Chapter 6 SmartBook Flashcards
(62 cards)
Most investments involve _____ cash flows.
Multiple
A single cash flow is also known as a:
Lump Sum
Which of the following processes can be used to calculate future value for multiple cash flows?
- Find the future value of a single lump sum amount
- Calculate the future value of each cash flow first and then add them up
- Compound the accumulated balance forward one year at a time
- Discount all of the cash flows back to Year 0
2 and 3
The present value of a series of future cash flows is the amount you would need today to _____.
Exactly duplicate those future cash flows
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.
end
A typical investment has a large cash ______ (inflow/outflow) at the beginning and then a cash _____ (inflows/outflows) for many years.
Outflow/Inflow
The formula for the ______ value interest factor of an annuity is {1–[1/(1+r)t]r}
present
When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.
lump
The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______.
A. [1 − (1/1.1030)]/.20]
B. [1 − (1/1.2030)]/.10]
C. [1 − (1/1.1030)]/.10]
D. [1 − (1.1/1.1030)]/.10]
C.
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.
One year
How frequently does continuous compounding occur?
Every instant
The present value of a series of _______ cash flows is the amount you would need today to exactly duplicate those future cash flows.
future
Which of the following are real-world examples of annuities?
A. Mortgages
B. Common stock dividends
C. Pensions
A and C
In the standard present and future value tables, and in all the default settings on a financial calculator, the assumption is that cash flows occur at the ______
(beginning/end) of each period.
end
The present value of a(n)
of C dollars per period for t periods when the rate of return or interest rate, r, is given by:
C × (1 − [1/(1 + r)t]r/)
Annuity
The formula for the present value interest factor for annuities is:
Annuity present value factor = {1–[1/(1+r)t]}r.
True false question.
True
False
True
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____.
A. [1.08 − (1/1.0820)]/.08
B. [1 − (1/1.0820)]/.08
C. [1 − (1/1.1820)]/.08
D. [1 − (1/1.0820)]/1.08
B
Which formula shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year?
$100{[1 − (1/(1.10)3)]/0.10}
Which compounding interval will result in the lowest future value assuming everything else is held constant?
Annual
To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value interest factor which is ______, and multiply that by ______.
3.7908; $100
Which of the following are annuities?
A. Tips to a waiter
B. Monthly grocery bill
C. Monthly rent payments in a lease
D. Installment loan payments
C and D
When using the spreadsheet (Excel) function for finding the PV of an annuity, it’s a good idea to enter the ______ as a negative value.
payment
Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?
$402.11
Reason: Correct. Calculate the payment using the PV of an annuity at 10 percent for 3 years.
$1,000/[(1 − 1/1.103)/0.10] = $402.11.
Which of the following is the formula for the future value of an annuity?
FV = C((1+r)t−1r)
