Opportunity cost rate
Questions
(4-1)
Define each of the following terms:
PV; I; INT; ; ; ; PMT; M;
Opportunity cost rate
Annuity; lump-sum payment; cash flow; uneven cash flow stream
Ordinary (or deferred) annuity; annuity due
Perpetuity; consol
Outflow; inflow; timeline; terminal value
Compounding; discounting
Annual, semiannual, quarterly, monthly, and daily compounding
Effective annual rate (EAR or EFF%); nominal (quoted) interest rate; APR; periodic rate
Amortization schedule; principal versus interest component of a payment; amortized loan
(4-2)
What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a timeline? Is the opportunity rate a single number that is used to evaluate all potential investments?
(4-3)
An annuity is defined as a series of payments of a fixed amount for a specific number of periods. Thus, $100 a year for 10 years is an annuity, but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. However, the entire series does contain an annuity. Is this statement true or false?
(4-4)
If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.
(4-5)
Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
Answer preview to opportunity cost rate
APA
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