If you deposit $100 today and $100 in 1 year at an 8% interest rate, how much will you have in 2 years? $224.64
What is the future value of $2,000 deposited at the end of each of the next 5 years at an interest rate of 10%? $12,210.20
What is the present value of an investment that will pay $1,00...
Chapter 5 Discounted Cash Flow
Valuation Review Questions and Correct
Answers
If you deposit $100 today and $100 in 1 year at an 8% interest rate, how much will you
have in 2 years? ✅$224.64
What is the future value of $2,000 deposited at the end of each of the next 5 years at an
interest rate of 10%? ✅$12,210.20
What is the present value of an investment that will pay $1,000 at the end of every year
for the next 5 years assuming a 6% discount rate? ✅$4,212.37
What is an annuity?
2 Types ✅A series of constant, or level, stream of cash flows for a fixed period of time
This is a finite series of equal payments occur at regular intervals
(multiple cash flows that are all the same amount)
2 MOST COMMON TYPES OF ANNUITIES
1) Ordinary Annuity
An annuity where the cash flows occur at the end of each period
2) Annuity Due (only a qualitative question on this)
An annuity where the cash flows occur at the beginning of each period
Note: Unless stated otherwise, you can assume an ordinary annuity.
Ordinary Annuity Timeline & Examples ✅Car loans and home mortgages are
examples of ordinary annuities whereby the loan is taken out at time 0 and the first
payment is then due at the end of each period.
Draw Timeline
Annuity Due Timeline & Examples ✅Most apartment lease arrangements are
examples of an annuity due. The monthly payment is due at the beginning of each
month.
Draw Timeline
Future Value for Annuities - Formula ✅FVannuity = Cash Amount per period * Annuity
Future Value Factor
Breakdown -
, Annuity Future Value Factor - (future value factor -1)/ r
Future Value Factor: (1+r)^t
ORRRR
FVannuities = C* [(1+r)^t -1]/r
How much money will you have when you retire in 40 years if you deposit $2,000 per
year into an account and earn 7.5%? ✅[future value of annuities]
$454,513.04
Present Value for Annuities - Formula ✅PVannuity = Cash amount per period * annuity
present value factor
BREAK DOWN --
Annuity Present Value Factor = (1-Present Value Factor)/r
Present Value factor = 1/(1+r)^t
ORRR
PVannuities = C* {1- [1/(1+r)^t]}/r
How much money do you need to deposit today if you want to receive $2,000 per year
for the next 40 years assuming an interest rate of 7.5%? ✅[Present value of annuities]
= $25,188.82
FV and PV for Annuities - Example (What is the relationship)
How much money do you need to deposit today if you want to receive $2,000 per year
for the next 40 years assuming an interest rate of 7.5%?
How much money will you have in 40 years if you deposit $2,000 per year into an
account and earn 7.5%? ✅PV $25,188.82
FV $454,513.04
NOTE: The relationship between PVa and FVa is (1+r)^t
PVa * (1+r)^t = FVa
Annuity Due
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller twishfrancis. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $8.99. You're not tied to anything after your purchase.
