Smartbook 5
The present value interest factor for $1 at 5% compounded annually for 5 years [PVIF(5%,5)] is:
0.7835 1 / (1.05)^5
Which formula below represents a present value factor?
1 / (1 + r) ^ t
Using a time value of money table, what is the future value interest factor for 10% of 2 years?
1.21
Which of the following are correct spreadsheet functions?
Discount Rate = RATE(nper,pmt,pv,fv) Future Value = FV(rate,nper,pmt,pv) Present Value = PV(rate,nper,pmt,fv)
T/F - The correct mathematical formula for finding the future value of a $68 present value in 12 years at 9% annual interest is FV = $68(1.12^9)
False FV = $68 (1.09^12)
T/F - The multi-period formula for future value using compounding is FV = (1 + r)^t
False FV = PV x (1 + r)^t
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
Future value is the ___ value of an investment at some time in the future
cash
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
sales growth dividend growth
If you invest $100 at 10% simple interest, how much money will you have in 10 years?
$200
If you plan to put a $10,000 down payment on a house in five years and you can earn 6% per year, how much will you need to deposit today?
$7,472.58 Enter 10,000 for FV 5 for N 6 for I/Y Solve for PV
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
How long will it take $40 to grow $240 at an interest rate of 6.53% compounded annually?
28.33 years Use financial calculator -40 for PV 240 for FV 6.53 for I/Y solve for N
T/F - When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal
False
Which of the following investment would result in a higher future value? Investment A - 12% APR for 10 years Investment B - 12% APR for 12 years
Investment B Since the rates are the same, B would give a higher future value because on additional period of interest is earned
T/F - The formula for a present value factor is 1 / (1 + r)^t
True This is the present value interest factor, not the present value itself. In order to get PV, you need to multiply FV by this factor. Notice how as the denominator becomes larger due to higher interest or longer periods, it reduces the factor
T/F - Discounting is the opposite of compounding
True compounding increases money forward in time, discounting reduces money back in time
The idea behind ___ is that interest is earned on interest
compounding
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
T/F - The correct future value interest factor in time value of money table for $1 in 10 years at 10 percent per year is 2.5937
True
A dollar received one year from today has ___ value than a dollar received today
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
If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find a(n) ___ value
present
The following equation results in the ___ vale interest factor for a single deposit: 1 / (1 + r)^t
present
What is the future value of $100 compounded for 50 years at 10% annual interest?
$11.739.09 FV = $100 x 1.10^50
T/F - Small change 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 small rate differences can be worth thousands of dollars, especially when either the amount or the time period is large
Which of the following methods can be used to calculate present value?
a financial calculator a time value of money table an algebraic formula
Suppose we invest $100 now and get back $236.74 in 10 years. What rate of interest will we achieve?
9.0% (236.74 / 100)^ 1/10 - 1
The difference between ___ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___ every year
simple bigger
If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ______
$121
If you invest $100 at 10% compounded annually, how much money will you have at the end of 3 years?
$133.10 FV.= $100 x 1.10^3
You invest $500 at 10% interest. At the end of 2 years with simple interest you will have ___ and with compound interest you will have ___
$600 $605 $500 + $100 = $600 $500 (1.10)^2 = $605
If you invest for a single period at an interest rate of r, your money will grow to ___ per dollar invested
(1 + r)