Purchase Solution

Present Value Factors and Simple versus Compound Interest

Not what you're looking for?

Ask Custom Question

1) Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations?

a. The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now.
b. Both discount factors are greater than one.
c. Regardless of the interest rate, the discount factors are such that the present value of the $1,000 will always be greater than the present value of the $800.
d. Since the payments are different, no statement can be made regarding the discount factors.
e. You should factor in the time differential and choose the payment that arrives the soonest.

2)You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using compound interest. You should:

a. Choose the simple interest option because both have the same basic interest rate.
b. Choose the compound interest option because it provides a higher return.
c. Choose the compound interest option only if the compounding is for monthly periods.
d. Choose the simple interest option only if compounding occurs more than once a year.
e. Choose the compound interest option only if you are investing less than $5,000.

Purchase this Solution

Solution Summary

The solution examines the present value factors and simple versus compound interest.

Solution Preview

1) Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations?

a. The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now.
b. Both discount factors are greater than one.
c. Regardless of the ...

Purchase this Solution


Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Motivation

This tests some key elements of major motivation theories.