You plan to analyze the value of a potential investment by calculating the sum of the present
Question:
You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?
A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
B) The discount rate increases.
C) The riskiness of the investment's cash flows decreases.
D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
E) The discount rate decreases.
Which of the following investments would have the highest future value at the end of 10 years? Assume that the effective annual rate for all investments is the same and is greater than zero.
A) Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
B) Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).
C) Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).
D) Investment D pays $2,500 at the end of 10 years (just one payment).
E) Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).
You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?
A) Bank 1; 6.1% with annual compounding.
B) Bank 2; 6.0% with monthly compounding.
C) Bank 3; 6.0% with annual compounding.
D) Bank 4; 6.0% with quarterly compounding.
E) Bank 5; 6.0% with daily (365-day) compounding.
Fundamentals of corporate finance
ISBN: 978-0470876442
2nd Edition
Authors: Robert Parrino, David S. Kidwell, Thomas W. Bates