EEquiz_Evaluate prj

What does MARR stand for?

• Maximum attractive rate of return

• Minimum attractive rate of return

• Multiple assets return on range

• Most annual rate of return

In which case we use PW, FW, AW method...

• Evaluating a project's profitability

• Calculating the money flow

• Avoiding possible risks

• “Weighting scale” in real estate

The net present value of a project is equal to

• The present value of all net cash flows that result from the project.

• The present value of all revenues minus the present value of all costs that result from the project.

• The present value of all future net cash flows that result from the project minus the initial investment required to start the project.

• All of the above are correct.
  

The commercial value of ____ is the PW of all future net cash flows expected to be received - the period dividend

• chain

• a bond

• products

• the projects

Vn = C*(P/F,i%,N) + r*Z*(P/A,i%,N) What is r stand for?

• Bond rate

• Nominal interest

• Face value

• A & B are correct

Year              A               B

 0          -$1,500      -$2,700

1          +$600         +$1,00

2          +$600         +$1,00

3          +$600         +$1,00

4          +$600         +$1,00
At a 6% interest rate, which alternative should be selected?

• 1. B because the NPW of A is negative

• 1. A because the NPW of A is greater than the NPW of B

• 1. A because the NPW of B is greater than the NPW of A

• 1. B because the NPW of B is greater than the NPW of A

Answer explanation

Solving by Present worth analysis,
Net present worth = PW of benefits " PW of costs
NPW of A = 600(P/A, 6%, 4) - 1,500 = 600(3.465) − 1,500 = $579
NPW of B = 1000(P/A, 6%, 4) - 2,700 = 1,000(3.465) −2,700 = $765
Maximizing NPW, choose Alternative B.

A project has an initial cost of $100,000 and uniform annual benefits of $12,500. At the end of its 8-year useful life, its salvage value is $30,000. At a 10% interest rate, the net present worth of the project is approximately

• 1. −$19,318

• 1. $0

• 1. +$30,000

• 1. +$100,000

Answer explanation

NPW = PW of benefits − PW of costs
=12,500(P/A, 10%, 8) + 30,000(P/F, 10%, 8) − 100,000
=12,500(5.335) + 30,000(0.4665) − 100,000
= −$19,317.50. Thus, this project has an overall cost of $19,317.50

What projects are called simple investments?

• Projects that consist of one inflow at the start followed by only one outflow

• Projects that have only two internal rates of return

• Projects that have a stream of revenues at the start followed by a stream of investments

• Projects that have one or more periods of outflows at the start followed by one or more periods of

  inflows

Your grandfather deposits $50,000 into your savings account that pays 6% interest compounded quarterly. Equal annual withdrawals are to be made from the account beginning 1 year from now and continuing forever. The maximum amount of equal annual withdrawals is approximately

• 1. $2,950

• 1. $3,000

• 1. $3,068

• 1. $3,100

Answer explanation

1. First we need to find the effective annual interest rate because our interest is compounded quarterly instead of annually. We then use the effective annual interest in the infinite life formula, P = A/i
   I_e= (1+0.015)⁴ − 1 = 0.06136
   The maximum annual withdrawal is approximately A = Pi = 50,000(0.06136) = $3,068

You borrow $10,000 from your parents at an interest rate of 12% compounded monthly. You agree to pay your parents $300 per month. Approximately how long will it take for you to pay off your loan assuming that you pay exactly $300 per month?

• 1. 28 months

• 1. 33 months

• 1. 38 months

• 1. 41 months

Answer explanation

PW of benefits = PW of costs
10,000 = 300(P/A, 1%, n)
10,000/300 = (P/A, 1%, n)
33.33 = (P/A, 1%, n)
n is approximately 41 months