Question #22806

2. Which of the following statements is CORRECT?

a. If you have a series of cash flows, each of which is positive, you can solve for I,

where the solution value of I causes the PV of the cash flows to equal the cash flow

at Time 0.

b. If you have a series of cash flows, and CF0 is negative but each of the following CFs

is positive, you can solve for I, but only if the sum of the undiscounted cash flows

exceeds the cost.

c. To solve for I, one must identify the value of I that causes the PV of the positive CFs

to equal the absolute value of the PV of the negative CFs. This is, essentially, a trialand-

error procedure that is easy with a computer or financial calculator but quite

difficult otherwise.

d. If you solve for I and get a negative number, then you must have made a mistake.

e. If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

a. If you have a series of cash flows, each of which is positive, you can solve for I,

where the solution value of I causes the PV of the cash flows to equal the cash flow

at Time 0.

b. If you have a series of cash flows, and CF0 is negative but each of the following CFs

is positive, you can solve for I, but only if the sum of the undiscounted cash flows

exceeds the cost.

c. To solve for I, one must identify the value of I that causes the PV of the positive CFs

to equal the absolute value of the PV of the negative CFs. This is, essentially, a trialand-

error procedure that is easy with a computer or financial calculator but quite

difficult otherwise.

d. If you solve for I and get a negative number, then you must have made a mistake.

e. If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

Expert's answer

The CORRECT statement is C. The general feature of finance area is to value a series of future cash flows (CF), possibly a series of backdowns from a pension

account, interest payments from a bond, or deposits for a savings account. The Present Value of a Cash Flow Stream (the series of cash flows) is equal to the sum of the Present Values of the individual cash flows, that's why the valuation is comprehensive: to calculate the present value of each cash flow and then add them up.

account, interest payments from a bond, or deposits for a savings account. The Present Value of a Cash Flow Stream (the series of cash flows) is equal to the sum of the Present Values of the individual cash flows, that's why the valuation is comprehensive: to calculate the present value of each cash flow and then add them up.

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