Present Value (PV)
The present value formula is used to determine the value of future cash flows discounted at a specific rate. What is the formula for Present Value?
What is PV=FV(1+r)n
Net Present Value is the difference between the present value of cash inflows and outflows. What is the decision rule for NPV?
What is "Accept the project if NPV > 0, and reject if NPV < 0"?
The future value formula is used to calculate the value of an investment after earning interest. What is the formula for Future Value?
What is FV=PV×(1+r)n
What is the capital budgeting technique that considers the time value of money and calculates the profitability of a project?
NPV
The concept of Time Value of Money states that a dollar today is worth more than a dollar in the future. Why?
What is "Because money today can be invested to earn interest"?
If you want $1,000 in 5 years and the annual discount rate is 10%, what is the present value?
What is $620.92?
Calculation:
PV=1000(1+0.10)5=620.92
A project costs $50,000 and generates cash inflows of $20,000 annually for 3 years. If the discount rate is 10%, what is the NPV?
What is $3,815.57?
If you invest $1,000 at an annual interest rate of 5% for 3 years, what is the future value?
what is $1,157.63?
Calculation: FV=1000×(1+0.05)3=1157.63
Which capital budgeting method calculates the time it takes to recover the initial investment?
What is the payback period?
If you invest $1,000 at an annual interest rate of 10%, how much will it be worth in 2 years?
What is $1,210?
Calculation: FV=1000×(1+0.10)2=1210
What is the present value of a $30,000 payout to be received in 15 years, discounted at a 6% annual interest rate
The present value (PV) of a $30,000 payout to be received in 15 years, discounted at a 6% annual interest rate, is $12,517.95.
If a project has an NPV of $10,000 at a discount rate of 8%, what happens to the NPV if the discount rate increases to 12%?
What is "The NPV decreases"?
You invest $8,000 today in an account earning 6% interest compounded annually. How much will it be worth after five years?
The formula for Future Value (FV) is:FV=PV×(1+r)n
=10,705.80
A project has an initial cost of $100,000 and generates cash inflows of $25,000 annually for 6 years. What is the payback period?
What is 4 years?
Calculation: 100000/25000=4
What is the present value of $5,000 to be received in 3 years if the discount rate is 7%?
What is $4,081.48?
A company expects to receive $10,000 in 2 years. If the discount rate is 8%, what is the present value?
What is $8,573.39?
(Calculation: PV=10000(1+0.08)2=8573.39
A project requires an initial investment of $100,000 and generates $30,000 annually for 5 years. If the discount rate is 6%, what is the NPV?
What is $16,931.33?
If the future value of an investment is $2,000 after 4 years at an annual interest rate of 6%, what was the initial investment?
hat is $1,584.89?
Calculation: PV=2000(1+0.06)4=1584.89
If two mutually exclusive projects have conflicting NPV and IRR rankings, which project should be chosen?
Wis "The project with the higher NPV"?
If you require a 12% return, how much should you pay today to receive $1,000 annually forever?
What is $8,333.33?
Calculation: PV=10000/.12=8333
f the present value of $500 to be received in 3 years is $400, what is the implied annual discount rate? (THIS ONE IS VERY HARD!)
What is 7.72%?
Calculation: 400=500/(1+r)3
solve for r
What is the NPV of a project with an initial cost of $200,000, cash inflows of $90,000 annually for 3 years, and a discount rate of 12%?
What is $16,184.80?
A $10,000 investment grows to $15,000 in 5 years. What is the annual interest rate?
What is 8.45%?
Calculation:
15000=10000×(1+r)5
solve for r
What is the capital budgeting technique that calculates the rate of return at which NPV equals zero?
What is the internal rate of return (IRR)?
A loan of $10,000 is repaid in 5 equal annual installments at an interest rate of 6%. What is the annual payment?
What is $2,374.11?
Calculation: Use the annuity formula: PMT=PV×r/1−(1+r)−n