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Chapter 6
Discounted Cash Flows and Valuation
Critical Thinking Questions
6.1
Identify the steps involved in computing the future value when you have multiple cash
flows.
First, prepare a time line to identify the size and timing of the cash flows. Second,
calculate the present value of each individual cash flow using an appropriate discount
rate. Finally, add up the present values of the individual cash flows to obtain the present
value of a cash flow stream. This approach is especially useful in the real world where
the cash flows for each period are not the same.
6.2
What is the key economic principle involved in calculating the present value and future
value of multiple cash flows?
Regardless of whether you are calculating the present value or the future value of a cash
flow stream, the key idea is to discount or compound the cash flows to the same point in
time.
6.3
What is the difference between a perpetuity and an annuity?

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