Chapter 6

Formula for present value of an annuity due

(1+r) X (PV of an ordinary annuity)

Formula for the present value interest factor for annuities

(1-[1/(1+r)])/r

Lump Sum

A single cash flow

Processes that can be used to calculate future value for multiple cash flows

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

Formula for the future value of an annuity

FV = c((1+r) - 1)/r)

Most investments involve

Multiple cash flows

What should be valued using a perpetuity formula

Prefered Stock A Consol Cash flows from a product whose sales are expected to remain constant forever

Which is true about a growing annuity

The cash flows grow at a constant rate The cash flows grow for a finite period

An annuity due is a series of payments that are made

at the beginning of each period

In all cash flow calculations, assumed that cash flows occur when

end of each period

If the interest rate is greater than zero the value of an annuity due is always ____ an ordinary annuity

grater than

A perpetuity is a constant stream of cash flows for an______ period of time

infinite

A traditional annuity consists of a _____ stream of cash flows for a fixed period of time

level

When calculating the future value of multiple cash flows using a spreadsheet you must

Calculate the future value of each cash flow then add the compounded values together

Annuities Example

Monthly Rent payments in a lease Installment loan payments