1. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows?
A. The discount rate decreases.
B. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.
C. The discount rate increases.
D. Answers A and B above.
2. The purchase price of a piece of property is $70,000. After analysis of the cash flows, expected sales price, and expected yield, the investor decides the deal has a present value (PV) of $80,000. What is the net present value (NPV), and should the investor take the deal?
A. $10,000; Yes
B. $10,000; No
C. -$10,000; Yes
D. -$10,000; No
3. Suppose an investor is interested in purchasing the following income producing property at a current market price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year four is $500,000, what is the NPV of the project?
A. $8,829.96
B. $9,889.56
C. $428,113.65
D. $459,889.56
4. When using the WACC as the discount rate the firm takes in to account the risk of the capital providers that invest in the firm.
True/False
5. The discount rate is different for each investor, depending on his expectations about risk and uncertainty.
True/False