Chapter 4 Questions

The amount an investment is worth after one or more periods is called the ______ value.

future

The present value is the current value of the ______ cash flows discounted at the appropriate discount rate.

future

What is the multi-period formula for compounding a present value into a future value?

FV = PV×(1 + r)t

T/F: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.

false

If you invest at a rate of r for ___ periods, under compounding, your investment will grow to (1+r)2 per dollar invested.

two

Future value is the ____ value of an investment at some time in the future.

cash

Calculating the present value of a future cash flow to determine its worth today is commonly called __________ ____ ____ (___) valuation.

discounted cash flow (DCF)

T/F: Future value refers to the amount of money an investment is worth today.

false

T/F: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1+r)2 per dollar invested.

true

T/F: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.

false

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.

(1+r)

Using a time value of money table, what is the future value interest factor for 10 percent for 2 years?

1.21

Using a time value of money table, what is the future value interest factor for 20 percent for 2 years?

1.4400

Which formula represents a present value factor?

1/(1+r)t

If FV= PV x (1+r) is the single period formula for future value, which of the following is the single period present value formula?

PV = FV/(1+r)

With discounting, the resulting value is called the _______ value; while with compounding the result is called the _______ value.

present; future

What are the primary as well as easy ways used to perform financial calculations today?

- financial calculator - spreadsheet functions

Time value of money tables are not as common as they once were because:

- it is easier to use inexpensive financial calculators instead - they are available for only a relatively small number of interest rates

With ______ interest, the interest is not reinvested.

simple

T/F: The formula for a present value factor is 1(1+r)t

true

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?

because the $100 is an outflow from you which should be negative

The idea behind ___________ is that interest is earned on interest.

compounding

The process of accumulating interest in an investment over time to earn more interest is called ___________.

compounding

T/F: If you invest for two periods at an interest rate of r, then your money will grow th (1 + r) per dollar invested.

false

T/F: The present value is the sum of all expenses in a project.

false

When dealing with compound interest, it is more financially advantageous to have a ______ time horizon for investment.

longer

Given an investment amount and a set rate of interest, the _______ the time horizon the ________ the future value.

longer; greater

The current value of a future cash flow discounted at the appropriate rate is called the _______ value.

present