return on equity
B) The discount rate applicable to other investments with similar risks
C) A discount rate equal to Smiley's net profit percentage
D) The rate of interest charged by a bank for a loan similar in size to the cost of the purchase
E) A discount rate that makes the NPV of the proposed purchase positive
24) For a proposed purchase to be acceptable, the PV of the future cash flows must:
A) be positive at the relevant discount rate.
B) be less than the cost of the purchase.
C) equal or exceed the cost of the purchase.
D) equal the purchase price.
E) be positive at all discount rates.
25) What is the present value of $6,811 to be received in one year if the discount rate is 6.5
percent?
A) $6,395.31
B) $6,023.58
C) $6,643.29
D) $6,671.13
E) $7,253.72
26) Stu can purchase a house today for $110,000, including the cost of some minor repairs. He
expects to be able to resell it in one year for $129,000 after cleaning up the property. At a
discount rate of 5.5 percent, what is the expected net present value of this purchase opportunity?
A) $13,001.61
B) $12,487.43
C) $12,274.88
D) $9,208.18
E) $11,311.02
27) You have been awarded an insurance settlement of $250,000 that is payable one year from
today. What is the minimum amount you should accept today in exchange for this settlement if
you can earn 6.7 percent on your investments?
A) $232,866.67
B) $234,301.78
C) $242,408.19
D) $250,000.00
E) $238,079.19
28) You plan to invest $6,500 for three years at 4 percent simple interest. What will your
investment be worth at the end of the three years?
A) $7,280.00
B) $7,311.62
C) $7,250.00
D) $6,924.32
E) $6,760.00
29) Shawn has $2,500 invested at a guaranteed rate of 4.35 percent, compounded annually. What
will his investment be worth after five years?
A) $2,997.04
B) $3,288.00
C) $3,321.32
D) $3,093.16
E) $2,857.59
30) Beatrice invests $1,000 in an account that pays 5 percent simple interest. How much more
could she have earned over a period of 10 years if the interest had compounded annually?
A) $132.45
B) $135.97
C) $128.89
D) $117.09
E) $121.67
31) A project is expected to produce cash flows of $48,000, $39,000, and $15,000 over the next
three years, respectively. After three years, the project will be worthless. What is the net present
value of this project if the applicable discount rate is 15.25 percent and the initial cost is
$78,500?
A) −$1,201.76
B) $2,309.09
C) −$3,457.96
D) $1,808.17
E) $3,132.48
32) Over the next three years, Marti plans to save $2,000, $2,500, and $3,000, respectively,
starting one year from today. You want to have as much money as Marti does three years from
now but you plan to make one lump sum investment today. What amount must you save today if
you both earn 4.65 annually?
A) $6,811.50
B) $6,791.42
C) $7,128.23
D) $6,607.23
E) $7,500.00
33) An insurance settlement offer includes annual payments of $36,000, $42,000, and $50,000
over the next three years, respectively, with the first payment being made one year from today.
What is the minimum amount you should accept today as a lump sum settlement if your discount
rate is 7 percent?
A) $119,877.67
B) $111,144.18
C) $105,000.10
D) $118,924.27
E) $114,556.88
34) You have been offered a job that pays an annual salary of $48,000, $51,000, and $55,000
over the next three years, respectively. The offer also includes a starting bonus of $2,500 payable
immediately. What is this offer worth to you today at a discount rate of 6.5 percent?
A) $129,640.14
B) $134,383.56
C) $132,283.56
D) $138,066.75
E) $130,983.56
35) You are considering a project with projected annual cash flows of $32,200, $41,800, and
$22,900 for the next three years, respectively. What is the present value of these cash flows at a
discount rate of 14 percent?
A) $86,487.47
B) $75,866.20
C) $77,103.18
D) $81,292.25
E) $66,549.30
36) You expect an investment to return $11,300, $14,600, $21,900, and $38,400 annually over
the next four years, respectively. What is this investment worth to you today if you desire a rate
of return of 16.5 percent?
A) $64,253.91
B) $58,700.89
C) $63,732.41
D) $55,153.57
E) $59,928.16
37) Assume a cash flow of $82,400 in the first year and $148,600 in the second year. Also
assume a present value of $303,764.34 at a discount rate of 12.75 percent. What is the cash flow
in the third year if that is the only other cash flow?
A) $163,100
B) $163,800
C) $164,900
D) $164,400
E) $163,700
38) U Do It Centers deposited $3,200 in an account two years ago and is depositing another
$5,000 today. A final deposit of $3,500 will be made one year from now. What will the account
balance be three years from now if the account pays 4.85 percent interest, compounded annually?
A) $13,033.95
B) $13,430.84
C) $12,431.05
D) $14,328.90
E) $13,666.10
39) Anna has $38,654 in a savings account that pays 2.3 percent interest. Assume she withdraws
$10,000 today and another $10,000 one year from today. If she waits and withdraws the
remaining entire balance four years from today, what will be the amount of that withdrawal?
A) $20,916.78
B) $20,109.08
C) $20,676.53
D) $19,341.02
E) $19,608.07
40) Theo is depositing $1,300 today in an account with an expected rate of return of 8.1 percent.
If he deposits an additional $3,200 two years from today, and $4,000 three years from today,
what will his account balance be ten years from today?
A) $14,044.89
B) $16,412.31
C) $15,182.53
D) $15,699.54
E) $17,741.71
41) You want to save an equal amount each year for the next 38 years, at which time you will
retire. What amount of annual savings are needed if you desire a retirement income of $55,000 a
year for 25 years and earn 7.5 percent, compounded annually?
A) $3,333.33
B) $2,640.85
C) $3,146.32
D) $2,889.04
E) $3,406.16
