Chapter 4

discounted cash flow (DCF)

Calculating the present value of a future cash flow to determine its worth today

Which of the following is the multi-period formula for compounding a present value into a future value?

FV = PV × (1 + r)^n

True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

False. A financial calculator will already understand a number like 10 a 0.10.

(T/F): The present value is the sum of all expenses in a project.

false

Using the PV, discount rate, and ____, you can determine the number of periods.

future value (FV)

With _____ interest, the interest is not reinvested.

simple

Future value

the cash value of an investment at a particular time in the future

present value

the current value of the future cash flows discounted at the appropriate discount rate.

True or False: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)^2 per dollar invested.

true

If you invest at a rate of r for ____ periods, under compounding, your investment will grow to (1 + r)^2 per dollar invested.

two

Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r percent interest?

PV = FV/(1 + r)^t

What information do you need to determine the discount rate?

PV, FV, and life of the investment

What information do you need to determine the number of periods?

The PV, FV, and the discount rate

What information do you need to determine the number of periods?

The PV, FV, and the discount rate.

present value.

The current value of a future cash flow discounted at the appropriate rate

Which of the following methods are used to calculate present value?

an algebraic formula, a financial calculator, and a time value of money table

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?

because the $100 is an outflow from you which should be negative

The idea behind _______ is that interest is earned on interest.

compounding

In a present value equation, the _______ rate (r) can be found using the PV, FV, and t.

discount