Chapter 5- Finance and Accounting
The __________ value is the current value of future cash flows discounted at the appropriate discount rate.
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?
=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)
In general, if you invest for one period at an interest rate of r, your investment will grow to 1 ________ (minus/plus) r.
plus
Interest earned only on the original principal amount invested is called ________ interest.
simple
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
true
If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?
$133.10
The basic present value equation is:
PV = FVt/(1+r)t
Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav:
could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.
True or false: Small changes in the interest rate affect the future value of a small-term investment more than they would affect the value of a long-term investment.
false
True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.
false
A dollar received one year from today has _____ value than a dollar received today.
less
All else equal, the longer time period you have before you will need the money, the ________ (less/more) you will need to deposit today to have the same amount in the future.
less
The concept of the time value of money is based on the principle that a dollar today is worth __________ a dollar promised at some time in the future.
more than
True or false: The correct future value interest factor in a time value of money table for $1 in 10 years at 10 percent per year is 2.5937.
true
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
The discount rate is also called the rate of ________.
return
The difference between _______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___________ every year.
simple; bigger
What is the future value of $1,000 invested for 8 years at 6%?
$1,593.85
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
$11,739.09
You just invested $49,000 that you received as an insurance settlement. How much more will this account be worth in 40 years if you earn an average return of 7.6 percent rather than 7.1 percent? (Assume annual compounding.)
$155,986.70
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 ____.
$600; $605
Which of the following methods can be used to calculate present value?
-A financial calculator -An algebraic formula -A time value of money table
You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annually compounded interest until you have accumulated $50,000. How many years from today will it be when this occurs?
54.77 years
Twenty-one years ago, Marisol set aside $5,000 in case of a financial emergency. Today, that account has increased in value to $18,250. What annually compounded rate of interest is her account earning?
6.36%
Fifteen years ago, you invested $5,000. Today, it is worth $18,250. What annually compounded rate of interest did you earn?
9.01%
Twelve years ago, your parents set aside $8,000 to help fund your college education. Today, that fund is valued at $23,902. What annually compounded rate of interest is being earned on this account?
9.55%
Future value is the ________ value of an investment at some time in the future.
cash
Interest earned on the original principal amount invested is called _____.
compound interest
Discounting is the opposite of _______.
compounding
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
The ________ rate is the rate used to calculate the present value of the future cash flows.
discount
The equation that results in the _______ value interest factor for a single deposit is as follows: (1 + r)t
future
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
If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.
present value factor
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
When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.
the same
True or false: Discounting is the opposite of compounding.
true
True or false: When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.
false
The equation that results in the _______ value interest factor for a single deposit is as follows: 1/(1+r)t
future
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
-Dividend growth -Sales growth
Which of the following are correct spreadsheet functions?
-Present value = PV(rate,nper,pmt,fv) -Discount rate = RATE(nper,pmt,pv,fv) -Future value = FV(rate,nper,pmt,pv)
__________ value is the cash value of an investment at some time in the ___________.
-future -future
Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?
1.21
Which formula below represents a present value factor?
1/(1 + r)^t
Assuming the interest rate offered for a 10-year investment plan is same as for a 4-year investment plan. For an investor to achieve the same future value, which of these two plans would require a smaller savings amount to be deposited today?
10-year investment
You're trying to save to buy a new $68,000 sports car. Currently, you have saved $36,840 which is invested at 4.9 percent annually compounded interest. How many years will it be before you purchase the car, assuming the price of the car remains constant?
12.81 years
Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?
FV = $100 × (1.10)^3
The _________ (smaller/greater) the interest rate changes, the greater the impact to the future value of an amount invested.
greater
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be reinvested, yielding a greater amount in the future.
Calculating the present value of a future cash flow to determine its value today is called _____.
discounted cash flow valuation
Naples Corporation has an unfunded pension liability of $327 million that must be paid in 16 years. What is the present value of this liability at a discount rate of 6.24 percent, compounded annually?
$124,147,723.50
Assume you currently earn a salary of $50,000 per year. What will be your annual salary 17 years from now if you receive annual raises of 3.75 percent?
$93,491
You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. The prize will be awarded on your 100th birthday, 79 years from now. The appropriate discount rate is 6.4 percent, compounded annually. What is the present value of your winnings?
$9,300.82
