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Click on each question to check your answer.
1. What does the present value of a given stream of future cash flows tend to be if the discount rate is infinite?
The present value tends to be zero as the future cash flows is divided by infinite discount rate. (p. 107)
2. What is the major difference between arithmetic and geometric gradient series cash flows?
Each subsequent number of the arithmetic gradient series cash flows is greater or less than the previous number by the same amount, while the subsequent number of geometric gradient series is greater or less than the previous number by a percentage. (p. 108; 115)
3. Compare an ordinary annuity and an annuity due.
An ordinary annuity gives smaller present value compared with that of annuity due because the latter being paid at the beginning of each period. (p. 96)
4. How would you estimate the present value of a perpetual annuity?
The present value of a perpetual annuity is dividing the future cash flows (FC) by the discount rate (r). (p. 96)
5. What is the major assumption underlying the method of discounting cash flows analysis?
The cash flows earned reinvest at the opportunity cost rate, given by the discount rate. (p. 96)