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14. Which of the following statements is CORRECT?
1) 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.
2) 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.
3)
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.
4) If you solve for I and get a negative number, then you must have
made a mistake.
5) If CF0 is positive and all the other CFs are negative, then you
cannot solve for I.
15. You are considering two equally risky annuities, each of which pays
$5,000 per year for 10 years. Investment ORD is an ordinary (or
deferred) annuity, while Investment DUE is an annuity due. Which of
the following statements is CORRECT?
1) The present value of ORD must exceed the present value of DUE,
but the future value of ORD may be less than the future value of DUE.
2) The present value of DUE exceeds the present value of ORD, while
the future value of DUE is less than the future value of ORD.
3) The present value of ORD exceeds the present value of DUE, and
the future value of ORD also exceeds the future value of DUE.