Present Value

1. Which of the following is true about finding the present value of cash flows?

A. Finding the present value of cash flows is important for financial theory, but it does not have much relevance to actual business decision making

B. Finding present value tells you what a cash flow will be worth in future years

C. Finding the present value of cash flows in future years tells you how much you would need to invest today so that it would grow to equal the given future amount

2. what is the value today of a $42K cash flow expected to be received 9 years from now based on an annual interest rate of 7%?

A. $28,556

B. $77,215

C. $22,845

D. $18,276

3. Your broker called earlier today & offered you the opportunity to invest in a security. As a friend, she suggested that you compare the current, or present value, cost of the security & the discounted value of its expected future cash flows before deciding whether to invest or not. The decision rule that should be used to decide is:

A. Everything else being equal, you should invest if the current cost of the security is greater than then present value of the securitys expected future cash flow

B. Everything else being equal, you should invest if the present value of the securitys expected future cash flows is less than the current cost of the security

C. Everything else being equal, you should invest if the discounted value of the securitys expected future cash flows is greater than or equal to the current cost of the security

Now that youve thought about the decision rule that should be applied, apply it to the following offer from your broker:

4. Jing Associates, LLC, is building a new office complex. To pay for the construction, Jing is selling a security that will pay the investor the lump sum of $17,500 in 6 years. The current market price of the security is $12, 372. Assuming that you can earn an annual return of 6.75% on your next most attractive investment, how much is the security worth to you today?

• $11,826
• $9,461
• $15,965

5. From strictly a financial perspective, should you invest in the Jing security?

• Yes
• No

6. Why or why not?

• Because the discounted value of the securitys future cash flows is greater than the cost of the security
• Because the cost of the security is greater than the discounted value of the securitys future cash flows