FIN 311 Lecture Notes - Lecture 5: Cash Flow, Capital Budgeting, Sign Convention

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pucemouse259

14 Dec 2019

School

University of Arizona

Department

Finance

Course

FIN 311

Professor

Homi Songur

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Document Summary

A dollar today is worth more than a dollar tomorrow. Can buy something today and thus get the use today of what i buy. Can invest today and gain the return of that investment. Could avoid the loss of value due to inflation in costs. Could lend the money today and gain the interest on that loan. There needs to be a return, given the value today vs. tomorrow. The loss of value from the other potential uses must be recognized. There are risks that the loan may not be repaid. Important tool used in time value analysis; it is a graphical representation used to show the timing of the cash flows. Time 0 is today; time 1 is end of the first period, or beginning of the second period. I% is the interest rate (discount or growth. Each tick mark corresponds to both the end of one period and the beginning of the next one.

Related Questions

QUESTION 1 The time value of money refers to the issue of: A. what the value of the stream of future cash flows is today. B. why a dollar received tomorrow is worth more than a dollar received today. C. what the time required to double an amount of money. D. why people prefer to consume things at some time in the future rather than today.

QUESTION 2 The process of converting an amount given at the present time into a future value is called: A. annualizing. B. discounting. C. compounding. D. capital budgeting. 2 points

QUESTION 3 Juan Vinson is planning to buy a house in five years. He is looking to invest $25,000 today in an index mutual fund that will provide him a return of 12 percent annually. How much will he have at the end of five years? (Round to the nearest dollar.) A. $45,000 B. $28,000 C. $44,059 D. $28,530 2 points

QUESTION 4 Which of the following statements is true with respect to the present value of a future amount? A. The higher the discount rate, the higher the present value of a single sum for a given time period. B. The relation between present value and time is exponential. C. The greater the time period, the higher the present value of a single sum for a given interest rate. D. The lower the discount rate, the lower the present value of a single sum for a given time period. 2 points

QUESTION 5 Which of the following statements is true of the rule of 72? A. It can be used to determine the amount of time it takes to double an investment. B. It is fairly accurate for interest rates between 25 and 50 percent. C. It states that the time to double your money (TDM) approximately equals 72/i, where i represents the years it takes to double your investment. D. It can be used to estimate approximate compound interest earned for a period of 72 days. 2 points

QUESTION 6 The present value of future cash flows are computed by multiplying future value with the: A. discounting factor. B. compound factor. C. interest rate. D. number of periods. 2 points

QUESTION 7 The present value of multiple cash flows is: A. greater than the sum of the cash flows. B. equal to the sum of all the cash flows. C. less than the sum of the cash flows. D. higher or lower than the cash flows depending on the interest rate. 2 points

QUESTION 8 Cash flows associated with annuities are considered to be: A. an uneven cash flow stream. B. a constant cash flow stream. C. a mix of constant and uneven cash flow streams. D. a cash flow stream with decreasing trend. 2 points

QUESTION 9 The annuity transformation method is used to transform: A. a present value annuity to a future value annuity. B. a present value annuity to an annuity due. C. an ordinary annuity to an annuity due. D. a perpetuity to an annuity. 2 points

QUESTION 10 The true cost of borrowing is the: A. annual percentage rate. B. effective annual rate. C. quoted interest rate. D. periodic rate.

Can you please indicate the correct answers from my quiz. If you give the answers I can figure out what I did wrong.

Which one of the following statements is correct?
Select one:
a. The present value of an annuity increases when the interest rate decreases.
b. The future value of an annuity is unaffected by the amount of each annuity
payment.
c. The future value of an annuity increases when the interest rate decreases.
d. The present value of an annuity is unaffected by the number of the annuity
payments.
e. The present value of an annuity increases when the interest rate increases

Augusta Acres is planning a major expansion for 3 years from today. In preparation
for this, the company is setting aside $30,000 each quarter, starting today, for the
next 3 years. How much money will the firm have when it is ready to expand if it
can earn an average of 7.5 percent on its savings?
Select one:
a. $594,165
b. $486,152
c. $407,038
d. $552,712
e. $399,546

financed this purchase at 8.25 percent interest with monthly payments of
$2,379.45. How many years will it take the firm to pay off this debt?
Select one:
a. 5.0 years
b. 3.5 years
c. 4.5 years
d. 3.0 years
e. 4.0

You are comparing two investments, both of which provide annuity payments in
exchange for a lump sum investment today. Each annuity is for a period of 25
years and each pays $500 a month. You require a 7 percent return on these
investments. Annuity A pays at the beginning of each month and annuity B pays at
the end of each month. Given this information, which one of the following
statements is correct?
Select one:
a. Annuity B is worth more today because of the timing of its cash flows.
b. Both annuities are equally valuable today.
c. Annuity A has a higher present value and a lower future value than annuity
B.
d. Annuity A has both a higher present value and a higher future value than
annuity B.
e. Annuity A is worth more today because you will receive 25 payments
whereas Annuity B only pays 24 payments.

The Corner Bank pays 4 percent interest, compounded monthly, on its savings
accounts. The Uptown Bank pays 4 percent interest, compounded quarterly, on its
savings accounts. You want to deposit sufficient funds today so that you will have
$2,400 in your account 3 years from today. The amount you must deposit today:
Select one:
a. will be greater if you invest with The Corner Bank.
b. is the same regardless of which bank you choose because they both pay 4
percent interest.
c. is the same regardless of which bank you choose because they both pay
compound interest.
d. will be greater if you invest with The Uptown Bank.
e. is the same regardless of which bank you choose because they both pay
simple interest.

The Mailbox Co. invested $50,000 at 7.5 percent compounded annually for 2
years. How much interest on interest did the company earn over this period of
time?
Select one:
a. $3,750.00
b. $4,614.83
c. $281.25
d. $7,781.25
e. $7,500.00

erinalligator919

8. You have saved $250,000 for a cash down payment to buy a house. You are currently prepared to
pay up to $3,000 per month for a 20-year mortgage, and your bank is currently charging 4% p.a.
interest, compounded monthly. What amount is closest to the maximum you can pay for a house?
A) $633,453
B) $745,066
C) $824,204
D) $1,205,365
E) None of the above
9. You have just accepted a job offer, which came with a signing bonus of $5,000 to be paid today
in your retirement account. Your employer will also contribute an extra $10,000 at the end of
each full year (you start work tomorrow!). If this account is expected to earn 10% p.a.
compounded semi-annually, which number is closest to the amount of money will you have in
that account after five years? (including the payment for that year).
A) $59,500
B) $65,500
C) $69,500
D) $72,500
E) None of the above
10. Which of the following is/are an advantage of being a publicly listed company?
A) Access to capital markets
B) Limited liability
C) Unlimited life
D) All of the above
E) None of the above
11. A bond with 15 years to maturity is paying 6% coupons semi-annually, and the last coupon has
just been paid. The face value is $1,000 and the yield to maturity is 8% p.a.
What is the price today closest to:
A) $827.08
B) $932.95
C) $1,000.00
D) $1,324.32
E) None of the above
12. Company HDE is expected to pay an interim dividend of $1.00 six months from now and a final
dividend of $2.10 one year from now. HDE is then expected to repeat the same pattern every year
for the foreseeable future with no growth in dividends. Given that the appropriate effective
discount rate is 7.0% p.a., what is the stock price of HDE closest to today?
A) $30
B) $35
C) $40
D) $45
E) None of the above
13. Which of the following statements is FALSE?
A) The process of moving a value or cash flow forward in time is known as compounding.
B) The effect of earning interest on interest is known as compound interest.
C) It is only possible to compare or combine values at the same point in time.
D) A dollar in the future is worth more than a dollar today.
E) Interest paid only on the principal is simple interest.
14. Consider the following four alternatives:
1. $132 received in two years.
2. $160 received in five years.
3. $200 received in eight years.
4. $220 received in ten years.
The ranking of the four alternatives from most valuable to least valuable if the interest rate is
7% per year would be:
A) 1, 2, 3, 4
B) 4, 3, 2, 1
C) 3, 4, 2, 1
D) 3, 1, 2, 4
E) 3, 1 = 2, 4

FIN 311 Lecture Notes - Lecture 5: Cash Flow, Capital Budgeting, Sign Convention

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