FRL 3000 Ch.6 Part 1

When calculating the present value of multiple cash flows using a spreadsheet, you must:

calculate the present value of each cash flow then add the discounted values together

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _________ of each period.

end

Use a financial calculator to compute the present value of $100 per year for 30 years if the discount rate is 5%?

$1,537.25 N= 30 I/Y= 5 PMT= 100 Search for PV FV= 0

Which of the following is the formula for the future value of an annuity?

FV = C((1+r)^t - 1 / r )

Suppose you need $5,000 in one year, $4,300 in two years, and $5,000 in three years. Match each present value amount to the corresponding cash flow asusming a discount rate of 17%.

One year = 5000/1.17 = $4273.50 Two years = 4300/1.17^2 = $3141.21 Three years = 5000/(1.17^3) = $3122.85

True or false: The spreadsheet (Excel) formula for calculating the present value of $100 at the end of each year for 2 years at 10 percent per year is PV(0.1,2,-100,0).

True

The first cash flow at the end of week is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is a(n) ________ type of cash flow.

uneven

What is the future value of an annuity due of $100 per year for 10 years at 10 percent per year?

$1,753.12 100[(1.10^10-1)/0.10][1.10] Future Values of Annuities Calculator N= 10 I/Y= 10 PMT= -110 (Because 100*0.10 per year) PV= 0 Solve for FV

An annuity due is a series of payments that are made _____.

at the beginning of each period

You have decided to fund an account that will pay your descendants the inflatino-adjusted equivalent of $100 per year forever. You assume inflation will equal 3% per year, and you expect the account to earn 7% per year. How much do you need to put in the account today to ensure your gift will continue forever?

$2,500 PV= C/(r-g) = 100/ (0.07-0.03)

Use your financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%.

$5,031.16 Future Values of Annuities Calculator N = 10 I/Y = 5 PMT = -400 PV = 0 Find FV

Which of the following processes can be used to calculate future value for multiple cash flows?

- Calculate the future value of each cash flow first and then add them up - Compound the accumulated balance forward one year at a time

To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value interest factor which is ______ and multiply that by ______.

3.7908; $100 Number of periods on the table = 5, interest rate of 10% = 3.7908 Present value interest value = $100

A single cash flow is also known as a:

lump sum

Most investments involve:

multiple cash flows

The present value of an annuity due is equal to the present value of a(n) _______ annuity multiplied by (1+r).

ordinary

Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?

-402.11 aka $402.11 Annuity Payments Calculator N=3 I/Y= 10 Solve for PMT PV= 1000 FV=0

Which of the following processes can be used to calculate future value for multiple cash flows?

-compound the accumulated balance forward on year at a time -calculate the future value of each cash flow first and then add them up

Which of the following are annuities?

-installment loan payments -monthly rent payments in a lease

Which of the following should be valued using a perpetuity formula?

-preferred stock -cash flows from a product whose sales are expected to remain constant forever -a consol (bond that pays interest only and does not mature)

$100 at the end of each year forever at 10% per year is worth how much today?

100/.1= $1,000

You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, how many months will it take to pay off your credit card? (Use your financial calculator to solve this.)

29.98 therefore, 30 months Finding the Number of Payments Calculator Find N I/Y = 1.5 PMT = -50 PV = 1,200 FV = 0

You are planning to buy a CD for $1,352. You will recieve $1,500 in 2 years. (Use your financial calculator to find the interest rate you wil receive on that investment, assuming annual compounding.)

5.33% Finding the Rate Calculator N = 2 FV = 1500 PV = -1352 PMT = 0 Now, press CPT I/Y

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is _______.

9.8181 1/1.08^20 = 0.2145482074 1 - 0.2145482074 = 0.78545179259 0.78545179259/0.08 = 9.8181

You are considering an investment that will earn the following cash flows over the next three years. You expect to earn 6% return on the investment. Match each cash flow with its present value, then match the total amount you should pay for the investment today to the appropriate box. Year 1: $5,000 Year 2: $6,000 Year 3: $5,500

Year 1 = $4,716.98 Discount for 1 period: 5000/(1.06) Year 2 = $5,339.98 Discount for 2 periods: 6000/(1.06)^2 Year 3 = $4,617.91 Discount for 3 periods: 5500/(1.06)^3 You should not pay more than the PV of the cash flows, which the sum of the discounted cash flows, Amount you should pay for the investment: $14,674.87

You expect to receive bonuses with your job at the end of each year for the next five years. Assume you can invest all of your bonuses at 4.5%, and the bonuses are as shown below, match each amount to its future value at the end of the five years, then match the total to the appropriate box. Year 1: $500 Year 2: $1,200 Year 3: $1,000 Year 4: $2,400 Year 5: $2,200

Year 1 = 500(1.045)^4 Year 2 = 1200(1.045)^3 Year 3 = 1000(1.045)^2 Year 4 = 2400(1.045) Year 5 = 2200 596.26 + 1,369.40 + 1,092.03 + 2,508.00 + 2,200.00 = 7,765.68

A growing annuity has a(n) __________.

finite number of growing cash flows

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

level

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

perpetuity

The forumla for the _____ value interest factor of an annuity is { 1 - [ 1 / (1 +r )^t] / r }

present

What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?

$851.36 = 100[1-(1/1.10)^20]/0.10 Annuity Present Value Factor Calculator N = 20 I/Y = 10 PMT = $100 FV = 0 Solve for PV = -851.36