Question

1. If we want to move a cash flow forward in time we will usually multiply by a number bigger than 1, but sometimes we would want to divide in order to keep the present value unchanged.

a. True

b. False

2. Assume we want to move a cash flow from period 8 to period 5. The calculation of the new amount of the cash flow would include

a. Adding the interest rate to number one and raising the result to the power of 5.

b. Adding the interest rate to number one and raising the result to the power of 3.

c. Raising the interest rate to the power of 5.

d. Raising the interest rate to the power of 3.

3.  You have been promised to receive $400 in 4 years. After receiving the $400 you plan to deposit it for another 4 years at a 4% interest rate. How much will you have in year 8? In other words, if you move the $400 to be received in year 4 to year 8 what will be the new amount of the cash flow?

a. $384.62.

b.$1,600.00.

c. $1,664.00.

d. $467.94.

4. How many years would you have to wait in order for a deposit to grow from $1,000 to $10,000, assuming a 7% interest rate?

a. 34 years

b. 10 years

c. 9.35 years

d. 16 years

Answer 1

(1) If a cash flow has to be moved forward in time, it has to be multiplied by (1+r)ⁿ, where r is the interest rate and n is the number of periods for which the cash flow has to be moved. However it is not divided to keep the present value same.

Hence (b) False is correct option

(2) Number of periods to be moved n = 8-5 = 3

Since the cash flows are moved back in period, we need to divide the cash flow in period 8 by (1+r)³, where r is the rate of interest.

Hence, the correct option is (b) Adding the interest rate to number one and raising the result to the power of 3

(3) Number of periods = n = 8-4 = 4

Cash flow = P = $400

Value in Year 8 = P(1+r)ⁿ = 400(1+4/100)⁴ = $467.94

Hence, correct option is (d) $467.94

(4) Let the number of years be n

Interest rate = r = 7%

Present Value = $1000

Future Value = $10,000

=> FV = PV(1+r)ⁿ

=> 10000 = 1000(1+7/100)ⁿ

=> (1+7/100)ⁿ = 10

=> n ln(1.07) = ln 10

=> n = 34.03

Hence, correct option is (a) 34 years