Business Finance Ch 4 Reading - Connect
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV×(1 + r)^t
True or false: Future value refers to the amount of money an investment is worth today.
False
True or false: Given the PV, FV, and payment amount, you can determine the number of periods.
False
True or false: The present value is the sum of all expenses in a project.
False
True or false: The process of leaving your money and any accumulated interest in an investment for more than one period is called multiplied interest.
False
True or false: When entering the interest rate in a financial calculator, you should key in the interest rate as a decimal.
False
True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.
Fasle
The amount an investment is worth after one or more periods is called the _____ value.
Future
Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r per cent interest?
PV = FV / ((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)
The basic present value equation is:
PV=FV^t / (1+r)^t
A dollar received one year from today has ______ value than a dollar received today.
less
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 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 current value of a future cash flow discounted at the appropriate rate is called the _____ value.
present
With discounting, the resulting value is called the _____ value; while with compounding the result is called the ____ value.
present; future
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested.
(1+r)
For a given time period (t) and interest rate (r), the present value factor is _______ the future value factor. (Select all that apply.)
- 1 divided by - the reciprocal of
Which of the following methods are used to calculate present value?
- A time value of money table - A financial calculator - An algebraic formula
Which of the following 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.
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 below represents a present value factor?
1/((1+r)^t)
Which of the following is the correct Excel function to calculate the present value of $300 due in 5 years at a discount rate of 10%?
=PV(0.10,5,0,-300)
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.
Using the PV, discount rate, and _____________ , you can determine the number of periods. (Enter abbreviation only.)
Blank 1: FV
FV = _____________-×(1 + r)^t
Blank 1: PV
Future value is the ________ value of an investment at some time in the future.
Blank 1: cash
In a present value equation, the _____________ rate (r) can be found using the PV, FV, and t. (Enter one word per blank.)
Blank 1: discount
The present value is the current value of the __________ cash flows discounted at the appropriate discount rate.
Blank 1: future
With __________ interest, the interest is not reinvested
Blank 1: simple
If you invest at a rate of r for _________ periods, under compounding, your investment will grow to (1+r)^2 per dollar invested.
Blank 1: two
What is the primary difference between time value of money data entries in your calculator and in a spreadsheet function?
The interest rate in your calculator is entered as a whole number while in the spreadsheet function it is entered as a decimal.
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 PV, FV, and life of the investment, you can determine the discount rate.
True
True or false: 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
True or false: The formula for a present value factor is 1/ ((1+r)t)
True
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
Calculating the present value of a future cash flow to determine its worth today is commonly called ___________ valuation.
discounted cash flow (DCF)