1. You found an investment that offers 10% per annum. The return sounds good to you and therefore you decide to invest $1,000 today. How much will you have in 3 years? How much will you have in 15 years? At the end of 15 years, how much interests have you earned?
a. You would have $1,400 after 3 years. The balance is $3,500 in year 15. Since you have invested $1,000, the total interest is $1,500.
b. You would have $1,331 after 3 years. The balance is $4,177.25 in year 15. Since you have invested $1,000, the total interest is $3,177.25.
c. You would have $1,300 after 3 years. The balance is $2,500 in year 15. Since you have invested $1,000, the total interest is $1,500.
d. You would have $1,343.92 after 3 years. The balance is $1,557.97 in year 15. Since you have invested $1,000, the total interest is $557.97.
2. Which of the following statement is not correct?
a. The IRR on an investment is the required return that results in a zero NPV when it is used as the discount rate.
b. Payback period is the amount of time required for an investment to generate cash flows that recover its net present value.
c. Net present value profile is a graphical representation of the relationship between an investment’s NPVs and various discount rates.
d. Based on the IRR rule, an investment is acceptable if the IRR exceeds the required return. It should be rejected otherwise.
3. What is the effective annual interest rate corresponding to a nominal interest rate of 7.5% per annum, compounding monthly?
a. The effective annual interest rate is 7.91%.
b. The effective annual interest rate is 7.46%.
c. The effective annual interest rate is 7.5%.
d. The effective annual interest rate is 7.76%.
4. Management may be tempted to make decisions that benefit themselves rather than the shareholders they represent. Management compensation, however, can be structured to better align management decisions with shareholder interests.
True
False