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What will be the total value in the account at the end of 3 years if you deposit $4,000 at the end of each year for three years and start with $7,000?
What will be the total value in the account at the end of 3 years if you deposit $4,000 at the end of each year for three years and start with $7,000?
The future value of a cash flow is calculated by multiplying the present value by the interest rate.
The future value of a cash flow is calculated by multiplying the present value by the interest rate.
False
What is the future value of $7,000 after three years at an 8% interest rate?
What is the future value of $7,000 after three years at an 8% interest rate?
$8,817.98
The formula to calculate future value for an amount deposited in Year 1 is ______.
The formula to calculate future value for an amount deposited in Year 1 is ______.
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Match the type of cash flow with its description:
Match the type of cash flow with its description:
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Which of the following is true regarding interest rates?
Which of the following is true regarding interest rates?
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Loan amortization involves paying off a loan through equal payments over its term.
Loan amortization involves paying off a loan through equal payments over its term.
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What is the future value of $4,000 deposited at the end of Year 2 in an account paying 8% interest?
What is the future value of $4,000 deposited at the end of Year 2 in an account paying 8% interest?
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What is the present value of the cash flow of $600 received in year 3 if the interest rate is 12 percent?
What is the present value of the cash flow of $600 received in year 3 if the interest rate is 12 percent?
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The total present value of the cash flows is calculated by adding the present values of all individual cash flows.
The total present value of the cash flows is calculated by adding the present values of all individual cash flows.
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What is the formula used to calculate the present value of a cash flow?
What is the formula used to calculate the present value of a cash flow?
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To find the present value of each cash flow, you divide the cash flow amount by ________ raised to the power of the year.
To find the present value of each cash flow, you divide the cash flow amount by ________ raised to the power of the year.
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Match the cash flows with their corresponding present values:
Match the cash flows with their corresponding present values:
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If an investment gives you $800 in year 4, what is the present value of that cash flow at a 12 percent interest rate?
If an investment gives you $800 in year 4, what is the present value of that cash flow at a 12 percent interest rate?
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If you invest $1000 at an interest rate of 8 percent, the balance will decrease after five years due to the interest.
If you invest $1000 at an interest rate of 8 percent, the balance will decrease after five years due to the interest.
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How much is the total present value of the cash flows: $200, $400, $600, and $800 at a 12 percent interest rate?
How much is the total present value of the cash flows: $200, $400, $600, and $800 at a 12 percent interest rate?
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What is the present value of receiving $1,000 in one year at a 10% interest rate?
What is the present value of receiving $1,000 in one year at a 10% interest rate?
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To receive $75 in two years with a required return of 15%, you should be willing to invest more than $56.71 today.
To receive $75 in two years with a required return of 15%, you should be willing to invest more than $56.71 today.
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What is the total present value of receiving $1,000 in one year, $2,000 in two years, and $3,000 in three years at 10%?
What is the total present value of receiving $1,000 in one year, $2,000 in two years, and $3,000 in three years at 10%?
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If you desire an interest rate of 12 percent, you would need to find the present value of receiving __________ payment for five years.
If you desire an interest rate of 12 percent, you would need to find the present value of receiving __________ payment for five years.
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What is the present value of receiving $75 in two years using a 15% return rate?
What is the present value of receiving $75 in two years using a 15% return rate?
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How much will you have in three years if you deposit $100 in one year, $200 in two years, and $300 in three years at an interest rate of 7%?
How much will you have in three years if you deposit $100 in one year, $200 in two years, and $300 in three years at an interest rate of 7%?
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The sum of present values can exceed the initial investment amount when calculating returns over multiple years.
The sum of present values can exceed the initial investment amount when calculating returns over multiple years.
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If you invest $500 today and $600 one year later in a mutual fund that pays 9% annually, your total future value in two years will be $1,248.05.
If you invest $500 today and $600 one year later in a mutual fund that pays 9% annually, your total future value in two years will be $1,248.05.
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How much would you be willing to contribute today if you will receive five annual payments of $25,000 each in 40 years at a 12 percent interest rate?
How much would you be willing to contribute today if you will receive five annual payments of $25,000 each in 40 years at a 12 percent interest rate?
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Match the following investment options with their calculated present values:
Match the following investment options with their calculated present values:
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What is the future value of a $200 deposit made in two years at a 7% interest rate after one year?
What is the future value of a $200 deposit made in two years at a 7% interest rate after one year?
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If you deposit $100 in one year and $300 in three years, the total future value at the end of three years is _____ when compounded at 7%.
If you deposit $100 in one year and $300 in three years, the total future value at the end of three years is _____ when compounded at 7%.
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Match the following amounts with their corresponding future values at a 9% interest rate in two years:
Match the following amounts with their corresponding future values at a 9% interest rate in two years:
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What is the future value of a $500 investment made today after two years at a 9% interest rate?
What is the future value of a $500 investment made today after two years at a 9% interest rate?
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The formula used to calculate future value involves multiplying the amount by (1 + interest rate) raised to the power of the number of years.
The formula used to calculate future value involves multiplying the amount by (1 + interest rate) raised to the power of the number of years.
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If no further deposits are made after the initial investments, what will be the future value after 5 years from the original investment of $500 in a mutual fund at 9%?
If no further deposits are made after the initial investments, what will be the future value after 5 years from the original investment of $500 in a mutual fund at 9%?
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What is an ordinary annuity?
What is an ordinary annuity?
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A perpetuity refers to a series of payments that continues indefinitely.
A perpetuity refers to a series of payments that continues indefinitely.
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What must match in annuity calculations for accurate results?
What must match in annuity calculations for accurate results?
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The annual salary of the individual buying the house is $________.
The annual salary of the individual buying the house is $________.
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Match the type of payment with its definition:
Match the type of payment with its definition:
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How much can you borrow if you can afford $632 per month at a 1% interest rate for 48 months?
How much can you borrow if you can afford $632 per month at a 1% interest rate for 48 months?
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The bank's allowed monthly mortgage payment is calculated as 25% of monthly income.
The bank's allowed monthly mortgage payment is calculated as 25% of monthly income.
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What are cash inflows considered in financial calculations?
What are cash inflows considered in financial calculations?
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Study Notes
Key Concepts in Discounted Cash Flow Valuation
- Understand future and present value calculations for investments with multiple cash flows.
- Learn to calculate loan payments and determine interest rates.
- Explore loan amortization and its impact on repayment schedules.
- Gain insight into how interest rates are quoted and interpreted.
Future Value of Multiple Cash Flows
- Future Value (FV) is calculated for each cash flow and then summed together.
- Example: With an initial deposit of 7,000andannualdepositsof7,000 and annual deposits of 7,000andannualdepositsof4,000 at 8% interest, total value after 3 years is $21,803.58.
- Future cash flows can also be analyzed separately to track their growth based on the interest rate.
Present Value of Multiple Cash Flows
- Present Value (PV) discounts future cash flows back to today’s value using a specific interest rate.
- Example: An investment paying 200,200, 200,400, 600,and600, and 600,and800 over four years at 12% would have a PV of $1,432.93.
- Important to apply the discounting formula accurately: PV = CF / (1 + r)^n.
Annuities and Perpetuities
- An annuity is a series of equal payments made at regular intervals, while a perpetuity provides infinite equal payments.
- Ordinary annuities pay at the end of each period; annuity due payments occur at the beginning.
- Basic formulas can determine the present value of these cash flows.
Importance of Matching Rates and Time Periods
- Ensure that the interest rate and time period used in calculations are consistent (annual, monthly, etc.).
- Cash inflows should be treated as positive and cash outflows as negative in calculations.
Loan Payment Calculations
- Monthly mortgage payments typically represented as a percentage of income can determine maximum loan amounts.
- Example: An individual with a monthly income of 3,000canaffordan3,000 can afford an 3,000canaffordan840 monthly payment, leading to a loan amount of approximately $140,105.
Investment Decisions
- Evaluating whether to accept an investment opportunity requires comparing the present value of expected cash flows to the upfront cost.
- Factors like required return rates (e.g., 15%) and future cash flows need to be considered in decision-making.
Saving for Retirement
- When planning for retirement, consider future cash flows and determine how much to invest today based on expected interest rates and time frames.
Practical Applications
- Use calculators and software (like Excel) for solving complex present and future value scenarios effectively.
- Understand the practical implications of financing decisions in various contexts such as mortgages, investments, and retirement planning.
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Description
This quiz covers key principles of discounted cash flow valuation, including future and present value calculations for investments with multiple cash flows. You will learn how to calculate loan payments, determine interest rates, and understand loan amortization and its effects on repayment schedules. Dive into practical examples to reinforce your understanding of these critical financial concepts.
