Chapter 5: Introduction to Valuation: The Time Value of Money
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
__________________value is the cash value of an investment at some time in the________________
Future; future
The basic present value equation is:
PV = FVt(1+r)t
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
The basic present value equation underlies many of the _____.
most important ideas in corporate finance
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 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
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
$11,739.09
If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?
$133.10
Which formula below represents a present value factor?
1/(1 + r)^t or C/(1 + r)^t
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)
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.
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
True
Future value is the ________ value of an investment at some time in the future.
cash
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
When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.
the same
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
Dividend growth; Sales growth
The_______________ value is the current value of future cash flows discounted at the appropriate discount rate.
present