FINS1613 Lecture Notes - Lecture 2: Cash Flow, Discounting, Arbitrage
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Your daughter is currently 6 years old. You anticipate that she will be going to college in 12 years. You would like to have $137,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 12% per​ year, how much money do you need to put into the account today to ensure that you will have $137,000 in 12 ​years?
Your deposit today should be
​$.
​ (Round to the nearest​ dollar.)
| |
Suppose you receive $180 at the end of each year for the next three years.
a. If the interest rate is 7%​, what is the present value of these cash​ flows?
b. What is the future value in three years of the present value you computed in (a​)?
c. Suppose you deposit the cash flows in a bank account that pays 7% interest per year. What is the balance in the account at the end of each of the next three years​ (after your deposit is​ made)? How does the final bank balance compare with your answer in ​(b​)?
a. If the interest rate is 7%​, what is the present value of these cash​ flows?
The present value of these cash flows is
​$ .
​ (Round to the nearest​ cent.)
| |
You have just received a windfall from an investment you made in a​ friend's business. He will be paying you $31,004 at the end of this​ year, $62,008 at the end of the following​ year, and $93,012 at the end of the year after that​ (three years from​ today). The interest rate is 13.3% per year.
a. What is the present value of your​ windfall?
b. What is the future value of your windfall in three years​ (on the date of the last​ payment)?
a. What is the present value of your​ windfall?
The present value of your windfall is
​$.
​ (Round to the nearest​ dollar.)
Question 1 5 pts
0 multiple_choice_question 22046808
The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.
The internal rate of return (IRR) is the interest rate that sets the net present value of the future cash flows equal to ________.
| zero |
| one |
| one hundred |
| none of the above |
Question 2 5 pts
On a timeline, the space between date 0 and date 1 represents the _______ between dates. Let’s assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.
On a timeline, the space between date 0 and date 1 represents the _______ between dates. Let’s assume it is the first year of the loan. Date 0 is the beginning of the first year, and date 1 is the end of the first year.
| dollar amount |
| present value |
| time period |
| future value |
Question 3 5 pts
As the interest rate __________, present value decreases.
As the interest rate __________, present value decreases.
| decreases |
| increases |
| remains unchanged |
| is unrelated |
Question 4 5 pts
The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow
The present value (PV) of a stream of cash flows is the _______ the present values of each individual cash flow
| difference between |
| product of |
| sum of |
| same as |
Question 5 5 pts
When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.
When a constant cash flow will occur at regular intervals for a finite number of periods of time, it is called a(n) __________.
| annuity |
| perpetuity |
| interest payment |
| principle payment |
Question 6 5 pts
Edit this Question Delete this Question
0 multiple_choice_question 22047052
There are two basic types of annuities:
There are two basic types of annuities:
| Discounted and compounded annuities |
| Ordinary annuities and annuities due. |
| Future value and present value annuities |
| None of the above |
Question 7 5 pts
The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.
The NPV measures the ______ change in shareholder wealth that arises from undertaking a project.
| consistent |
| dollar |
| annual |
| semi-annual |
Question 8 5 pts
The Net Present Value rule implies that we should compare a project’s net present value (NPV) to ________
The Net Present Value rule implies that we should compare a project’s net present value (NPV) to ________
| zero |
| one |
| 100 |
| none of the above |
Question 9 5 pts
To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one year’s time, how much will you need to donate to endow the party?
The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =
To endow a perpetuity is the same as calculating the present value (PV) of a perpetuity. Say you want to endow an annual graduation party at your alma mater. You want the event to be a memorable one, so you budget $30,000 per year forever for the party. If the university earns 8% per year on its investments, and if the first party is in one year’s time, how much will you need to donate to endow the party?
The formula for PV of a perpetuity = C\r; = $30,000 \ 0.08; =
| $3,750 |
| $37,500 |
| $375,000 |
| $3,750,000 |
Question 10 5 pts
With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.
With an Ordinary Annuity, payments are required at the ________ of each period. An example of this is bonds which usually pay coupon payments at the end of every six months until the bond's maturity date.
| beginning |
| middle |
| end |
| payments are not required |
