A Project Manager Is Using the Net Present Value Method

question 64

Multiple Choice

A project manager is using the net present value method to make the final decision on which project to undertake.The company has a 15% required rate of return and expects a 5% rate of inflation for the following four years.What is the NPV of a project that has cash flows as shown in the table? $$\begin{array} { | l | l | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 350,000 \\\hline 1 & \$ 50,000 \\\hline 2 & \$ 80,000 \\\hline 3 & \$ 100,000 \\\hline 4 & \$ 150,000 \\\hline\end{array}$$

• A) $4.955
• B) $42,586
• C) -$23,667
• D) -$122,569

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Definitions:

Default Risk

The risk associated with the possibility of a borrower failing to make required payments on their debt obligations.

Interest Rate Risk Premium

The compensation investors demand for bearing interest rate risk.

Term Structure

The relationship between interest rates or bond yields and different terms or maturities.

Duration

Duration is a measure of the sensitivity of the price of a bond or other debt instrument to changes in interest rates, typically expressed in years.