3. To use the present value formula PVO-C/r at time zero, which of the following

Question

3. To use the present value formula PVO-C/r at time zero, which of the following is correct? a. There are a finite number of cash flows in the future b. The cash flows can differ in different time periods c. The number of cash flows can be counted d. There may be a stopping point of cash flows e. None of the above 3. Your friend promises you a perpetuity of $1 every year. The first payment occurs next year, which ofthe following is right about its present value at time zero if r-10%? b. c. d. e. S10 $9.1 S0.91 No enough information None of the above 4. Your friend promises you a perpetuity of $1 every year. The first payment occurs in year 2, which ofthe following is right about its present value at time zero if r-10%? a. $10 b. $9.1 c. S091 d. No enough information e. None of the above 5. To use the present value formula PVO-C/r-C+t)T) at time zero, which of the following is correct? a. There are a finite number of cash flows in the future b. There are at least one billion pieces of cash flows c. The number of cash flows cannot be counted d. There is no stopping of cash flows in the future 17

Explanation / Answer

3. “PV0 = C /r” is the formula to calculate present value of a perpetual cash-flow stream. Hence, Option E (none of the above) is correct.

3. Present value of perpetual cash-flow stream = C / r
=> $1 / 0.10 = $10
Hence, Option A is correct.

4. Value at year 2 = $10
Present value = $10 / 1.102 = $8.26

Hence, Option E (None of the above) is correct.

5. This formula is used to calculate present value of finite number of cash-flows. Hence, Option A is correct.

Please post remaining question separately

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