chapter 4

Question 1

what is a stream of cash flow?

Answer 1

multiple cashflows that last several periods

Question 2

what are the 3 rules of cashflow time travel?

Answer 2

1) only cash flow values at the same point in time can be compared or combined

2) to move cash flow forward in time you must compound it

3) to move a cash flow backward you must discount it

Question 3

what is the formula to compound a cash flow forward in time?

Answer 3

FV= Cn (1+r)^n

Question 4

what is the formula to discount a cash flow backward in time?

Answer 4

PV=Cn/ (1+r)^n

Question 5

what is the formula to discount multiple cash flows backwards?

Answer 5

PV= C + C1/(1+r) + C2/(1+r)^2+….+ Cn/ (1+r)^n

Question 6

what is a regular perpetuity?

Answer 6

a stream of equal cash flows that occur at constant time intervals and last forever

Question 7

what is an example of a perpetuity?

Answer 7

if you set up a fund at UofW to give 10,000 dollar scholarships to one person for a year forever, that would be a perpetuity, 10,000 dollar payments forever

Question 8

what is the formula to find the present value of a perpetuities?

Answer 8

PV=C/r

Question 9

what is an annuity?

Answer 9

a series of identical payments at identical periods or intervals over a specified term at a constant interest rate

Question 10

what are some examples of annuities?

Answer 10

mortgage payments and car leases, they both require regular fixed monthly payments

Question 11

what are the 2 kinds of annuities?

Answer 11

ordinary annuity
annuity due

Question 12

what is an ordinary annuity?

Answer 12

an annuity paid or received at the end of the interest compounding period (mortgage payments)

Question 13

what is an annuity due?

Answer 13

an annuity paid ire received at the beginning of the interest compounding period (rent)

Question 14

what is a regular annuity?

Answer 14

a stream of n equal cash flows paid over constant time intervals

Question 15

what is the difference between an annuity and a perpetuity?

Answer 15

an annuity ends after a fixed number of payments and a perpetuity last forever

Question 16

what is the formula for finding the present value of an annuity?

Answer 16

PV= C/r (1- 1/(1+r)^n)

Question 17

what is then formula for finding the future value of an annuity?

Answer 17

FV=C/r ((1+r)^r -1)

Question 18

what is a growing perpetuity?

Answer 18

a stream of cash flows that occur at regular intervals and grow at a constant rate forever

Question 19

what is the formula for finding the present value of a growing perpetuity?

Answer 19

PV= C1/ r-g

g= growth rate

Question 20

what does g stand for?

Answer 20

growth rate

Question 21

what are the 2 conditions that need to hold for us to use the same formulas for annual PV and FV for non-annual time intervals cash flows?

Answer 21

interest rates used corresponds to the specific time interval
(if the time interval is monthly, interest must be per month)

the number of periods used corresponds to the specific time interval
(if the time interval is monthly, count the total number of months to use for n)