Finance chapter 5

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 basic present value equation is:

PV = FVt(1+r)t

Interest earned on the original principal amount invested is called _____.

Simple

The -------- rate , Incorrect Unavailable rate is the rate used to calculate the present value of the future cash flows.

discount

Calculating the present value of a future cash flow to determine its value today is called _____.

discounted cash flow valuation

True or false: When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.

fals

The discount rate is also called the rate of

return

The discount rate is also called the rate of-------------

return

The basic present value equation underlies many of the _____.

most important ideas in corporate finance

In general, if you invest for one period at an interest rate of r, your investment will grow to 1 (minus/plus) r.

plus

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)

Which of the following investments would result in a higher future value?Investment A - 12% APR for 10 yearsInvestment B - 12% APR for 12 years

Invesment B

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

1.21

Which formula below represents a present value factor?

1/(1 + r)t

True or false: The correct future value interest factor in a time value of money table for $1 in 10 years at 10 percent per year is 2.5937.

True

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

True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.

Fals. it is FV = PV X ( 1 + r )^t

Question Mode True or False Question True or false: The multi-period formula for future value using compounding is FV = (1 + r)t.

False

Which of the following can be determined using the future value approach to compound growth developed in this chapter?

Sales growth,Dividend growth

Given the same rate of interest, more money can be earned with compound interest than with simple interest.

true

True or false: Discounting is the opposite of compounding.

true

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 (.06,0,-6000,10000)

The equation that results in the Blank______ value interest factor for a single deposit is as follows: (1 + r)t

future

The equation that results in the Blank______ value interest factor for a single deposit is as follows: 1(1+r)t

present

Interest earned only on the original principal amount invested is called ------------interest.

simple

If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value.

present value factor

What is the future value of $1,000 invested for 8 years at 6%?

$1,593.851000 for PV8 for n and 6 for 1/Y

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

All else equal, the longer time period you have before you will need the money, the -------(less/more) you will need to deposit today to have the same amount in the future.

less

Discounting is the opposite of-----------

compounding

When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.

the same

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

Cash

True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest. True

------value is the cash value of an investment at some time in the -------- Future Future

Which of the following methods can be used to calculate present value?

-A financial calculator. -A time value of money table. -An algebraic formula

What is the future value of $1,000 invested for 8 years at 6%?

$1,593.85

True or false: When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.

Fals

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 Reason: With simple interest you will earn $500 X 0.10 = $50 each year. Your total will be $500+100=$600. With compound interest, you will have $500(1.10)2 = $605 at the end of the two years. Given the same rate of interest, the FV will always be higher with compound interest.

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

(1+r)

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

(1+r)

Question Mode Multiple Choice Question 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

The (smaller/greater) the interest rate changes, the greater the impact to the future value of an amount invested.

greater

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

present

True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.

true

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. Multiple choice question. present idealistic past future

present

If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?

=$133.10

Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?

FV = $100 × (1.10)3

True or false: Small changes 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 ( because : Small rate differences can be worth thousands of dollars, especially when either the amount or the time period is large.