Module 2 - Economic Equivalence, Cash Flow Patterns

Question 1

What is typically used in economically equivalence?

Answer 1

NPV analysis

Question 2

What are the principles of economic equivalence?

Answer 2

• Alternatives must have same time basis
• Equivalence depends on interest rate
• Can require conversion to 1 cash flow
• Equivalence maintained regardless of POV

Question 3

What does the time value of money refer to?

Answer 3

Purchasing power of money

Question 4

What is the rule of 72?

Answer 4

Rule of thumb: it will take 72/I periods to double your money

Question 5

If you buy a car for $12,000 and want to pay it off with equal payments over a 5 year period, how much would each payment be with an interest rate of 0.75% compounded monthly?

Answer 5

$249.10

Question 6

If you can ford to put away $2000 a year into savings and expect to increase that amount by $100 per year for the next 24 years, how much would you have after 25 years with a 9% interest rate?

Answer 6

$235,736.12

Question 7

If you make deposits into an account with a 6% annual interest rate with the first deposit being $1200 and the deposits decrease by $100 every year, how much will you have in 8 years?

Answer 7

$8,714.51

Question 8

If you make deposits into a 6% account with the first deposit being $1200 and the deposits increase by 5% every year, how much will you have in 10 years?

Answer 8

$19,434.37

Question 9

How much money should be put into an account today so that you can withdraw $2000/yr for 5 years starting in 3 years (7% annually)

Answer 9

$7,162.54