What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown on a time line? Is a single number used in all situations? Explain.
2-2 Explain whether the following statement is true or false: $100 a year for 10 years is an annuity, but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity. However, the second series contains an annuity.
2-3 If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100 percent, but the annual growth rate would be less than 10 percent. True or false? Explain. (Hint: If you aren’t sure, plug in some numbers and check it out.)
2-4 Would you rather have a savings account that pays 5 percent interest compounded semiannually or one that pays 5 percent interest compounded daily? Explain
5 To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even if some of the cash flows constitute an annuity because the entire series is not an annuity. True or false? Explain.
2-6 The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the interest rate, I: PV PMT/I. What is the future value of a perpetuity of PMT dollars per year? (Hint: The answer is infinity, but explain why.)
2-7 Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were comparing the costs of loans from different lenders, could you use their APRs to determine the one with the lowest effective interest rate? Explain.
2-8 What is a loan amortization schedule, and what are some ways these schedules are used?
