FIN360 Ch. 5

A the discount rate (interest rate) increases, what happens to the numerator and denominator?

- the numerator stays the same - the denominator increated

which of the following is true about present value calculations? A. Other things remaining equal, the present value of a future cash flow decreases if the discount rate increases. B. Other things remaining equal, the present value of a future cash flow increases if the discount rate increases.

A. Other things remaining equal, the present value of a future cash flow decreases if the discount rate increases

when a payment is made at the beginning of each period, what is it treated as?

Annuity due

PV=

FV/(1+i)^n

if a job contract pays the contractor at an hourly rate tied to the number of hours worked on a particular day, would it be considered an annuity?

No because the payments will be irregular and therefore will not be considered to be an annuity.

when a payment is made at the end of each period, what is it treated as?

Ordinary annuity

True or False: Annuity due payments are made one period earlier than ordinary annuity payments, so they will earn interest for an additional period.

True

True or False: an annuity due always has a higher PV than an ordinary annuity that makes the same periodic payment

True

What is an annuity?

a series of equal payments at regular intervals either made, received, or both, for a certain number of periods

What is a perpetuity?

a series of payments made at fixed intervals that continue infinitively and can be thought of as an infinite annuity

annuities due

annuities that pay at the beginning of every year or six-month period

ordinary annuities

annuities that pay at the end of every year or six-month period

What does a higher discount rate mean?

more interest is being deducted, leading to a lower present value of the cash flow

PVscholarship =

payment / interest rate

A perpetuity's present value is calculated as:

payment per period / interest rate per period

what is the present value of a PVAdue

the present value of a similar PVA times (1+I)

which is uneven cash flows or annuity payments? 1. You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year. 2. SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund. 3. Franklinia Venture Capital (FVC) invested in a budding entrepreneur's restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years. 4. You have committed to deposit $600 in a fixed interest-bearing account every quarter for four years.

1. Annuity Payments 2. Uneven Cash Flows 3. Uneven Cash Flows 4. Annuity Payments

what is true about annuities? A. An annuity is a series of equal payments made at fixed intervals for a specified number of periods. B. An annuity due is an annuity that makes a payment at the beginning of each period for a certain time period. C. An annuity due earns more interest than an ordinary annuity of equal time. D. Ordinary annuities make fixed payments at the beginning of each period for a certain time period.

A. An annuity is a series of equal payments made at fixed intervals for a specified number of periods. B. An annuity due is an annuity that makes a payment at the beginning of each period for a certain time period. C. An annuity due earns more interest than an ordinary annuity of equal time.

which of the following are characteristics of perpetuity? A. The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows. B. The value of a perpetuity is equal to the sum of the present value of its expected future cash flows. C. A perpetuity is a stream of regularly timed, equal cash flows that continues forever. D. The value of a perpetuity cannot be determined.

A. The current value of a perpetuity is based more on the discounted value of its nearer (in time) cash flows and less by the discounted value of its more distant (in the future) cash flows. B. The value of a perpetuity is equal to the sum of the present value of its expected future cash flows. C. A perpetuity is a stream of regularly timed, equal cash flows that continues forever.

what is an example of an annuity? A. a job contract that pays a regular monthly salary for three years B. a job contract that pays an hourly wage based on the work done on a particular day

A. a job contract that pays a regular monthly salary for three years

which of the following is true about finding the present value of cash flows? A. Finding the present value of cash flows tells you what a cash flow will be worth in future years at a specified rate of return. B. Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return.

B. Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return