Discounted Cash Flow Valuation

An individual is offered two deals for a piece of land. The first offer is for $10,000 today. The second offer is for $11,424 to be paid one year from now. If the relevant interest rate is 12 percent, what is the present value of the second offer?

If an investor takes an offer of $10,000 today and invests it in a bank at an insured rate of 12 percent, what is the future value of this investment at the end of one year?

What is the definition of Net Present Value (NPV) for an investment?

An analyst is evaluating an investment in a piece of land that costs $85,000. She is certain that next year the land will be worth $91,000. If the interest rate on similar alternative investments is 10 percent, what is the Net Present Value (NPV) of this investment?

How does the process of leaving money in a financial market and lending it for another period, earning interest on previously earned interest, get described?

An individual has put $500 in a savings account that earns 7 percent, compounded annually. How much will this person have at the end of three years?

An individual is set to receive $10,000 three years from now. If this person can earn 8 percent on their investments, what is the present value of this future cash flow?

What is the key difference between compound interest and simple interest?

An individual has $10,000 and wants to buy a car that will cost $16,105 in five years. What annual interest rate must this person earn to be able to afford the car?

An investor has $25,000 and wants to accumulate $50,000. If the investor can earn 12 percent annual interest, approximately how long will it take to reach the goal?

What does the Effective Annual Rate (EAR) represent?

If the stated annual rate of interest is 8 percent and it is compounded quarterly, what is the effective annual rate (EAR)?

An investor is investing $5,000 at a stated annual interest rate of 12 percent per year, compounded quarterly, for five years. What will be the value of the investment at the end of the five years?

What is the limiting case of compounding, where it occurs every infinitesimal instant, commonly called?

The Michigan State Lottery is going to pay you $100,000 at the end of four years. If the annual continuously compounded rate of interest is 8 percent, what is the present value of this payment?

What is a perpetuity?

Consider a perpetuity paying $100 a year. If the relevant interest rate is 8 percent, what is the value of this perpetuity?

Which condition must be met for the growing perpetuity formula, PV = C / (r - g), to be valid?

Popovich Corporation is about to pay a dividend of $3.00 per share. Investors anticipate that the annual dividend will grow by 6 percent a year forever, and the applicable discount rate is 11 percent. What is the price of the stock today?

A lottery prize is advertised as the 'Million Dollar Lottery' because it pays $50,000 a year for 20 years. If the relevant interest rate is 8 percent and the first payment is one year from now, what is the actual present value of the prize?

An investor puts $3,000 per year into a Roth IRA for 30 years. The account pays 6 percent interest per year. What is the future value of this investment upon retirement?

What is an annuity that begins today, at Date 0, rather than a full period from now, commonly called?

An investor will receive a four-year annuity of $500 per year, beginning at Date 6. If the interest rate is 10 percent, what is the present value of this annuity at Date 0?

What is the process of providing for a loan to be paid off by making regular principal reductions called?

A five-year, 9 percent, $5,000 loan is to be repaid with a single, fixed payment every period. What is the annual payment required to amortize this loan?

For a standard amortizing loan with fixed total payments, what happens to the amount of interest and principal paid with each successive payment?

One way to determine the value of a firm is to calculate the present value of its future cash flows. A firm is expected to generate net cash flows of $5,000 in the first year and $2,000 for each of the next five years (Years 2-6). The firm can be sold for $10,000 seven years from now. If the required return is 10 percent, what is the value of the firm today?

A firm has the opportunity to invest in a new computer that costs $50,000. It will generate cost savings of $25,000 in one year, $20,000 in two years, and $15,000 in three years. The appropriate discount rate is 7 percent. What is the Net Present Value (NPV) of this investment?

When comparing two investments, one receiving $10,000 today and the other receiving $11,424 in one year with a 12 percent interest rate, both future value analysis and present value analysis are used. What is the relationship between the decisions reached by these two methods?

What does the term 'interest on interest' refer to in the context of multiperiod investing?

What is the primary reason that the Effective Annual Rate (EAR) is typically higher than the Stated Annual Interest Rate (APR) when interest is compounded more than once a year?

The formula for the present value of a growing perpetuity is PV = C / (r - g). What does the cash flow 'C' in the numerator represent?

An annuity is a level stream of regular payments that lasts for a fixed number of periods. Which of the following is the correct formula for the present value of an ordinary annuity?

A commercial mortgage of $100,000 has a 12 percent APR and a 20-year (240-month) amortization. It also has a five-year (60-month) balloon payment. What does the balloon payment represent?

If you are calculating the future value of a sum of money over T periods with an interest rate of r, which formula would you use?

What is the primary difference in the cash flows of an annuity versus a perpetuity?

An investment offers to pay you $4,900 per year for 15 years, with the first payment occurring one year from now. If the required return is 8 percent, what is the value of this investment?

How does the value of a perpetuity change when the interest rate rises?

An investment of $1,000 is made at a stated annual interest rate of 10 percent. Which compounding frequency results in the highest future value at the end of one year?

In a loan amortization schedule with fixed total payments, the principal reduction in the first year for a $5,000, 9 percent loan is $835.46. How is this value calculated?

An infrequent annuity pays $450 once every two years for a total of 20 years (10 payments). If the annual interest rate is 6 percent, what is the correct two-year interest rate to use for valuation?

What is the primary difference between a stated annual interest rate (SAIR) and an effective annual rate (EAR)?

The algebraic formula for the net present value of a T-period project is given as NPV = -C0 + Σ [Ci / (1 + r)^i] from i=1 to T. What does the term -C0 represent?

A growing annuity has a finite number of growing cash flows. What is the correct formula for its present value?

A loan of $5,000 has a 9 percent interest rate and is amortized with fixed principal payments of $1,000 per year plus interest. What is the total payment in the second year?

What is the general relationship between the present value of an investment and the interest rate used to discount its future cash flows?

What is the term for the factor used to calculate the present value of a stream of level payments for a fixed number of years, often found in tables like Table A.2?

If you need to find the value of an investment at a future point in time, including all compounded interest, which type of calculation should you perform?

A home mortgage with fixed monthly payments is a real-world example of which type of cash flow stream?

When an analyst refers to the 'discount rate,' what does this rate typically represent in the context of valuation?