Ch. 4 Concept Questions

(4.2C) What do we mean by discounted cash flow, or DCF, valuation?

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

(4.1C) In general, what is the future value of $1 invested at r per period for t periods?

FV = $1 x (1 + r)^t

(4.2D) In general, what is the present value of $1 to be received in "t" periods, assuming a discount rate of "r" per period?

PV = $1 / (1 + r) ^ t

(4.3A) What is the basic present value equation?

PV = FV,t / (1 + r) ^ t where: PV = Present Value FV,t = future value r = discount rate t = life of the investment

(4.2A) What do we mean by the present value of an investment?

PV is the reverse of FV. How much is needed to invest today to reach a certain goal with "r" interest after "t" a period of time.

(4.3D) What is the Rule of 72?

Simple way to determine how long an investment will take to DOUBLE given a fixed annual rate of interest.

(4.1A) What do we mean by the future value of an investment?

The cash value of an investment at some time in the future.

(4.1B) What does it mean to compound interest? How does compound interest differ from simple interest?

To earn interest on interest. Simple interest - interest is not reinvested. Interest is earned each period only on the original amount.

(4.2B) The process of discounting a future amount back to the present is the opposite of doing what?

finding the Future Value