Question #12140

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 trial-and-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 trial-and-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

Statement C is CORRECT. It is quite common in finance to value a series of

future cash flows (CF), perhaps a series of withdrawals from a retirement

account, interest payments from a bond, or deposits for a savings account. The

present value (PV) of the series of cash flows is equal to the sum of the

present value of each cash flow, so valuation is straightforward: find the

present value of each cash flow and then add them up.

future cash flows (CF), perhaps a series of withdrawals from a retirement

account, interest payments from a bond, or deposits for a savings account. The

present value (PV) of the series of cash flows is equal to the sum of the

present value of each cash flow, so valuation is straightforward: find the

present value of each cash flow and then add them up.

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