Chapter 3

Question 1

Name the 4 discrete cash flow patterns

Answer 1

1. single disbursement/receipt
2. annuity
3. arithmetic gradient series
4. geometric gradient series

Question 2

List the 4 fundamental assumptions of discrete models.

Answer 2

1. All periods are equal length
2. each single payment occurs at the end of a time period
3. first cost occurs at period 0 (now)
4. annuities/gradients coincide with the ends of sequential periods

Question 3

2 examples of single cost.

Answer 3

• salvage value of production equipment

- investment today redeemed at future date

Question 4

define single disbursement/receipt.

Answer 4

a one time cost/benefit showing equivalence between present and future value

Question 5

define annuity

Answer 5

a series of N equal cost/benefits that start at the end of the first period and continue over N periods

Question 6

examples of annuity

Answer 6

• mortgage/lease payments

- maintenance contracts

Question 7

what does the compound amount factor represent and its formula

Answer 7

a factor that converts present worth to future worth

(F/P,i,N) = (1+i)^N

Question 8

what does present worth factor represent and its formula

Answer 8

a factor that converts future worth to present worth

(P/F,i,N) = (1+i)^-N

Question 9

what does sinking fund factor represent and its formula?

Answer 9

the equal amounts of cost/benefits each period in order to meet future amount

(A/F,i,N) = i / [(1+i)^N - 1]

Question 10

what does uniform series compound amount factor represent and its formula?

Answer 10

the future amount that is equivalent to a series of equal sized receipts/disbursements

(F/A,i,N) = [(1+i)^N - 1] / i

Question 11

what does capital recovery factor represent and its formula?

Answer 11

the equal amounts of costs/benefits each period that are equivalent to the present amount

(A/P,i,N) = (A/F,i,N)*(F/P,i.N)
= [i(1+i)^N]/[(1+i)^N - 1]

Question 12

what does series present worth factor represent and its formula?

Answer 12

the present amount that is equivalent to a series of equal sized costs/benefits

(P/A,i,N) = [(1+i)^N-1]/[i(1+i)^N]

Question 13

what is capitalized value and its formula?

Answer 13

present worth of infinite series of equal payments

A*(P/A,i,infinity) = A/i

Question 14

What is a arithmetic gradient series?

Answer 14

a series of costs/benefits that increases/decreases by a constant amount each period

Question 15

what is arithmetic gradient to annuity factor and its formula?

Answer 15

gives a value of annuity that is equivalent to an arithmetic gradient series

(A/G,i,N) = 1/i - N/[(1+i)^N - 1]

Atot = A+G(A/G,i,N)

Question 16

what is geometric gradient to present worth conversion factor and its formula

Answer 16

gives present worth that is equivalent to a geometric gradient series

(P/A,g,i,N) = (P/A,i0,N)/(1+g)

Question 17

what is i0 and its formula

Answer 17

growth adjusted interest rate

i0 = (1+i)/(1+g) - 1

Question 18

four cases of geometric gradient to present worth conversion factor are..

Answer 18

1. i>g>0 = +growth < i
2. g>i>0 = +growth > i
3. g=i>0 = +growth = i
4. g<0 = -growth

Question 19

what is geometric gradient series

Answer 19

series of cash flow that increase or decrease by a constant percentage each period.