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Fundamentals of Business Economics

CHAPTER 7 – DISCOUNTING AND INVESTMENT APPRAISAL

7.1 Discounting a future stream of income means:

A taking into account possible future falls in the stream of income

B ignoring yearly fluctuations in income and taking the average

C reducing the value of future income streams because future income is worth
less than current income

D increasing the value of future income streams to take account of the effect
of inflation

7.2 Peter put $1000 in the bank. However, the interest rate he gets is floating
year to year with 3%, 3.5% and 3.2% respectively. He reinvests the interest
he receives at the end of each year. How much is Peter going to get by the
end of year three? (Round to 2 d.p.)

A = $1097.00

B = $1100.16

C = $1110.16

D = $1132.00

7.3 A company is considering purchasing a new machine for $25,000. This would
increase the annual cash flow of the company by $6,500 in each of the next six
years.

If the cost of capital is 9 per cent per annum, the net present value of this
investment is:

A $4,159

B $10,780

C $10,901

D $14,000

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