DISCOUNTED CASH FLOW VALUATION
Answers to Concepts Review and Critical Thinking Questions
Assuming positive cash flows and interest rates, the future value increases and the present value
Assuming positive cash flows and interest rates, the present value will fall and the future value will
The better deal is the one with equal installments.
Yes, they should. APRs generally don’t provide the relevant rate. The only advantage is that they are
easier to compute, but, with modern computing equipment, that advantage is not very important.
A freshman does. The reason is that the freshman gets to use the money for much longer before
interest starts to accrue.
It’s a reflection of the time value of money. TMCC gets to use the $24,099 immediately. If TMCC
uses it wisely, it will be worth more than $100,000 in thirty years.
This will probably make the security less desirable. TMCC will only repurchase the security prior to
maturity if it is to its advantage, i.e. interest rates decline. Given the drop in interest rates needed to
make this viable for TMCC, it is unlikely the company will repurchase the security. This is an
example of a “call” feature. Such features are discussed at length in a later chapter.
The key considerations would be: (1) Is the rate of return implicit in the offer attractive relative to
other, similar risk investments? and (2) How risky is the investment; i.e., how certain are we that we
will actually get the $100,000? Thus, our answer does depend on who is making the promise to
The Treasury security would have a somewhat higher price because the Treasury is the strongest of
The price would be higher because, as time passes, the price of the security will tend to rise toward
$100,000. This rise is just a reflection of the time value of money. As time passes, the time until
receipt of the $100,000 grows shorter, and the present value rises. In 2019, the price will probably be
higher for the same reason. We cannot be sure, however, because interest rates could be much
higher, or TMCC financial position could deteriorate. Either event would tend to depress the