FIN 300 Study Guide - Cash Flow, Compound Interest, Net Present Value

86 views48 pages

coffeeprairie-dog40

5 May 2011

School

Department

Course

Professor

For unlimited access to Study Guides, a Grade+ subscription is required.

Document Summary

Answers to concepts review and critical thinking questions. The four pieces are the present value (pv), the periodic cash flow (c), the discount rate (r), and the number of payments, or the life of the annuity, t. Assuming positive cash flows, both the present and the future values will rise. Assuming positive cash flows, the present value will fall and the future value will rise. The basic concept of time value of money is that a dollar today is not worth the same as a dollar tomorrow. The deception is particularly irritating given that such lotteries are usually government sponsored! If the total money is fixed, you want as much as possible as soon as possible. The team (or, more accurately, the team owner) wants just the opposite. The better deal is the one with equal installments. Note: all end of chapter problems were solved using a spreadsheet.

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.

Modified IRR

1^. find the present value of all negative cash flows,

2^. find the future value of all positive cash flows,

3^. sum the two columns,

then find the interest rate that makes the future value equal to the present value given n.

Rule: If MIRR is equal to or larger than Cost of Capital accept the project.

T CF2

0 (80,000)

1 25,000

2 25,000

3 (10,000)

4 50,000

5 70,000

Which of the following statements are true? Select 4 that apply. (4 points)

Discounted payback method of capital appraisal ignores cash flows beyond the discounted payback period.

The net present value is found by discounting all positive cash flows at the projectâs cost of capital.

The project is accepted if the IRR is less than the projectâs cost of capital.

The IRR is the discount rate which forces the present value of a projectâs future cash flows to equal the future value of its costs.

Firms often choose among mutually exclusive projects on the basis of the present value of future costs.

To use the CAPM approach in capital budgeting, we estimate the firmâs beta, multiply this by the market risk premium and add the firmâs risk premium to the risk-free rate to obtain the firmâs cost of retained earnings or cost of equity.

The best proxy for the risk-free rate is the yield on treasury bonds.

Floatation costs are generally material when looking at its effect on the after-tax cost of debt.

burgundygnat457

FIN 300 Study Guide - Cash Flow, Compound Interest, Net Present Value

Document Summary

Get access

Related Documents

FIN 300 Chapter Notes - Chapter 6: Net Present Value, Exponential Growth, Signing Bonus

FIN 300 Study Guide - Cash Flow, Compound Interest, Net Present Value

FIN 300 Lecture Notes - Lecture 6: Cash Flow, Effective Interest Rate, Annual Percentage Rate

Related Questions