Multiple choice

1. If the discount rate is stated in nominal terms, then in order to calculate the NPV in a 

consistent manner requires that project: I) cash flows be estimated in nominal terms II) cash flows be estimated in real terms III) accounting income be used  

a. I only 

b. II only 

c. III only 

d. None of the above 

2. If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner requires that project: I) cash flows be estimated in nominal terms II) cash flows be estimated in real terms III) accounting income be used  

a. I only 

b. II only 

c. III only 

d. None of the above 

3. A firm owns a building with a book value of $150,000 and a market value of $250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes is:  

a. $100,000 

b. $150,000 

c. $250,000 

d. None of the above 

4. The real interest rate is 3% and the inflation rate is 5%. What is the nominal interest rate?  

a. 3% 

b. 5% 

c. 8.15% 

d. 2% 

5. If the nominal interest rate is 7. 5% and the inflation rate is 4%, what is the real interest rate?  

a. 4% 

b. 9.5% 

c. 3.4% 

d. None of the above 

6. A cash flow received in two years is expected to be $10,816 in nominal terms. If the real rate of interest is 2% and the inflation rate is 4%, what is the real cash flow for year-2?  

a. $11,236 

b. $10,816 

c. $10,000 

d. $9,246 

7. Given the following data for Project M:    

Real discount rate = 5% 

Nominal discount rate = 10% 

Calculate the NPV of the project:  

a. $51.70 

b. $35.54 

c. $45.21 

d. None of the above 

8. Given the following data for Project M:    

Real discount rate = 5% 

Nominal discount rate = 10% 

Calculate the NPV of the project:  

a. $25.85 

b. $17.77 

c. $22.65 

d. None of the above 

9. The real rate of interest is 3% and the inflation is 4%. What is the nominal rate of interest?  

a. 3% 

b. 4% 

c. 7.12% 

d. 1% 

10. The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the: I) same as the NPV value obtained by discounting real cash flows using the real discount rate II) same as the NPV value obtained by discounting real cash flows using the nominal discount rate III) same as the NPV value obtained by discounting nominal cash flows using the real discount rate  

a. I only 

b. II only 

c. III only 

d. II and III only