1.

Which of the following does the discount rate r (eg: 4% p.a.) NOT account for?

expected inflation

opportunity cost

the expected value of the cash flow

risk-free interest rate

2.

If I invest $600 today at an annual interest rate of 5% p.a. (interests reinvested), after 8 years my investment will be worth more than $850

False

True

3.

The quality of an analyst’s earnings forecast does NOT depend on which of the following:

The quality of the analyst’s financial model

The analyst’s interpretation of historical information

Unexpected future events that are unpredictable in nature

The analyst’s interpretation of ‘environmental’ information (eg: macroeconomic news)

4.

At which of the following discount rates would the following investment ‘break even’:

Initial cost of $11,000, cash flows of $6,000 for two years

4%

5%

6%

7%

5.

According to NPV analysis, should the following project be undertaken?

Initial gain of $10,500; negative cash flows of $6,000 for two years with a 8% p.a. discount rate

Yes

No

We are indifferent (NPV = $0)

We do not have enough information

6.

At which of the following discount rates would the following investment ‘break even’:

Initial cost of $3,000, cash flows of $1,682.5 for 2 years

6% p.a.

7% p.a.

8% p.a.

9% p.a.

7.

Calculate the NPV of a project with an initial cost of $1,000,000; **and** positive cash flows of $300,000 for the next 5 years with a 10% p.a. discount rate:

$327,343

$137,236

$500,000

$97,579

8.

Calculate the NPV of a project that has no initial cost ($0) however will provide the following cash flows with a discount rate of 8% p.a.

Yr1: $4,000

Yr2: -$3,000

Yr3: $80,000

$64,638

$56,743

$61,699

$81,000

9.

If a firm is considering 2 independent investment proposals (Investment A: NPV $4,000 & Investment B: NPV $2,500), both of which take the same time to complete, then it is correct to say the firm should invest in A instead of investing in B.

True

False

10.

Calculate the NPV of a project that has an initial cost of $10,000 and three years of positive $3,000 cash flows with a discount rate of 0% p.a.

$1,563

-$1,000

-$436

We cannot calculate this with the information given