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Free CMA Exam Braindumps (page: 24)

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PDF with 1336 Questions
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Basic time value of money concepts concern Interest Factors Risk Cost of capital

  1. Yes Yes No
  2. Yes No Yes
  3. No Yes No
  4. No No Yes

Answer(s): A

Explanation:

The time value of money is concerned with two issues: (1)the investment value of money, and (2) the risk (uncertainty) inherent in any executor agreement. Thus, a dollar today is worth more than a dollar in the future, and the longer one waits for a dollar, the more uncertain the receipt is. The cost of capital involves a specific, 1application of the time value of money principles; It is not a basic concept thereof.



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The present value may be calculated for discounted cash Inflows Outflows Annuities

  1. Yes Yes Yes
  2. Yes No Yes
  3. No Yes No
  4. No No Yes

Answer(s): A

Explanation:

The present value concept may be applied both to dollars-in (inflows) and to dollars-out (outflows). Thus, individual cash inflows and cash outflows or a series thereof (an annuity') may be discounted to time: zero (the present). Net present value is the sum of discounted cash inflows minus any discounted cash outflows. Net present value may be either positive or negative.



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Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer?

  1. Option
  2. Option
  3. Option
  4. Option

Answer(s): A

Explanation:

The concept of present value gives greater value to inflows received earlier in the stream. Thus, the declining inflows would be superior to increasing inflows, or even inflows.



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Wilkinson, Inc., which has a cost of capital of 12%, invested in a project with an internal rate of return (IRR) of 14%. The project is expected to have a useful life of four years, and it will produce net cash inflows as follows:


The initial cost of this project amounted to

  1. $7,483
  2. $9,647
  3. $11,000
  4. $12,540

Answer(s): A

Explanation:

The internal rate of return (IRP) of a capital project is the rate at which the net present value (NPV) of its future cash flows equals zero. To find this project's NPV, therefore, it is necessary to discount the cash flows at the appropriate rate (14%) as follows:






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