CHAPTER 6
DISCOUNTED CASH FLOW VALUATION
Answers to Concepts Review and Critical Thinking Questions
1.
The four pieces are the present value (PV), the periodic cash flow (
C
), the discount rate (
r
), and the number of
payments, or the life of the annuity,
t
.
2.
Assuming positive cash flows, both the present and the future values will rise.
3.
Assuming positive cash flows, the present value will fall and the future value will rise.
4.
It’s deceptive, but very common. The basic concept of time value of money is that a dollar today is not worth the
same as a dollar tomorrow. The deception is particularly irritating given that such lotteries are usually government
sponsored!
5.
If the total money is fixed, you want as much as possible as soon as possible. The team (or, more accurately, the
team owner) wants just the opposite.
6.
The better deal is the one with equal installments.
7.
Yes, they should. APRs generally don’t provide the relevant rate. The only advantage is that they are easier to
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 Spring '11
 VARNEY
 Finance, Time Value Of Money, Annuity, Net Present Value, Valuation, Viatical settlement

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