Fundamentals of Corporate Finance (2015), 3e (Berk/DeMarzo/Harford) test bank.

Fundamentals of Corporate Finance, 3e (Berk/DeMarzo/Harford)
Chapter 4 Time Value of Money: Valuing Cash Flow Streams

4.1 Valuing a Stream of Cash Flows

1) The present value (PV) of a stream of cash flows is just the sum of the present values of
each individual cash flow.
Answer: TRUE
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition

2) You are given two choices of investments, Investment A and Investment B. Both
investments have the same future cash flows. Investment A has a discount rate of 4%, and
Investment B has a discount rate of 5%. Which of the following is true?
A) The present value of cash flows in Investment A is higher than the present value of cash
flows in Investment B.
B) The present value of cash flows in Investment A is lower than the present value of cash
flows in Investment B.
C) The present value of cash flows in Investment A is equal to the present value of cash
flows in Investment B.
D) No comparison can be made—we need to know the cash flows to calculate the present
value.
Answer: A
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Analytic Skills
Author: JP
Question Status: New




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,3) Which of the following investments has a higher present value, assuming the same
(strictly positive) interest rate applies to both investments?

Year Investment X Investment Y
1 $5,000 $11,000
2 $7,000 $9,000
3 $9,000 $7,000
4 $11,000 $5,000

A) Investment X has a higher present value.
B) Investment Y has a higher present value.
C) Investment X and Investment Y have the same present value, since the total of the cash
flows is the same for both.
D) No comparison can be made—we need to know the interest rate to calculate the present
value.
Answer: B
Diff: 1 Var: 1
Skill: Conceptual
AACSB Objective: Reflective Thinking Skills
Author: JP
Question Status: New

4) An investment pays you $30,000 at the end of this year, and $10,000 at the end of each
of the four following years. What is the present value (PV) of this investment, given that the
interest rate is 5% per year?
A) $39,614
B) $63,382
C) $79,228
D) $95,074
Answer: C
Explanation: C) Using the CF keys, input $30,000 as CF1, $15,000 as CF2, and 4 as F2;
calculate PV at 5,
Diff: 1 Var: 6
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition




2
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, 5) A lottery winner will receive $6 million at the end of each of the next twelve years. What
is the future value (FV) of her winnings at the time of her final payment, given that the
interest rate is 8.6% per year?
A) $94.40 million
B) $118.00 million
C) $165.20 million
D) $188.80 million
Answer: B
Explanation: B) Calculate the FV with and which gives

Diff: 1 Var: 50+
Skill: Analytical
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised

6) Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of
11%. The amount of money will you have in ten years is closest to which of the following?
The amount you will have in 50 years is closest to which of the following?
A) $1420; $110,739
B) $2271; $166,109
C) $2839; $184,565
D) $3123; $221,478
Answer: C
Explanation: C) FV = 1000(1 + 0.11)10 = $2839;
Diff: 1 Var: 10
Skill: Analytical
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition




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