Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 8 Investment Decision Rules
8.1 The NPV Decision Rule
1) Preference for cash today versus cash in the future in part determines net present value
(NPV).
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Net present value (NPV) is the difference between the present value (PV) of the benefits
and the present value (PV) of the costs of a project or investment.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Most corporations measure the value of a project in terms of which of the following?
A) discount value
B) discount factor
C) future value (FV)
D) present value (PV)
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) The present value (PV) of an investment is ________.
A) the amount that an investment would yield if the benefit were realized today
B) the difference between the cost of the investment and the benefit of the investment in
dollars today
C) the amount you need to invest at the current interest rate to re-create the cash flow
from the investment
D) the amount by which the cash flow of an investment exceeds or falls short of the cash
flow generated by the same amount of money invested at market rate
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Revised
5) Tanner is choosing between two investment options. He can invest $500 now and get
(guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later
today. The risk-free rate is 3.5%. Which investment should Tanner prefer?
A) $531.40 later today, since $1 today is worth more than $1 in one year.
B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he
1
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,invested.
C) Neither - both investments have a negative NPV.
D) Tanner should be indifferent between the two investments, since both are equivalent to
the same amount of cash today.
Answer: D
Explanation: D) The NPVs are equal, so that each is the same as $31.40 today.
Diff: 1 Var: 1
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
6) A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If
interest rates are 4%, what is the net present value (NPV) of this investment?
A) $10,048
B) $11,053
C) $16,077
D) $14,250
Answer: A
Explanation: A) $109,250 / (1 + 0.04) = $105,048.077;
$105,048.077 - $95,000 = $10,048
Diff: 1 Var: 45
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) A car dealership offers a car for $14,000, with up to one year to pay for the car. If the
interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not
to pay for the car for one year?
A) $667
B) $1333
C) $13,333
D) $14,000
Answer: A
Explanation: A) $14,000 / (1 + 0.05) = $13,333.3333;
$14,000 - $13,333 = $667
Diff: 1 Var: 25
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2
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,8) Martin is offered an investment where for $6000 today, he will receive $6180 in one
year. He decides to borrow $6000 from the bank to make this investment. What is the
maximum interest rate the bank needs to offer on the loan if Martin is at least to break
even on this investment?
A) 1%
B) 2%
C) 3%
D) 4%
Answer: C
Explanation: C) = 3%
Diff: 1 Var: 30
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
9) A security firm is offered $80,000 in one year for providing CCTV coverage of a property.
The cost of providing this coverage to the security firm is $74,000, payable now, and the
interest rate is 8.5%. Should the firm take the contract?
A) Yes, since net present value (NPV) is positive.
B) It does not matter whether the contract is taken or not, since NPV = 0.
C) Yes, since net present value (NPV) is negative.
D) No, since net present value (NPV) is negative.
Answer: D
Diff: 1 Var: 1
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
10) A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground,
and sow the crop. In one year's time it will cost $93,200 to harvest the crop. If the crop will
be worth $350,000, and the interest rate is 7%, what is the net present value (NPV) of this
investment?
A) $240,000
B) $87,103
C) $0
D) $567,103
Answer: C
Explanation: C) - 240,000 = $0
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
3
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, 11) A delivery service is buying 600 tires for its fleet of vehicles. One supplier offers to
supply the tires for $80 per tire, payable in one year. Another supplier will supply the tires
for $20,000 down today, then $45 per tire, payable in one year. What is the difference in PV
between the first and the second offer, assuming interest rates are 8.1%?
A) -$860
B) -$229
C) -$574
D) $860
Answer: C
Explanation: C) -$80 × 600 = $48,000;
PV1 = 48,000 / (1 + 0.081) = $44,403.3302;
-$45 × 600 = $27,000;
PV2 = -20,000 + $27,000 / (1 + 0.081) = $44,976.8733;
PV1 - PV2 = $44,403.3302 - $44,976.8733 = -$574
Diff: 3 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12) Peter has a business opportunity that requires him to invest $10,000 today, and receive
$12,000 in one year. He can either use $10,000 that he already has for this investment or
borrow the money from his bank at an interest rate of 10%. However, the $10,000 he has
right now is needed for urgent repairs to his home, repairs that will cost at least $15,000 if
he delays them for a year. What is the best alternative for Peter out of the following
choices?
A) No, since the net present value (NPV) of the investment, should he take it, is less than
the net present value (NPV) of the home repairs if he delays them for one year.
B) Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in
the business opportunity, which, since it has a NPV > 0 will mean he will still come out
ahead after repaying the loan.
C) Yes, since the net present value (NPV) of the investment is greater than zero he can
invest the $10,000 in the business opportunity, and then next year use this money plus the
benefit from this money to make the necessary home repairs.
D) Yes, since the net present value (NPV) of the investment, should he take it, is greater
than the net present value (NPV) of the home repairs if he delays them for one year.
Answer: B
Diff: 2 Var: 1
Skill: Analytical
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Revised
4
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Chapter 8 Investment Decision Rules
8.1 The NPV Decision Rule
1) Preference for cash today versus cash in the future in part determines net present value
(NPV).
Answer: FALSE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
2) Net present value (NPV) is the difference between the present value (PV) of the benefits
and the present value (PV) of the costs of a project or investment.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
3) Most corporations measure the value of a project in terms of which of the following?
A) discount value
B) discount factor
C) future value (FV)
D) present value (PV)
Answer: D
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
4) The present value (PV) of an investment is ________.
A) the amount that an investment would yield if the benefit were realized today
B) the difference between the cost of the investment and the benefit of the investment in
dollars today
C) the amount you need to invest at the current interest rate to re-create the cash flow
from the investment
D) the amount by which the cash flow of an investment exceeds or falls short of the cash
flow generated by the same amount of money invested at market rate
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Revised
5) Tanner is choosing between two investment options. He can invest $500 now and get
(guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later
today. The risk-free rate is 3.5%. Which investment should Tanner prefer?
A) $531.40 later today, since $1 today is worth more than $1 in one year.
B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he
1
Copyright © 2015 Pearson Education, Inc.
,invested.
C) Neither - both investments have a negative NPV.
D) Tanner should be indifferent between the two investments, since both are equivalent to
the same amount of cash today.
Answer: D
Explanation: D) The NPVs are equal, so that each is the same as $31.40 today.
Diff: 1 Var: 1
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JP
Question Status: Revised
6) A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If
interest rates are 4%, what is the net present value (NPV) of this investment?
A) $10,048
B) $11,053
C) $16,077
D) $14,250
Answer: A
Explanation: A) $109,250 / (1 + 0.04) = $105,048.077;
$105,048.077 - $95,000 = $10,048
Diff: 1 Var: 45
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) A car dealership offers a car for $14,000, with up to one year to pay for the car. If the
interest rate is 5%, what is the net present value (NPV) of this offer to buyers who elect not
to pay for the car for one year?
A) $667
B) $1333
C) $13,333
D) $14,000
Answer: A
Explanation: A) $14,000 / (1 + 0.05) = $13,333.3333;
$14,000 - $13,333 = $667
Diff: 1 Var: 25
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
2
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,8) Martin is offered an investment where for $6000 today, he will receive $6180 in one
year. He decides to borrow $6000 from the bank to make this investment. What is the
maximum interest rate the bank needs to offer on the loan if Martin is at least to break
even on this investment?
A) 1%
B) 2%
C) 3%
D) 4%
Answer: C
Explanation: C) = 3%
Diff: 1 Var: 30
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
9) A security firm is offered $80,000 in one year for providing CCTV coverage of a property.
The cost of providing this coverage to the security firm is $74,000, payable now, and the
interest rate is 8.5%. Should the firm take the contract?
A) Yes, since net present value (NPV) is positive.
B) It does not matter whether the contract is taken or not, since NPV = 0.
C) Yes, since net present value (NPV) is negative.
D) No, since net present value (NPV) is negative.
Answer: D
Diff: 1 Var: 1
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
10) A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground,
and sow the crop. In one year's time it will cost $93,200 to harvest the crop. If the crop will
be worth $350,000, and the interest rate is 7%, what is the net present value (NPV) of this
investment?
A) $240,000
B) $87,103
C) $0
D) $567,103
Answer: C
Explanation: C) - 240,000 = $0
Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
3
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, 11) A delivery service is buying 600 tires for its fleet of vehicles. One supplier offers to
supply the tires for $80 per tire, payable in one year. Another supplier will supply the tires
for $20,000 down today, then $45 per tire, payable in one year. What is the difference in PV
between the first and the second offer, assuming interest rates are 8.1%?
A) -$860
B) -$229
C) -$574
D) $860
Answer: C
Explanation: C) -$80 × 600 = $48,000;
PV1 = 48,000 / (1 + 0.081) = $44,403.3302;
-$45 × 600 = $27,000;
PV2 = -20,000 + $27,000 / (1 + 0.081) = $44,976.8733;
PV1 - PV2 = $44,403.3302 - $44,976.8733 = -$574
Diff: 3 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
12) Peter has a business opportunity that requires him to invest $10,000 today, and receive
$12,000 in one year. He can either use $10,000 that he already has for this investment or
borrow the money from his bank at an interest rate of 10%. However, the $10,000 he has
right now is needed for urgent repairs to his home, repairs that will cost at least $15,000 if
he delays them for a year. What is the best alternative for Peter out of the following
choices?
A) No, since the net present value (NPV) of the investment, should he take it, is less than
the net present value (NPV) of the home repairs if he delays them for one year.
B) Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in
the business opportunity, which, since it has a NPV > 0 will mean he will still come out
ahead after repaying the loan.
C) Yes, since the net present value (NPV) of the investment is greater than zero he can
invest the $10,000 in the business opportunity, and then next year use this money plus the
benefit from this money to make the necessary home repairs.
D) Yes, since the net present value (NPV) of the investment, should he take it, is greater
than the net present value (NPV) of the home repairs if he delays them for one year.
Answer: B
Diff: 2 Var: 1
Skill: Analytical
AACSB Objective: Reflective Thinking Skills
Author: DS
Question Status: Revised
4
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