For Samuel Peter ONLY

1) The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

A. True  B. False

2) Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

A. $1,781.53
B. $1,870.61
C. $1,964.14
D. $2,062.34
E. $2,165.46

3) What’s the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?

A. $1,537.69
B. $1,618.62
C. $1,699.55
D. $1,784.53
E. $1,873.76

4 You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?

A. $1,994.49
B. $2,099.46
C. $2,209.96
D. $2,326.27
E. $2,442.59

5) Once a firm has defined its purpose, scope, and objectives, it must develop a strategy for achieving its goals. Corporate strategies are detailed plans rather than broad approaches.

A. True  B. False

6) Operating plans sketch out broad approaches for realization of the firm's strategic vision. These plans usually are developed for a period no longer than a 1-year time horizon because detail is "lost" by extending out the time horizon by more than 1 year.

A. True  B. False

7) Your company is considering replacing an old steel cutting machine with a new one. Two months ago, you sent the company engineer to a training seminar demonstrating the new machine’s operation and efficiency. The $2,500 cost for this training session has already been paid. If the new machine is purchased, it would require $5,000 in installation and modification costs to make it suitable for operation in your factory. The old machine originally cost $50,000 five years ago and is being depreciated by $7,000 per year. The new machine will cost $75,000 before installation and modification. It will be depreciated by $5,000 per year. The old machine can be sold today for $10,000. The marginal tax rate for the firm is 40%. Compute the relevant initial outlay in this capital budgeting decision.

A. $72,500
B. $68,000
C. $70,500
D. $78,000

8) The initial outlay of an asset does not include installation costs.

A. True  B. False

9) The use of the risk-adjusted discount rate assumes that risk increases over time and that cash flows occurring further in the future should be more severely penalized.

A. True  B. False

Question 10 of 10

5.0 Points

Which of the following statements is false?

A. The certainty equivalent method results in a lower net present value for a risky project.
B. The risk-adjusted discount rate leaves cash flows at their expected value and adjusts the discount rate downward to compensate for additional risk.
C. The certainty equivalent penalizes or adjusts downward the value of the expected annual free cash flows of a project.
D. The risk-adjusted discount rate leaves cash flows at their expected value and adjusts the discount rate upward to compensate for additional risk.