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Patterns of Cash Flows in Finance

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Questions and Answers

In finance, what is a lump-sum amount?

The amount to which a cash flow will grow over a period of time
A series of equal payments over time
Multiple payments that are not equal and do not occur at equal intervals
A single payment paid or received in the current period or some future period (correct)

What is an annuity in finance?

A series of equal payments that occur at equal time intervals (correct)
A lump-sum amount
Multiple payments that are not equal
The amount to which a cash flow will grow over a period of time

What is the Time Value of Money concept primarily concerned with?

Future value of cash flows
Graphical representations
Equal payments over time
The idea that a dollar today is worth more than a dollar in the future (correct)

How would you describe an uneven cash flow stream in finance?

Multiple payments that are not equal and do not occur at equal intervals (B) Signup and view all the answers

What does 'Future Value' refer to in finance?

The value to which a cash flow or series of cash flows will grow over time (B) Signup and view all the answers

How are cash flow time lines used in finance?

To represent timing of cash flows graphically (B) Signup and view all the answers

Which of the following statements best describes the time value of money?

It is the principle that a dollar today is worth more than a dollar in the future due to its potential earning capacity (A) Signup and view all the answers

What is a cash flow pattern?

The sequence of cash inflows and outflows over time (C) Signup and view all the answers

Which of the following is used to calculate the future value of an investment?

Future value formula (D) Signup and view all the answers

What is an annuity?

A series of equal periodic payments made at the end of each period (C) Signup and view all the answers

Which of the following is NOT a typical cash flow pattern observed in business?

A geometric series (D) Signup and view all the answers

What is the difference between the Annual Percentage Rate (APR) and the Effective Annual Rate (EAR)?

APR is the stated interest rate, while EAR is the actual interest rate earned or paid after compounding (C) Signup and view all the answers

What is the term used to designate constant cash flows (an annuity stream)?

Payment (PMT) (C) Signup and view all the answers

What does the term "Cash Flow (CF)" designate?

Both constant cash flows and uneven cash flows (D) Signup and view all the answers

What is the present value of the uneven cash flow stream given in the example ($400, $300, $250 at 5% interest)?

$869.02 (A) Signup and view all the answers

Which of the following formulas is used to calculate the present value of an uneven cash flow stream?

$PV = \sum_{t=1}^n \frac{CF_t}{(1+r)^t}$ (D) Signup and view all the answers

In the numerical example, what is the present value of the $400 cash flow occurring at time 0?

$400 (A) Signup and view all the answers

Which of the following cash flow patterns represents an annuity?

$500, $500, $500, $500 (C) Signup and view all the answers