Module 23: Time Value of Money

By investing cash one period sooner, an annuity ___ essentially compounds one more period of interest.

Due

The value of an asset at a specific date is measured by calculating the nominal future sum of money that a given sum of money is "worth" at a specified time in the future. This is accomplished by calculating _____.

FV

FV

Future Value - Returns the Present Value of an investment: the total amount a series of payments is worth now. The cash balance you want to attain after the last payment is made

On a project the _____ must exceed the cost of capital to add shareholder value and generate positive net present value (NPV).

IRR

The rate that makes the PV of net cash flows = zero NPV is _____

IRR or internal rate of return

Which of the following are true regarding Net Present Value (NPV) decision rules?

If NPV is positive, accept If NPV is negative, reject

Which of the following are ordinary annuities used for?

Most capital budget projects for corporations End of month savings (equal $) Home mortgages/auto notes

A financial function that returns the number of periods for loan or investment is called _____. You can use this calculation to get the number of payment periods for a loan, given the amount, the interest rate, and periodic payment amount.

Number of Periods (NPER)

Nper

Number of payment periods

Pmt

Payment made each period

Which of the following are used in an Interest Rate calculation?

Pmt = Any annuity payments (equal amounts of cash received) FV = Future Value—A cash balance you want to attain after the last payment is made. If omitted, uses FV = 0 PV = Present Value—The total amount a series of payments is worth now Nper = Number of payment periods

Also referred to as discounted value, _____ measures the worth of a future amount of money or stream of payments in today's dollars adjusted for interest and inflation.

Present value

Which principle of finance states that a dollar in your hand today is worth more than a dollar you will receive in the future because a dollar in hand today can be invested to turn into more money in the future?

TVM

A contract between an individual and a company in which you make a lump sum payment or series of payments and, in return, receive regular disbursements beginning either immediately or more commonly at some point in the future is called an _____.

annuity

The interest rate that is actually earned or paid on an investment, loan or other financial instrument due to the result of compounding interest over a given time period is referred to as the ___________________. It is also called the annual equivalent rate.

effective interest rate

In Microsoft Excel, the Financial Functions can be found under the _________________ tab in the Functions Library.

formulas

The amount charged by a lender that a borrower must pay for using the lender's principal (money) is referred to as an ________. In other words, this is the extra amount beyond the premium (payment) that the borrower must repay the lender.

interest rate

The total present value (PV) of the annual net cash flows—the initial cash outlay is ____

npv

In a Future Value calculation, if the Present Value (PV) is negative, the Future Value (FV) will be ______ or or vice versa.

positive

In Excel, the [Type] is shown as _____ for beginning of period cash flows.

1 In Excel, the [Type] is shown as "1" for beginning of period cash flows

If you have $100 today, what is the FV of that $100 in one year's time if you earn 6% interest per year?

106

If you invest $1,000 each year at 8%, how much would you have after 3 years?

Calculator Solution: P/Y = 1 I = 8 N = 3PMT = -1,000 FV = $3,246.40

If you invest $1,000 at the beginning of each of the next 3 years at 8%, how much would you have at the end of year 3?

Calculator Solution: Mode = BEGIN P/Y = 1 I = 8 N = 3 PMT = -1,000 FV = $3,506.11

The difference between the present value of cash inflows and the present value of cash outflows over a period of time is referred to as _____.

NPV

If you deposit money into an account for 5 years that pays interest quarterly you need to properly account for the ____________ and adjust the Rate (interest rate).

Nper

The transfer of a good, service, or financial assets/instrument in exchange for another form of good, service, or financial assets/instrument that is agreed upon by all parties involved in the transaction is called a _____.

$134.69

If you invest $1,000 each year at 8% for 3 years, what is the Present Value of the investment.

$2,577.10

We call an annuity "ordinary" because the first payment is due at the end of the period. Microsoft Excel uses a type of _____ to represent this payment at the end of a period.

0

If you invest $1,000 each year at 8% for three years, what is the present value?

2577.10

Suppose you are considering graduate school that costs $25,000 and provides an incrementally higher salary of $10,000/year for forty years. Assume you can invest your money otherwise and receive 10% interest. What is the NPV of the decision to attend graduate school?

72,791

Select the true statements about ordinary annuities.

An ordinary annuity is a series of equal payments made at the end of consecutive periods over a fixed length of time. Most of the time ordinary annuity payments are made monthly, quarterly, semiannually, or annually. Payments in an ordinary annuity can be made as often as every week.

Type

Cash flows at the end of period (0) or beginning of period (1)