Assume that you are nearing graduation and that you have applied for a job with a local bank. As part of the bank’s evaluation process, you have been asked to take an examination that covers several financial analysis techniques. The first section of the test addresses discounted cash flow analysis and bonds.
a. The notion that money has “time-value” is based on the existence of a nonzero “opportunity rate”, i.e., a rate of return at which it is possible to invest. Why is the opportunity rate so important? b. Present value is used extensively by managers who are reviewing proposed projects. How does the present value of a cash flow assist management in making these business decisions?
c. We sometimes need to find how long it will take a sum of money (or anything else) to grow to some specified amount. For example, if a company’s sales are growing at a rate of 20 percent per year, how long will it take sales to double?
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