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 compute, but, with modern computing equipment, that advantage is not very important.
8. A freshman does. The reason is that the freshman gets to use the money for much longer before interest
starts to accrue. The subsidy is the present value (on the day the loan is made) of the interest that would
have accrued up until the time it actually begins to accrue.
9. The problem is that the subsidy makes it easier to repay the loan, not obtain it. However, ability to repay
the loan depends on future employment, not current need. For example, consider a student who is currently