Discounted Cash Flow Valuation Ch 5 SmartBook - Finance

To find the present value of an annuity of $100 per year for 10 years at 10% per year using the tables, find a present value factor of 6.1446 and multiply it by ______.

$100

Which of the following spreadsheet functions will result in the correct answer for the following annuity problem: You plan to deposit $100 per year for the next 10 years in an account paying 8%. How much will you have in this annuity?

=FV(.08,10,-100,0)

Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10% per year?

=PV(0.10,10,-100,0,0)

Which of the following is a perpetuity?

A constant stream of cash flows forever

When calculating annuity present values using a financial calculator, the _________ amount is left blank.

FV

True or false: To find the annuity future value factor, you only need the cash flows and the discount rate.

False Rationale: You need the future value factor and the discount rate to find the annuity future value factor.

True or false: The annuity due calculation assumes cash flows occur evenly throughout the period.

False Rationale: The annuity due calculation assumes cash flows occur at the beginning of the period. False

True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.

False Rationale: The annuity present value factor equals one minus the present value factor all divided by the discount rate.

True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.

False Rationale: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.

True or false: When using a financial calculator to find the number of payments, the PMT value should be entered as a positive.

False Rationale: When using a financial calculator to find the number of payments, the PMT value should be entered as a negative.

Which of the following is not a way to amortize a loan?

Fixed interest payments only

Which of the following could not be evaluated as annuities or annuities due?

Monthly electric bills Tips to a waiter

Which of the following are real-world examples of annuities?

Mortgages Leases Pensions

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

Ordinary

Which of the following are ways to amortize a loan?

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

In the Excel setup of a loan amortization problem, which of the following occurs?

To find the principal payment each month, you subtract the dollar interest payment from the fixed payment. The payment is found with = PMT(rate, nper, -pv, fv).

The formula for the future value of an annuity factor is [(1+r)t -1]/r.

True

True or false: A simple way to amortize a loan is to have the borrower pay the interest each period plus a fixed amount.

True Rationale: A simple way to amortize a loan is to have the borrower pay the interest each period plus a fixed amount.

True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.

True Rationale: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.

True or false: The perpetuity present value can be found using the perpetual cash flow and the discount rate.

True Rationale: The perpetuity present value can be found using the perpetual cash flow and the discount rate.

True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

True Rationale: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.

True or false: The annuity present value of an amount C is calculated as C multiplied by {1-[1/(1+r)t]}r .

True Rationale: The present value interest factor is the term in parentheses.

True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.

True Rationale: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.

The most common way to repay a loan is to pay ______________.

a single fixed payment every period

An annuity with payments beginning immediately rather than at the end of the period is called an _________.

annuity due

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

end

Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the _______ of the period.

end

When entering variables in a spreadsheet function (or in a financial calculator) the "sign convention" can be critical to achieving a correct answer. The sign convention says that outflows are negative values; inflows are positive values. For which variables is this a consideration?

future value present value payment

If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity.

greater than

A perpetuity is a constant stream of cash flows for a(n) ______ period of time.

infinite Rationale: A perpetuity is a constant stream of cash flows for an infinite time period.

When finding the present or future value of an annuity using a spreadsheet, the ______ ______ should be entered as a decimal.

interest rate

An ordinary annuity consists of a(n) ________ stream of cash flows for a fixed period of time.

level

The annuity present value factor equals one ________ the present value factor all divided by the discount rate.

minus

When using a financial calculator to find the number of payments, the PMT value should be entered as a ___________.

negative

Using an Excel spreadsheet to solve for the payment in an amortized loan, enter the number of periods as the _____________ value.

nper

The entire principal of an interest-only loan is the:

original loan amount

The ________ for an annuity can be calculated using the annuity present value, the present value factor, and the discount rate.

payment

C/r is the formula for the present value of a(n) ____.

perpetuity

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

perpetuity

Amortization is the process of paying off loans by regularly reducing the _________.

principal

If you borrow $15,000 today at 5% annual interest to be repaid in one year as a lump sum, this is termed a _______________ .

pure discount loan

With typical interest-only loans, the entire principal is:

repaid at some point in the future

The first cash flow at the end of Week 1 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

The cash flows of an annuity due are the same as those of an ordinary annuity except that there is an extra cash flow at Time ________ .

zero