FIN 6710 Wall Street Prep1 Excel Crash Course : A+
Score Guide
Preference for cash today versus cash in the future in part determines net present
value (NPV). - ANSWERFALSE
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. -
ANSWERTRUE
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) - ANSWERD
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 -
ANSWERA
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 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. - ANSWERD) The NPVs are equal, so
that each is the same as $31.40 today.
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 - ANSWERA) $109,250 / (1 + 0.04 ) = $105,048.077 ;
$105,048.077 - $95,000 = $10,048
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 - ANSWERA) $14,000 / (1 + 0.05 ) = $13,333.3333 ;
$14,000 - $13,333 = $667
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% - ANSWERC) ($6180 - $6000) / $6000 = 3%
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. - ANSWERD
A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground,
and sow the crop. In one yearʹs 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 - ANSWERC) (350,000 - $93,200 ) / (1 + 0.07 ) - 240,000 = $0
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 - ANSWERC) -$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
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,
Score Guide
Preference for cash today versus cash in the future in part determines net present
value (NPV). - ANSWERFALSE
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. -
ANSWERTRUE
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) - ANSWERD
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 -
ANSWERA
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 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. - ANSWERD) The NPVs are equal, so
that each is the same as $31.40 today.
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 - ANSWERA) $109,250 / (1 + 0.04 ) = $105,048.077 ;
$105,048.077 - $95,000 = $10,048
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 - ANSWERA) $14,000 / (1 + 0.05 ) = $13,333.3333 ;
$14,000 - $13,333 = $667
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% - ANSWERC) ($6180 - $6000) / $6000 = 3%
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. - ANSWERD
A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground,
and sow the crop. In one yearʹs 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 - ANSWERC) (350,000 - $93,200 ) / (1 + 0.07 ) - 240,000 = $0
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 - ANSWERC) -$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
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,
