Ch4 Present Value

Question 1

What is the time value of money?

Answer 1

The principle that a dollar today is worth more than a dollar in the future due to its earning potential.

Question 2

What is present value (PV)?

Answer 2

The current value of a future amount of money discounted at a given interest rate.

Question 3

What is the formula for present value of a single cash flow?

Answer 3

PV = FV / (1 + r)^t

Question 4

What is future value (FV)?

Answer 4

The value of a current amount of money at a future date based on an assumed rate of growth.

Question 5

What is the formula for future value?

Answer 5

FV = PV * (1 + r)^t

Question 6

What is an annuity?

Answer 6

A series of equal payments made at regular intervals.

Question 7

What is the present value of an annuity?

Answer 7

PV = C * [1 - 1/(1 + r)^t] / r

Question 8

What is a perpetuity?

Answer 8

A stream of equal cash flows that continue forever.

Question 9

What is the present value of a perpetuity?

Answer 9

PV = C / r

Question 10

What is the difference between an ordinary annuity and an annuity due?

Answer 10

An ordinary annuity pays at the end of each period; an annuity due pays at the beginning.