Chapter 6 Discounted Cash Flow Valuation (Learning Smart)

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 assuming a discount rate of 17%

* Present value of the Year 1 Cash Flow= $4,273.17 [$5,000/1.17] * Present value of the Year 2 Cash Flow= $3,141.21 [$4,300/(1.17)^2] *Present value of the Year 3 Cash Flow= $3,121.85 [$5,000/(1.17)^3]

Match the type of rate with its definition.

APR= The interest rate per period multiplied by the number of periods in the year. EAR= The interest rate stated as thought it were compounded once per year.

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

Compounded the accumulated balance forward one year at a time. & Calculate the future value of each cash flow and then add them up.

Which of the following are ways to amortize loan?

Pay principal and interest every period in a fixed payment. & Pay the interest each period plus some fixed amount of the principal.

You expect to receive bonuses with your job 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: $596.26 Year 2: $ Year 3: $ Year 4: $ Year 5: $ Total after 5 years $7,765.68

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

end

Which of the following are annuities?

installment loan payments & monthly rent payments

Which of the following payment methods amortizes a loan?

interest plus fixed amount & fixed payments that result in a zero loan balance

A single cash flow is also known as:

lump sum

Most investments involve

multiple cash flows

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

present

An effective annual rate of 7.12 percent is equal to 7 percent compounded _

semiannually

Because of _ and _, interest rates are often quoted in many different ways.

tradition; legislation

The original loan amount is called the:

principal

Semiannual compounding means that interest paid _ per year.

two times

Which of the following are true abut a partial amortization loan?

*The amortization period is longer than the loan period. *The borrower makes a large balloon payment at the end of the loan period. *The monthly payment is based on a longer amortization period than the maturity of the loan. *The monthly payments do not fully pay off the loan by the end of the loan period.