Future Value, Present Value, and Net Present Value | 60+ MCQs Answers
What is the formula for calculating Future Value (FV)?
a)
b)
c)
d)
Answer: b)
If $100 is invested today at an annual interest rate of 8%, what will be its future value after 1 year?
a) $108
b) $100
c) $92
d) $115
Answer: a) $108
If $100 is invested today at an annual interest rate of 8%, what will be its future value after 5 years?
a) $130.5
b) $146.93
c) $160
d) $120
Answer: b) $146.93
The future value of $100 invested at 8% for 15 years is:
a) $200
b) $250
c) $317.22
d) $400
Answer: c) $317.22
The term "compounding" in finance refers to:
a) Earning interest on the initial principal only
b) Adding interest to the principal and earning interest on it
c) Subtracting interest from the principal
d) None of the above
Answer: b) Adding interest to the principal and earning interest on it
The formula for Present Value (PV) is:
a)
b)
c)
d)
Answer: b)
What is the present value of $100 to be received after 1 year at a discount rate of 8%?
a) $100
b) $92
c) $93
d) $95
Answer: c) $93
If the discount rate is 8%, the present value of $100 to be received after 5 years is:
a) $70
b) $80
c) $68
d) $60
Answer: c) $68
The present value of $100 to be received after 15 years at an 8% discount rate is:
a) $50
b) $45
c) $32
d) $60
Answer: c) $32
A higher discount rate results in:
a) Higher present value
b) Lower present value
c) No effect on present value
d) Higher future value
Answer: b) Lower present value
What does a positive NPV indicate?
a) The project should be rejected
b) The project is at break-even
c) The project should be accepted
d) The project has no impact
Answer: c) The project should be accepted
If NPV is negative, the project should be:
a) Accepted
b) Rejected
c) Deferred
d) Recalculated
Answer: b) Rejected
Which of the following is true about NPV?
a) The higher the NPV, the better the project
b) The lower the NPV, the better the project
c) NPV is irrelevant in decision-making
d) NPV is always zero
Answer: a) The higher the NPV, the better the project
In the first NPV example, the opportunity cost of capital was:
a) 5%
b) 8%
c) 10%
d) 12%
Answer: b) 8%
If the opportunity cost of capital increases, what happens to the NPV?
a) It increases
b) It decreases
c) It remains the same
d) It doubles
Answer: b) It decreases
The Net Present Value (NPV) is calculated as:
a) Sum of all future cash flows
b) Present value of all cash inflows minus present value of all cash outflows
c) Future value minus present value
d) Discount rate multiplied by cash inflows
Answer: b) Present value of all cash inflows minus present value of all cash outflows
In the second NPV example with a discount rate of 15%, the NPV was:
a) Positive
b) Negative
c) Zero
d) Unchanged
Answer: b) Negative
A discount rate is also known as:
a) Growth rate
b) Opportunity cost of capital
c) Inflation rate
d) Dividend rate
Answer: b) Opportunity cost of capital
The NPV method is superior to other methods because:
a) It considers time value of money
b) It ignores cash flows
c) It does not require a discount rate
d) It assumes equal cash flows every year
Answer: a) It considers time value of money
What happens if the discount rate is increased from 8% to 15%?
a) NPV will increase
b) NPV will decrease
c) NPV will remain the same
d) The project will always be accepted
Answer: b) NPV will decrease
Future value is also known as:
a) Net value
b) Compounded value
c) Discounted value
d) Present value
Answer: b) Compounded value
The process of determining the future value of a sum of money is called:
a) Discounting
b) Compounding
c) Depreciation
d) Amortization
Answer: b) Compounding
If the interest rate increases, the future value of an investment will:
a) Decrease
b) Increase
c) Remain the same
d) First increase, then decrease
Answer: b) Increase
Which factor affects future value the most?
a) Inflation
b) Time period
c) Discount rate
d) Government policies
Answer: b) Time period
If compounding is done semi-annually instead of annually, the future value will be:
a) Lower
b) Higher
c) Same
d) Zero
Answer: b) Higher
If you deposit $500 at an annual rate of 10% for 2 years, what will be its future value?
a) $605
b) $550
c) $600
d) $620
Answer: a) $605
The higher the interest rate, the __________ the future value.
a) Lower
b) Higher
c) Unchanged
d) Fluctuating
Answer: b) Higher
Which of the following will have the highest future value?
a) $100 invested at 5% for 10 years
b) $100 invested at 10% for 5 years
c) $200 invested at 2% for 10 years
d) $50 invested at 15% for 5 years
Answer: b) $100 invested at 10% for 5 years
Present value helps in:
a) Determining the value of future money in today’s terms
b) Calculating interest rates
c) Finding depreciation rates
d) Predicting inflation
Answer: a) Determining the value of future money in today’s terms
A lower discount rate leads to:
a) Higher present value
b) Lower present value
c) No change in present value
d) Negative present value
Answer: a) Higher present value
If the discount rate is 5%, what is the present value of $500 to be received in 3 years?
a) $450
b) $432.9
c) $415
d) $500
Answer: b) $432.9
What will happen to the present value if the number of years increases?
a) Increases
b) Decreases
c) Remains the same
d) Doubles
Answer: b) Decreases
The process of finding the present value is called:
a) Discounting
b) Compounding
c) Forecasting
d) Hedging
Answer: a) Discounting
A dollar received today is worth __________ than a dollar received tomorrow.
a) More
b) Less
c) Equal
d) Zero
Answer: a) More
If the present value of $200 to be received in 3 years is $150, the discount rate is likely to be:
a) 3%
b) 5%
c) 10%
d) 12%
Answer: d) 12%
NPV takes into account:
a) Time value of money
b) Inflation
c) Interest rates
d) All of the above
Answer: d) All of the above
If a project’s NPV is negative, what should the company do?
a) Accept the project
b) Reject the project
c) Increase investment
d) Decrease discount rate
Answer: b) Reject the project
What happens when NPV is zero?
a) Accept the project considering non-financial factors
b) Reject the project
c) Increase project costs
d) Decrease the discount rate
Answer: a) Accept the project considering non-financial factors
A firm wants to evaluate multiple investment opportunities. The best method to compare them is:
a) Payback period
b) NPV method
c) Accounting profit
d) ROI
Answer: b) NPV method
If two projects have the same initial investment but different NPVs, which one should be selected?
a) The one with the higher NPV
b) The one with the lower NPV
c) The one with the lower initial investment
d) The one with the shortest payback period
Answer: a) The one with the higher NPV
If a project requires an initial investment of $500,000 and generates cash inflows of $200,000 per year for 3 years with a discount rate of 10%, what should the company do if NPV is negative?
a) Accept the project
b) Reject the project
c) Increase discount rate
d) Increase investment
Answer: b) Reject the project
If cash inflows exceed cash outflows in an NPV calculation, the project will have:
a) Positive NPV
b) Negative NPV
c) Zero NPV
d) No effect on NPV
Answer: a) Positive NPV
The higher the discount rate, the __________ the NPV.
a) Higher
b) Lower
c) Unchanged
d) Doubles
Answer: b) Lower
The opportunity cost of capital is the:
a) Rate of return on a risk-free investment
b) Return foregone from the next best alternative investment
c) Cost of borrowing
d) Interest rate of the company
Answer: b) Return foregone from the next best alternative investment
If the interest rate is 0%, what will be the future value of $1,000 after 10 years?
a) $0
b) $1,000
c) $1,100
d) $10,000
Answer: b) $1,000
If an investment doubles in 6 years at a constant interest rate, the approximate annual interest rate is:
a) 10%
b) 12%
c) 15%
d) 18%
Answer: a) 10% (Using Rule of 72: 72 ÷ 6 = 12%)
The future value of an investment will be lowest when:
a) The interest rate is lower
b) The time period is shorter
c) Compounding is done annually instead of semi-annually
d) All of the above
Answer: d) All of the above
If an investor wants to accumulate twice the principal amount in 8 years, what approximate interest rate should they choose?
a) 9%
b) 10%
c) 12%
d) 15%
Answer: b) 10% (Using Rule of 72: 72 ÷ 8 = 9%)
If inflation is higher than the discount rate, the present value of future cash flows will:
a) Increase
b) Decrease
c) Remain the same
d) Cannot be determined
Answer: b) Decrease
If the present value of $100 received in 3 years is $80, what is the approximate discount rate?
a) 5%
b) 7%
c) 10%
d) 12%
Answer: c) 10% (PV = FV / (1 + r)³ → 80 = 100 / (1 + r)³)
A bank offers an account where you deposit money today, and in 5 years, it will be worth $2,000. If the bank’s interest rate is 10%, how much should you deposit today?
a) $1,000
b) $1,242
c) $1,500
d) $1,245
Answer: b) $1,242 (PV = 2000 / (1.1)^5)
The higher the discount rate, the __________ the present value.
a) Lower
b) Higher
c) Unchanged
d) Doubles
Answer: a) Lower
If an investment promises $10,000 after 5 years at a 5% discount rate, what is its present value?
a) $7,835
b) $8,500
c) $9,000
d) $10,000
Answer: a) $7,835 (PV = 10,000 / (1.05)^5)
A project with a positive NPV means:
a) The project is unprofitable
b) The project is profitable and should be accepted
c) The project has no impact
d) The project should be rejected
Answer: b) The project is profitable and should be accepted
If the discount rate increases, the Net Present Value (NPV) of a project will:
a) Increase
b) Decrease
c) Remain unchanged
d) First decrease, then increase
Answer: b) Decrease
What will be the effect of using a higher discount rate on NPV calculations?
a) NPV will increase
b) NPV will decrease
c) No effect on NPV
d) The project will become more attractive
Answer: b) NPV will decrease
A project has an initial investment of $1,000,000 and cash inflows of $200,000 per year for 6 years. If the discount rate is 0%, what is the NPV?
a) $0
b) $200,000
c) $1,200,000
d) $200,000
Answer: c) $1,200,000 (Without discounting, NPV = Total inflows - Initial investment)
If a project has an NPV of zero, what does this imply?
a) The project is highly profitable
b) The project will break even
c) The project should be rejected
d) The project’s IRR is negative
Answer: b) The project will break even
If two projects have the same NPV, what should be the deciding factor?
a) The project with a shorter payback period
b) The project with higher risk
c) The project with the highest initial investment
d) The project with no salvage value
Answer: a) The project with a shorter payback period
If NPV is negative and IRR is greater than the discount rate, what should the company do?
a) Accept the project
b) Reject the project
c) Increase the investment
d) Reduce the discount rate
Answer: b) Reject the project
If an investment’s NPV is zero, then the IRR is:
a) Equal to the discount rate
b) Higher than the discount rate
c) Lower than the discount rate
d) Cannot be determined
Answer: a) Equal to the discount rate
If a project has multiple cash flows with different discount rates, how is NPV calculated?
a) Using the average discount rate
b) By discounting each cash flow separately
c) By ignoring the discount rate
d) By considering only the first year’s discount rate
Answer: b) By discounting each cash flow separately
If an investor chooses a project with a lower NPV but a shorter payback period, what does this indicate?
a) The investor is risk-averse
b) The investor prefers long-term gains
c) The investor ignores time value of money
d) The investor prefers higher risk
Answer: a) The investor is risk-averse
If inflation is higher than the discount rate, what will happen to NPV?
a) NPV will be higher
b) NPV will be lower
c) NPV will remain unchanged
d) The project will always be rejected
Answer: b) NPV will be lower
