BA 240 Chapter 5 (Week 2)

Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?

r = (1000/100)^(1/10) - 1

The discount rate is also called the rate of

return

When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year. Multiple choice question.

the same

If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____.

$121.00

You invest $500 at 10 percent interest. At the end of 2 years with simple interest you will have ____ and with compound interest you will have ____. Multiple choice question.

$600; $605

Which of the following are correct spreadsheet functions?

Future value = FV(rate,nper,pmt,pv) Present value = PV(rate,nper,pmt,fv) Discount rate = RATE(nper,pmt,pv,fv)

___value is the cash value of an investment at some time in the ___

Future, future

Future value is the Blank______ value of an investment at some time in the future. Multiple choice question.

cash

The idea behind ______ is that interest is earned on interest.

compounding

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called

compounding

If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.

present

Suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem? Multiple choice question.

=NPER(0.06,0,−6000,10000)

Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually?

=NPER(0.0653,0,−40,240)

The basic present value equation is:

PV = FVt(1+r)t

Which of the following can be determined using the future value approach to compound growth developed in this chapter?

Sales growth Dividend growth

Interest earned on the original principal amount invested is called _____.

Simple interest

True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.

True

The basic present value equation underlies many of the _____.

most important ideas in corporate finance