chapter 4

Question 1

• Stream of cash flows

Answer 1

a series of cash flows lasting several periods.

Question 2

• Timeline

Answer 2

– a linear representation of the timing of expected cash flows.

Question 3

3 rules of time travel.

Answer 3

1) Comparing and combining values
- Only able when values are at the same point of time.

2) Moving Cash flows forward in time
- Compounding - value of cash plus interest over a period.
- Time value of money – the difference in value between money in different time periods.
- Compound interest – interest on interest.
- FV¬¬n ¬¬= C x(1+r)¬n

3) Moving cash backwards in time
- Discounting – the rate of discount to find the present value of money from the future
- PV = C/(1+r) n

Question 4

• Perpetuity

Answer 4

a stream of cash flows that occur at regular intervals and last forever.

Question 5

Annuity

Answer 5

a stream of N equal cash lows paid at regular intervals (not forever)

Question 6

• Growing perpetuity

Answer 6

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

Question 7

Internal Rate of Return (IRR)

Answer 7

– the interest rate that sets the NPV of the cash flows = 0

IRR with 2 cash flows = (FV/P)1/N-1
IRR of growing perpetuity = (C/P) +g