Answer the following statements true (T) or false (F)
1) An investment today of $8,424 at 6% will yield payments of $2,000 per year for five years, or total payments of $10,000 over five years. The reason for this increase is that the interest is being earned on principal that is left invested each year.
2) When computing the present value, the interest rate will vary depending on the amount of risk. Riskier investments, such as FDIC-insured bank deposits, command higher interest rates.
3) When computing the present value, the interest rate will vary depending on the amount of risk. Safer investments, such as FDIC-insured bank deposits, yield lower interest rates.
4) Discounted cash flow methods incorporate compound interest by assuming that companies will reinvest future cash flows when they are received.
5) Net present value is defined as the difference between the present value of the investment's net cash inflows and the investment's initial cost.
1) TRUE
Explanation: PV = Payment × PVA factor (i = 6%, n = 5)
= $2,000 × 4.212
= $8,424
2) FALSE
Explanation: Riskier investments such as stock investments command higher interest rates.
3) TRUE
4) TRUE
5) TRUE
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