Chapter 3 - Cash Flow Analysis

Question 1

What are the 4 common discrete cash flow patterns?

Answer 1

1. Single Disbursement or Receipt
2. Annuity
3. Arithmetic Gradient Series
4. Geometric Gradient Series

Question 2

What do we assume about cash flows and the compounding of cash flows?

Answer 2

That they occur at the end of conventionally defined periods (eg. months/years)

Question 3

What are the 3 assumptions of Discrete Compounding Models?

Answer 3

1. Compounding periods are of equal length.
2. Each disbursement or receipt occurs at the end of a period.

•A payment at time 0 considered to be at the end of time period -1

3.Annuities and Gradients coincide with the ends of sequential periods (more to come).

Question 4

What is the compound amount factor?

Answer 4

It gives future amount F, equivalent to a present amount P, interest i and the number of periods until F is N.

F=P(1+i)^N

Question 5

What is the Present Worth factor?

Answer 5

It gives the amount P, that is equivalent to the future amount F, when the interest rate is i, and number of periods is N.

P=F/(1+i)^N

Question 6

What is the sinking fund factor?

Answer 6

It’s a series of N receipts/disbursements that should be set aside each period in order to meet a major financial need in the future.

(A/F,i,N)

Question 7

What is the Uniform Series Compound Amount Factor?

Answer 7

It’s used to compute the total amount saved at the end of a regular savings plan. It’s the inverse of the Sinking Fund factor.

(F/A,i,N)

Question 8

What is the Capital Recovery factor?

Answer 8

It’s used to compute how much money to be set aside each period to repay a present use of money.

(A/P,i,N)

Question 9

What is the Arithmetic Gradient to Uniform Series Factor?

Answer 9

It’s a series of N receipts or disbursements that increase by a constant amount from period to period.

(A/G,i,N)

Question 10

What is the Geometric Gradient to Present Worth factor?

Answer 10

It’s a series of cash flows that increase or decrease by a constant proportion (percentage) each year.

(P/A,g,i,N)

Question 11

What is the growth adjusted interest rate?

Answer 11

i^o = (1+i)/(1+g) - 1

Question 12

What is the Capitalized Value formula and when is it used?

Answer 12

P= A/i

It is used when N–> infinity. Valid for long lived projects.

Question 13

If i^o is 0, then what formula do you use to find the present value of a geometric gradient series?

Answer 13

P=N*A/(1+g)