FIN 320: TVM

Take the lump sum because it has the higher present value

Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from now. If you can earn 7% on your invested funds, which of the following is true?

I only

Given r and t greater than zero: I. Present value interest factors are less than one. II. Future value interest factors are less than one. III. Present value interest factors are greater than future value interest factors. IV. Present value interest factors grow as t grows, provided r is held constant.

equal payments paid at regular intervals over a stated time period

An ordinary annuity is best defined by which one of the following?

Compound Interest

Interest earned on both the initial principal and the interest reinvested from prior periods

Interest on Interest

Interest earned on the reinvestment of previous interest payments

Simple Interest

Interest earned only on the original principal amount invested

The discount factor for the cash flow ten years away is always less than or equal to the discount factor for the cash flow that is received seven years from now

Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is $1,000 ten years from now, the other $800 seven years from now. Which of the following is true about the discount factors used in these valuations?

Future Value

The amount an investment is worth after one or more periods of time

Present Value

The current value of future cash flows discounted at the appropriate discount rate is

1/(1+r)^t

The present value interest factor calculation

Compounding

The process of accumulating interest on an investment over time to earn more interest

Compounding

The process of accumulating interest on an investment over time to earn more interest is called:

Discounting

The process of finding the present value of some future amount

III only

Which of the following statements is/are accurate? All else the same, ________. I. present values increase as the discount rate increases II. present values increase the further away in time the future value III. present values are always smaller than future values when both r and t are positive

Choose the compound interest option because it provides a higher return

You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using compound interest. You should