What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line?

Chapter 4: Time Value of Money Questions
Book Title: Financial Management: Theory and Practice
(4-2)
What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used to evaluate all potential investments?
 © 2017 Cengage Learning, Cengage Learning
Chapter Review Questions
(4-1)
Define each of the following terms:
a. PV; I; INT;   ; PMT; M; 
b. Opportunity cost rate
c. Annuity; lump-sum payment; cash flow; uneven cash flow stream
d. Ordinary (or deferred) annuity; annuity due
e. Perpetuity; consol
f. Outflow; inflow; time line; terminal value
g. Compounding; discounting
h. Annual, semiannual, quarterly, monthly, and daily compounding
i. Effective annual rate (EAR or EFF%); nominal (quoted) interest rate; APR; periodic rate
j. Amortization schedule; principal versus interest component of a payment; amortized loan
(4-3)
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An annuity is defined as a series of payments of a fixed amount for a specific number of periods. Thus, $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 entire series does contain an annuity. Is this statement true or false?
(4-4)
If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.
(4-5)
Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
Chapter 4: Time Value of Money Questions
Book Title: Financial Management: Theory and Practice
Printed By: Kristina Mack (kmack5@grantham.edu) © 2017 Cengage Learning, Cengage Learning
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