Ch.6 - Time Value of Money: Advanced Concepts and Applications

Question 1

When trying to determine payments that occur multiple times within a certain time frame, what type of interest rate should you use?

Answer 1

effective annual interest rate

Question 2

How do you solve for the effective interest rate?

Answer 2

– DISP (set the decimals)
– NOM % (nominal interest rate)
– P/YR (The number of payments per year 52 for a week, 4 fourth-quarter, 2 for semi annually, 1 for annually)
– EFF% (effective interest rate)

Question 3

How do you solve for future value using effective interest rate?

Answer 3

– P/YR (The number of payments per year 52 for a week, 4 fourth-quarter, 2 for semi annually, 1 for annually)
– PV (the present value)
– I/YR (annual interest rate)
– N (The number of periods; quarter compound x 5 years = 20)

Question 4

How do you solve for present value using effective interest rate?

Answer 4

– P/YR (The number of payments per year 52 for a week, 4 fourth-quarter, 2 for semi annually, 1 for annually)
– FV (the future value)
– I/YR (annual interest rate)
– N (The number of periods; quarter compound x 5 years = 20)

Question 5

How do you solve for present value using annuity?

Answer 5

– BEG/END (BEG if you put money in at the beginning, END if you were putting money in at the end)
– PMT (The payment amount)
– I/YR (1.09 for a 9% rate of return divided by 1.05 5% inflation rate -1×100)
– N (Number of years)

Question 6

How do you solve for “net present value” using unequal cash flows?

Answer 6

– 0, CFj ($0 at the beginning)
– $x, CFj ($x for the end of year 1)
– $x, CFj ($x for the end of year 2)
– $x, CFj ($x for the end of year 3)
– I/YR (interests rate)
– NPV for the answer

Question 7

How do you solve for “net present value” using equal cash flows?

Answer 7

– 0, CFj ($0 at the beginning)
– $x, CFj ($x for the end of year 1)
– $x, CFj ($x for the end of year 2)
– $x, CFj ($x for the end of year 3)
– $x, CFj, 5 Nj ($x for years 4-8 straight)
– $x, CFj ($x for the end of year 9)
– I/YR (interests rate)
– NPV for the answer

Question 8

How do you solve for “future value” using different cash flows?

Answer 8

– 0, CFj ($0 at the beginning)
– $x, CFj ($x for the end of year 1)
– $x, CFj ($x for the end of year 2)
– $x, CFj ($x for the end of year 3) 
– $x, CFj, 5 Nj ($x for years 4-8 straight)
– $x, CFj ($x for the end of year 9)
– I/YR (interests rate)
– NPV for the 1st answer
😧THEN😧
– +/-, PV (puts the 1st answer as a present value)
– N (number of years total; 9 years)
– FV for the final answer

Question 9

How do you solve for internal rate of return?

Answer 9

– $, +/-, CFj (turn $ to outflow for today’s payment)
– $, +/-, CFj (turn $ to outflow for year 1)
– 0, CFj (for $0 for year 2)
– $, CFj ($x for the end of year 3)
– $, CFj ($x for the end of year 4)
– IRR/YR for the final answer