ch06sm - Chapter 6 Discounted Cash Flows and Valuation...

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Page 1 of 32 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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