chapter 4 conceptual Flashcards
T/F: the present value of a stream of cash flows is just the sum of the present values of each individual cash flow
true
you are given two choices of investments, investment A and investment B. both investments have the same future cash flows. A has a discount rate of 4% and B has a discount rate of 5%. which of the following is true?
the present value of cashflows in A is higher than the present value of cash flows in B
which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments?
investment Y has a higher present value
which of the following statements regarding perpetuities is FALSE?
PV of a perpetuity = r/C
which of the following is true about perpetuities?
since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate
which of the following is true about perpetuities?
all of the above are true statements
T/F: cash flows from an annuity occur every year in the future
false
which of the following statements regarding annuities is FALSE?
the difference between an annuity and perpetuity is that a perpetuity ends after some fixed number of payments
T/F: a growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value
true
investment X and investment Y are both growing perpetuities with initial cash flow of $100. both investments have the same interest rate and cash flows. the present value of X is $5,000, while the present value of Y is $4,000. which of the following is true?
investment X has a higher growth rate than investment Y
which of the following formulas is INCORRECT?
PV of a growing annuity
T/F: the internal rate of return is the interest rate that sets the net present value of the cash flows equal to zero
true
T/F: trial and error is the only way to compute the internal rate of return when interest is calculated over five or more periods
false
