FIN 300 Chapter Notes -Cash Flow, Investment, Forklift

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6 Jan 2023

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Stream of cash flows: series of cash flows lasting several periods. Rule 1: only values at the same point in time can be compared or combined. Rule 2: to calculate a cash flow"s future value, we must compound it. Rule 3: to calculate the present value of a future cash flow, we must discount it. Suppose we plan to deposit into our simplii financial bank account at the end of each of the next three years. We plan to save at the end of each of the next three years. General formula for the present value of a cash flow stream. Present value of a perpetuity with payment c and interest rate r is given. To find the value of a perpetuity by discounting one cash flow at a time, the cash flows in the future are discounted for an ever-increasing number of periods, so their contribution to the sum eventually becomes negligible.

Related Questions

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% perâ year, how much money do you need to put into the account today to ensure that you will have $137,000 in 12 âyears?

Your deposit today should be

â$.

â (Round to the nearestâ dollar.)

Suppose you receive $180 at the end of each year for the next three years.

a. If the interest rate is 7%â, what is the present value of these cashâ flows?

b. What is the future value in three years of the present value you computed in (aâ)?

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 yearsâ (after your deposit isâ made)? How does the final bank balance compare with your answer in â(bâ)?

a. If the interest rate is 7%â, what is the present value of these cashâ flows?

The present value of these cash flows is

â$ .

â (Round to the nearestâ cent.)

You have just received a windfall from an investment you made in aâ friend's business. He will be paying you $31,004 at the end of thisâ year, $62,008 at the end of the followingâ year, and $93,012 at the end of the year after thatâ (three years fromâ today). The interest rate is 13.3% per year.

a. What is the present value of yourâ windfall?

b. What is the future value of your windfall in three yearsâ (on the date of the lastâ payment)?

a. What is the present value of yourâ windfall?

The present value of your windfall is

â$.

â (Round to the nearestâ dollar.)

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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.

Consider the mixed streams of cash flows in the following table

Year. Cash flow stream

Find the present value of each stream A and B using a 12% discount rate

Compare the calculated present values and discuss them in light of the in discounted cash flows totaling 75,000 in each case