Chapter 5 Conceptual Questions

Which of the following is the correct equation for the present value of an annuity with regular payment C for t periods at interest rate r?

PV = C[1/r - 1/r(1+r)t]

An ordinary annuity is a series of level payments that begin ____.

at the end of one payment period

A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.

fixed

A perpetuity is a constant stream of cash flows for a(n) ______ period of time.

infinite

A stream of cash flows means that ________.

payments are made over time

C/r is the formula for the present value of a(n) ____.

perpetuity

Which of the following are annuities?

yearly lease payment annual installment loan payment

In Excel, cash inflows are recognized as ______ values and cash outflows are recognized as ______ values. Interest rates should be entered as ______.

positive, negative, decimals

If interest rates go down, the present value of a perpetuity will _____________

increase

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.

perpetuity

The present value of an annuity due is equal to the:

present value of an ordinary annuity x (1+r)

Real-world investments often involve many payments received or paid over time. Managers refer to this as a ___________________.

stream of cash flows