1. You are given a choice between receiving $30,000 three years from now (Plan A
ID: 1093775 • Letter: 1
Question
1. You are given a choice between receiving $30,000 three years from now (Plan A) or $10,000 in each of the next three years (Plan B). If i = 5%, which plan do you prefer ?
A.Plan A
B.Plan B
C.Plan A and Plan B are the same
D. Plan A because $20,000 is greater than $10,000
2. For Problem 1, which do you prefer if i = 0% ?
A. Plan A
B. Plan B
C. Plan A and Plan B are the same
3. A project has an NPV of $100,000 at 10%, What is true of the NPV for this project at 5% ?
A.Less than $100,000
B.Greater than $100,000
C.Zero
4. A project has an NPV of $150,000 at 10%. The investment is $1,000,000. What is its PI ?
Explanation / Answer
1)
FV of PLAN B
FV = 10000 * 1.05^2 +10000 * 1.05 + 10000 = 31525
FV of plan A = 30000
so choose PLAN B
2)
if i = 0
FV of plan A = FV of plan B
so
C. Plan A and Plan B are the same
3)
since interest rate is decreased , present value of increases
hence
B.Greater than $100,000
4)
PV of cash flows = 150000+1000000 = 1150000
PI = 1150000/1000000 = 1.15
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